For the fiscal
year ended September 30, 2021, certain dividends paid by the Fund may be subject to a maximum tax rate of 15% (20% for taxpayers with taxable income greater than $425,800 for single individuals and $479,000 for married couples filing jointly),
as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003 and The Tax Cuts and Jobs Act of 2017. The percentage of dividends declared from ordinary income designated as qualified dividend income was as follows:
For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividends received
deduction for the fiscal year ended September 30, 2021, was as follows:
The percentage of taxable ordinary income distributions that are designated as short-term capital gain distributions under
Internal Revenue Section 871(k)(2)(c) for the fiscal year ended September 30, 2021, was as follows:
The percentage of taxable ordinary income distributions that are designated as interest related dividends under Internal Revenue
Section 871(k)(1)(C) for the fiscal year ended September 30, 2021, was as follows:
Shareholders are advised to consult their own tax adviser with respect to the tax consequences of their investment in the Fund.
|
|
|
Trustees and Officers
|
|
(Unaudited)
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
Name, Address, and
Year of Birth(1)
|
|
Position with Trust
|
|
Term of Office
and Length of
Time Served
|
|
Principal Occupation(s) During Past 5 Years
|
|
Number of
Portfolios
Overseen(2)
|
|
Other Directorships
Held by Trustee During
Past 5 Years
|
|
|
|
|
|
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph J. Ciprari, 1964
|
|
Trustee
|
|
Class III (2022)*/Since Inception
|
|
President, Remo Consultants, a real estate financial consulting firm.
Formerly, Managing Director, UBS AG. Formerly, Managing Director, Ally Securities LLC.
|
|
23
|
|
None
|
|
|
|
|
|
|
John C. Salter, 1957
|
|
Trustee
|
|
Class I (2023)*/Since Inception
|
|
Partner, Stark Municipal Brokers. Formerly, Managing Director, Municipals, Tullet Prebon Financial Services LLC (d/b/a Chapdelaine). Formerly, Partner, Stark, Salter & Smith, a securities brokerage firm specializing in tax
exempt bonds.
|
|
23
|
|
None
|
|
|
|
|
|
|
Raymond B. Woolson, 1958
|
|
Trustee
|
|
Class II (2024)*/Since Inception
|
|
President, Apogee Group, Inc., a company providing financial consulting services.
|
|
23
|
|
Independent Trustee, Advisors Series Trust (an open-end investment company with 42 portfolios)(3)
|
(1) The address of each Independent Trustee is c/o DoubleLine Funds, 333 South Grand Avenue, Suite 1800, Los Angeles, CA 90071.
(2) Includes each series of DoubleLine Funds Trust, DoubleLine Opportunistic Credit Fund, DoubleLine Income Solutions Fund, and DoubleLine Yield
Opportunities Fund.
(3) Quasar Distributors, LLC serves as the principal underwriter of DoubleLine Funds Trust and Advisors Series Trust.
* The common shareholders of the Fund are expected to vote to elect trustees of the relevant class at the annual shareholders meeting in the year indicated
above.
The following Trustee is an interested person of the Trust as defined in the 1940 Act because he is an officer of the Adviser and holds direct or
indirect ownership interests in DoubleLine Capital LP and DoubleLine Alternatives LP. Additionally, Mr. Redell is an officer of the Trust.
|
|
|
|
|
|
|
|
|
|
|
Name, Address, and
Year of Birth(1)
|
|
Position with Trust
|
|
Term of Office
and Length of
Time Served
|
|
Principal Occupation(s) During Past 5 Years
|
|
Number of
Portfolios
Overseen(2)
|
|
Other Directorships
Held by Trustee During
Past 5 Years
|
|
|
|
|
|
|
Ronald R. Redell, 1970
|
|
Trustee, Chairman, President and Chief Executive Officer
|
|
Class II (2024)*/Since Inception
|
|
Trustee, Chairman, President, and Chief Executive Officer, DoubleLine Income Solutions Fund (since January 2013); President, DoubleLine Group LP (since January 2019 and Executive from January
2013 to January 2019); Trustee, Chairman, President and Chief Executive Officer, DoubleLine Opportunistic Credit Fund (since July 2011); Executive, DoubleLine Capital (since July 2010); President, DoubleLine Funds Trust (since January
2010).
|
|
23
|
|
None
|
(1) The address of each Interested Trustee is c/o DoubleLine Funds, 333 South Grand Avenue, Suite 1800, Los Angeles, CA 90071.
(2) Includes each series of DoubleLine Funds Trust, DoubleLine Opportunistic Credit Fund, DoubleLine Income Solutions Fund, and DoubleLine Yield
Opportunities Fund.
* The common shareholders of the Fund are expected to vote to elect trustees of the relevant class at the annual shareholders
meeting in the year indicated above. The Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request, by calling 877-DLine11 (877-354-6311) or email fundinfo@doubleline.com.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
43
|
|
|
|
Trustees and
Officers (Cont.)
|
|
|
Officers
The officers of the Trust who are not also Trustees of the Trust are:
|
|
|
|
|
|
|
Name, Address, and
Year of Birth(1)
|
|
Position with Trust
|
|
Term of Office
and Length of
Time Served
|
|
Principal Occupation(s) During Past 5 Years
|
|
|
|
|
Henry V. Chase, 1949
|
|
Treasurer and Principal Financial and Accounting Officer
|
|
Indefinite/Since January 2020
|
|
Treasurer and Principal Financial and Accounting Officer, DoubleLine Funds Trust (since January 2020); Treasurer and Principal Financial and Accounting Officer, DoubleLine Yield Opportunities
Fund (since January 2020); Treasurer and Principal Financial and Accounting Officer, DoubleLine Income Solutions Fund (since January 2020); Treasurer and Principal Financial and Accounting Officer, DoubleLine Opportunistic Credit Fund (since January
2020); Chief Financial Officer, DoubleLine Capital (since January 2013); Vice President, DoubleLine Yield Opportunities Fund (since November 2019); Vice President, DoubleLine Income Solutions Fund (since May 2019); Vice President, DoubleLine Funds
Trust (since May 2019); Vice President, DoubleLine Opportunistic Credit Fund (since May 2019).
|
|
|
|
|
Youse Guia, 1972
|
|
Chief Compliance Officer
|
|
Indefinite/Since March 2018
|
|
Chief Compliance Officer, DoubleLine Yield Opportunities Fund (since November 2019); Chief Compliance Officer, DoubleLine Capital (since March 2018); Chief Compliance Officer, DoubleLine
Equity LP (since March 2018); Chief Compliance Officer, DoubleLine Funds Trust (since March 2018); Chief Compliance Officer, DoubleLine Opportunistic Credit Fund (since March 2018); Chief Compliance Officer, DoubleLine Income Solutions Fund (since
March 2018). Formerly, Executive Vice President and Deputy Chief Compliance Officer, Pacific Investment Management Company LLC (PIMCO) (from April 2014 to February 2018); Chief Compliance Officer, PIMCO Managed Accounts Trust (from
September 2014 to February 2018); Chief Compliance Officer, PIMCO-sponsored closed-end funds (from September 2014 to February 2018); Chief Compliance Officer, PIMCO Flexible Credit Income Fund (from February
2017 to February 2018). Formerly, Head of Compliance, Allianz Global Investors U.S. Holdings LLC (from October 2012 to March 2014); Chief Compliance Officer, Allianz Funds, Allianz Multi- Strategy Trust, Allianz Global Investors Sponsored Closed-End Funds, Premier Multi-Series VIT and The Korea Fund, Inc. (from October 2004 to December 2013).
|
|
|
|
|
Winnie Han, 1988
|
|
Assistant Treasurer
|
|
Indefinite/Since May 2017
|
|
Assistant Treasurer, DoubleLine Yield Opportunities Fund (since November 2019); Assistant Treasurer, DoubleLine Income Solutions Fund (since May 2017); Assistant Treasurer, DoubleLine Funds
Trust (since May 2017); Assistant Treasurer, DoubleLine Opportunistic Credit Fund (since May 2017); Assistant Treasurer, DoubleLine Capital (since March 2017); Formerly, Investment Accounting Supervisor, Alexandria Real Estate Equities, Inc. (June
2016 to March 2017); Formerly, Manager, PricewaterhouseCoopers (January 2011 to June 2016).
|
|
|
|
|
Cris Santa Ana, 1965
|
|
Vice President and Secretary
|
|
Indefinite/Vice President Since Inception Indefinite/Secretary Since July 2018
|
|
Vice President and Secretary, DoubleLine Yield Opportunities Fund (since November 2019); Vice President, DoubleLine Income Solutions Fund (since January 2013); Vice President, DoubleLine
Opportunistic Credit Fund (since July 2011); Vice President, DoubleLine Funds Trust (since April 2011); Chief Risk Officer, DoubleLine Capital (since June 2010). Formerly, Chief Operating Officer, DoubleLine Capital (from December 2009 through May
2010).
|
|
|
|
|
Earl A. Lariscy, 1966
|
|
Vice President and Assistant Secretary
|
|
Indefinite/Since Inception
|
|
Vice President and Secretary, DoubleLine Yield Opportunities Fund (since November 2019); Vice President and Assistant Secretary, DoubleLine Income Solutions Fund (since January 2013); Vice
President, DoubleLine Funds Trust (since May 2012); Vice President and Assistant Secretary, DoubleLine Opportunistic Credit Fund (since May 2012 and inception, respectively); General Counsel, DoubleLine Capital (since April 2010).
|
|
|
|
|
David Kennedy, 1964
|
|
Vice President
|
|
Indefinite/Since Inception
|
|
Vice President and Secretary, DoubleLine Yield Opportunities Fund (since November 2019); Vice President, DoubleLine Income Solutions Fund (since January 2013); Vice President, DoubleLine
Funds Trust (since May 2012); Vice President, DoubleLine Opportunistic Credit Fund (since May 2012); Manager, Trading and Settlements, DoubleLine Capital (since December 2009).
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
|
|
|
|
|
|
|
Name, Address, and
Year of Birth(1)
|
|
Position with Trust
|
|
Term of Office
and Length of
Time Served
|
|
Principal Occupation(s) During Past 5 Years
|
|
|
|
|
Patrick A. Townzen, 1978
|
|
Vice President
|
|
Indefinite/Since Inception
|
|
Vice President, DoubleLine Yield Opportunities Fund (since November 2019); Vice President, DoubleLine Income Solutions Fund (since January 2013); Vice President, DoubleLine Funds Trust (since September 2012); Vice President,
DoubleLine Opportunistic Credit Fund (since September 2012); Director of Operations, DoubleLine Capital (since March 2018). Formerly, Manager of Operations, DoubleLine Capital (from September 2012 to March 2018).
|
|
|
|
|
Brady J. Femling, 1987
|
|
Vice President
|
|
Indefinite/Since May 2017
|
|
Vice President, DoubleLine Yield Opportunities Fund (since November 2019); Vice President, DoubleLine Income Solutions Fund (since May 2017); Vice President, DoubleLine Opportunistic Credit Fund (since May 2017); Vice President,
DoubleLine Funds Trust (since May 2017);Senior Fund Accountant, DoubleLine Capital (Since April 2013). Fund Accounting Supervisor, ALPS Fund Services (From October 2009 to April 2013).
|
|
|
|
|
Neal L. Zalvan, 1973
|
|
Vice President
|
|
Indefinite/Vice President Since May 2017
|
|
Vice President, DoubleLine Yield Opportunities Fund (since November 2019); Vice President, DoubleLine Opportunistic Credit Fund (since May 2017); Vice President, DoubleLine Funds Trust (since May 2016); Vice President, DoubleLine
Income Solutions Fund (since May 2016); Legal/Compliance, DoubleLine Group LP (since January 2013); Formerly, Anti-Money Laundering Officer, DoubleLine Yield Opportunities Fund (from November 2019 to September 2020); Anti-Money Laundering Officer,
DoubleLine Capital, DoubleLine Opportunistic Credit Fund, DoubleLine Income Solutions Fund, DoubleLine Equity LP and DoubleLine Alternatives (from March 2016 to September 2020).
|
|
|
|
|
Grace Walker, 1970
|
|
Assistant Treasurer
|
|
Indefinite/Since January 2020
|
|
Assistant Treasurer, DoubleLine Funds Trust (since January 2020); Assistant Treasurer, DoubleLine Income Solutions Fund (since January 2020); Assistant Treasurer, DoubleLine Opportunistic Credit Fund (since January 2020); Assistant
Treasurer, DoubleLine Yield Opportunities Fund (since January 2020); Treasurer, DoubleLine Funds (Luxembourg) and DoubleLine Cayman Unit Trust (since March 2017). Formerly, Assistant Treasurer, DoubleLine Income Solutions Fund (from January 2013 to
May 2017); Assistant Treasurer, DoubleLine Opportunistic Credit Fund (from March 2012 to May 2017); Assistant Treasurer, DoubleLine Funds Trust (from March 2012 to May 2017).
|
|
|
|
|
Adam D. Rossetti, 1978
|
|
Vice President
|
|
Indefinite/Since February 2019
|
|
Vice President, DoubleLine Yield Opportunities Fund (since September 2019); Vice President, DoubleLine Funds Trust (since February 2019); Vice President, DoubleLine Income Solutions Fund (since February 2019); Vice President,
DoubleLine Opportunistic Credit Fund (since February 2019); Chief Compliance Officer, DoubleLine Alternatives LP (since June 2015); Legal/ Compliance, DoubleLine Group LP (since April 2015). Formerly, Chief Compliance Officer, DoubleLine Capital
(from August 2017 to March 2018); Chief Compliance Officer, DoubleLine Equity LP (from August 2017 to March 2018); Chief Compliance Officer, DoubleLine Funds Trust (from August 2017 to March 2018); Chief Compliance Officer, DoubleLine Income
Solutions Fund (from August 2017 to March 2018); Chief Compliance Officer, DoubleLine Opportunistic Credit Fund (from August 2017 to March 2018); Vice President and Counsel, PIMCO (from April 2012 to April 2015).
|
|
|
|
|
Jeffery J. Sherman, 1977
|
|
Vice President
|
|
Indefinite/Since Inception
|
|
Deputy Chief Investment Officer, DoubleLine (since June 2016); President and Portfolio Manager, DoubleLine Alternatives LP (since April 2015 and May 2015, respectively); Vice President, DoubleLine Income Solutions Fund (since
January 2013); Vice President, DoubleLine Opportunistic Credit Fund (since July 2011); Portfolio Manager, DoubleLine Capital (since September 2010); Fixed Income Asset Allocation, DoubleLine Capital (since December 2009).
|
|
|
|
|
Dawn Oswald, 1980
|
|
Vice President
|
|
Indefinite/Since January 2020
|
|
Vice President, DoubleLine Funds Trust (since January 2020); Vice President, DoubleLine Yield Opportunities Fund (since January 2020); Vice President, DoubleLine Income Solutions Fund (since January 2020); Vice President, DoubleLine
Opportunistic Credit Fund (since January 2020); Pricing Manager, DoubleLine Capital (since January 2018). Formerly, Operations Specialist, DoubleLine Capital (from July 2016 to January 2018). Global Securities Fixed Income Valuation Senior Analyst,
Capital Group (from April 2015 to July 2016). Global Securities Fair Valuation Analyst, Capital Group (from January 2010 to April 2015).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
45
|
|
|
|
Trustees and
Officers (Cont.)
|
|
|
|
|
|
|
|
|
|
Name, Address, and
Year of Birth(1)
|
|
Position with Trust
|
|
Term of Office
and Length of
Time Served
|
|
Principal Occupation(s) During Past 5 Years
|
|
|
|
|
Robert Herron, 1987
|
|
Vice President
|
|
Indefinite/Since June 2020
|
|
Vice President, DoubleLine Funds Trust (since June 2020); Vice President, DoubleLine Yield Opportunities Fund (since June 2020); Vice President, DoubleLine Income Solutions Fund (since June 2020); Vice President, DoubleLine
Opportunistic Credit Fund (since June 2020). ManagerRisk Analytics, DoubleLine Capital (since January 2017); Formerly, AnalystRisk Analytics, DoubleLine Capital (from October 2011 to January 2017).
|
|
|
|
|
Jose Sarmenta, 1975
|
|
Anti-Money Laundering Officer
|
|
Indefinite/Since September 2020
|
|
Anti-Money Laundering Officer, DoubleLine Funds Trust (since September 2020); Anti-Money Laundering Officer, DoubleLine Yield Opportunities Fund (since September 2020); Anti-Money Laundering Officer, DoubleLine Opportunistic Credit
Fund (since September 2020); Anti-Money Laundering Officer, DoubleLine Income Solutions Fund (since September 2020); Compliance Analyst, DoubleLine Capital (since October 2019); Formerly, Compliance Manager, Anti-Money Laundering Manager for CIM
Group (from November 2017 to October 2019); Governance and Risk Manager for PennyMac Financial Services Inc. (from July 2015 to November 2017).
|
(1) The address of each officer is c/o DoubleLine Funds, 333 South Grand Avenue, Suite 1800, Los Angeles, CA 90071.
|
|
|
|
|
|
|
|
|
|
|
46
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
Additional Information Regarding the Fund
|
|
(Unaudited)
September 30, 2021
|
Summary of Fund Expenses
The following table is intended to assist investors in understanding the fees and expenses
(annualized) that an investor in DoubleLine Income Solutions Funds (the Fund) common shares of beneficial interest (the Common Shares) bears, directly or indirectly. The table reflects the use of leverage in the form of
borrowings under the Funds credit facility in an amount equal to 29.16% of the Funds total assets (including the amounts of leverage obtained through such borrowings), which reflects approximately the percentage of the Funds total
assets attributable to such borrowings as of September 30, 2021, and shows Fund expenses as a percentage of net assets attributable to Common Shares. The percentage above does not reflect the Funds use of other forms of economic leverage,
such as credit default swaps or other derivative instruments (where applicable). The table and the example below are based on the Funds capital structure as of September 30, 2021. The extent of the Funds assets attributable to
leverage, and the Funds associated expenses, are likely to vary (perhaps significantly) from these figures over time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder Transaction Expenses
|
|
|
|
Percentage of
Offering Price
|
|
|
|
Sales Load Paid by Investors(1)
|
|
|
|
|
|
|
|
|
See Footnote 1 below
|
|
|
|
|
Dividend Reinvestment Plan Fees(2)
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Expenses
|
|
|
|
Percentage
of
Net Assets
Attributable to
Common Shares
|
|
|
|
Management
Fees(3)
|
|
|
|
|
|
|
|
|
1.39%
|
|
|
|
|
Administration Fees(4)
|
|
|
|
|
|
|
|
|
0.05%
|
|
|
|
|
Interest Expense on Borrowed Funds(5)
|
|
|
|
|
|
|
|
|
0.32%
|
|
|
|
|
Other
Expenses(6)
|
|
|
|
|
|
|
|
|
0.07%
|
|
|
|
|
Total Annual Expenses
|
|
|
|
|
|
|
|
|
1.83%
|
|
(1)
|
As of September 30, 2021, the Fund had an effective registration statement under which it may offer and sell
additional Common Shares of the Fund. The maximum sales load paid by investors in an offering under that registration statement is presently expected to be 1.00% of the offering price.
|
(2)
|
You will pay brokerage charges if you direct your broker or the plan agent to sell your Common Shares that you
acquired pursuant to a dividend reinvestment plan. You will also bear a pro rata share of brokerage commissions incurred in connection with open-market purchases pursuant to the Funds Dividend Reinvestment Plan. See Dividend Reinvestment
Plan.
|
(3)
|
The Fund pays DoubleLine Capital LP (DoubleLine or the Adviser) a monthly management fee
for its investment management services in an amount equal to 1.00% of the Funds average daily total managed assets. In accordance with the requirements of the Securities and Exchange Commission (the SEC), the table above shows the
Funds management fee as a percentage of average net assets, which reflects the Funds use of leverage. Total managed assets means the total assets of the Fund (including assets attributable to any reverse repurchase
agreements, dollar roll transactions or similar transactions, borrowings, and preferred shares that may be outstanding) minus accrued liabilities (other than liabilities in respect of reverse repurchase agreements, dollar roll transactions or
similar transactions, and borrowings).
|
(4)
|
The Master Services Agreement between the Fund and U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank
Global Fund Services (the Administrator), obligates the Fund to pay the Administrator a fee of 0.03% of the Funds average daily total managed assets for providing administration, bookkeeping, pricing, and other services to the
Fund. The Administrator will also be reimbursed by the Fund for out-of-pocket expenses that are reasonably incurred by it in performing its duties under the Master
Services Agreement.
|
(5)
|
Assumes the use of leverage in the form of borrowings representing 29.16% of the Funds total assets
(including the amounts of leverage obtained through the use of such borrowings) at an annual effective interest rate cost to the Fund of 0.81%, which reflects approximately the percentage of the Funds total assets attributable to such
borrowings as of September 30, 2021.
|
(6)
|
Other expenses are for the Funds fiscal year ending September 30, 2021.
|
Example
As required by relevant
SEC regulations, the following example illustrates the expenses that you would pay on a $1,000 investment in Common Shares (and do not pay any Shareholder Transaction Expenses), assuming (a) the Funds net assets do not increase or
decrease, (b) the Funds total annual expenses are 1.83% of net assets attributable to Common Shares in years 1 through 10 (assuming the Fund obtains leverage through borrowings in an amount equal to 29.16% of the Funds total assets)
and (c) a 5% annual return(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
3 Years
|
|
5 Years
|
|
10 Years
|
|
|
|
|
|
|
Total Expenses Incurred
|
|
|
|
|
|
|
|
$
|
19
|
|
|
|
$
|
58
|
|
|
|
$
|
99
|
|
|
|
$
|
215
|
|
(1)
|
The example above should not be considered a representation of future expenses. Actual expenses may be higher or
lower than those shown. The example assumes that Interest Expense on Borrowed Funds, Other Expenses and Total Annual Expenses set forth in the Annual Expenses table remain the same each year and that all
dividends and distributions are reinvested at net asset value. Actual expenses may be greater or less than those assumed. Moreover, the Funds actual rate of return may be greater or less than the hypothetical 5% annual return shown in the
example. If the above example reflected Shareholder Transaction Expenses that may be paid in respect of shares purchased in connection with the Funds offering of Common Shares under the Funds Shelf Registration (see Note 13), the
Total Expenses incurred shown above would have been higher.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
47
|
|
|
|
Additional Information Regarding the Fund (Cont.)
|
|
|
Market and Net Asset
Value
The Funds Common Shares, which trade on the New York Stock Exchange (the NYSE), have traded both at a premium and a
discount to their net asset value per Common Share (NAV).
The following table sets forth, for each of the periods indicated, the high and low
closing market prices of the Funds Common Shares on the NYSE and the corresponding NAV and premium/discount to NAV on the days when the Funds Common Shares experienced such high and low closing market prices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Share
Market Price
|
|
Common Share
Net Asset Value
|
|
Premium (Discount)
as a % of Net Asset Value(1)
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
|
|
|
|
|
$
|
18.30
|
|
|
|
$
|
17.37
|
|
|
|
$
|
18.63
|
|
|
|
$
|
18.29
|
|
|
|
|
(1.77%
|
)
|
|
|
|
(5.03%
|
)
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
|
|
|
|
|
$
|
18.46
|
|
|
|
$
|
17.73
|
|
|
|
$
|
18.59
|
|
|
|
$
|
18.09
|
|
|
|
|
(0.70%
|
)
|
|
|
|
(1.99%
|
)
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
|
|
|
|
|
$
|
18.16
|
|
|
|
$
|
16.50
|
|
|
|
$
|
18.43
|
|
|
|
$
|
17.74
|
|
|
|
|
(1.47%
|
)
|
|
|
|
(6.99%
|
)
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
$
|
17.20
|
|
|
|
$
|
15.32
|
|
|
|
$
|
17.74
|
|
|
|
$
|
15.83
|
|
|
|
|
(3.04%
|
)
|
|
|
|
(3.22%
|
)
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
$
|
16.78
|
|
|
|
$
|
15.44
|
|
|
|
$
|
16.70
|
|
|
|
$
|
15.65
|
|
|
|
|
0.48%
|
|
|
|
|
(1.34%
|
)
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
$
|
16.19
|
|
|
|
$
|
11.51
|
|
|
|
$
|
15.74
|
|
|
|
$
|
12.44
|
|
|
|
|
2.86%
|
|
|
|
|
(7.48%
|
)
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
$
|
21.06
|
|
|
|
$
|
10.49
|
|
|
|
$
|
20.13
|
|
|
|
$
|
12.50
|
|
|
|
|
4.62%
|
|
|
|
|
(16.08%
|
)
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
$
|
20.18
|
|
|
|
$
|
19.14
|
|
|
|
$
|
19.63
|
|
|
|
$
|
18.96
|
|
|
|
|
2.80%
|
|
|
|
|
0.95%
|
|
(1)
|
Premium and discount information is shown for the days when the Fund experienced its high and low closing market
prices, respectively, per share during the respective quarter.
|
The Funds NAV at the close of business on September 30, 2021 was
$18.34 and the last reported sale price of a Common Share on the NYSE on that day was $17.76, representing a 3.16% discount to such NAV. As of September 30, 2021, the net assets of the Fund attributable to Common Shares were $1,870,237,728 and
the Fund had outstanding 101,996,828 Common Shares.
Shares of a closed-end investment company, including the Fund,
may frequently trade at prices lower than their net asset value per share. The Board of Trustees of the Fund will regularly monitor the relationship between the market price per Common Share and the NAV. If the Common Shares were to trade at a
substantial discount to their NAV for an extended period of time, the Board of Trustees may consider the repurchase of the Funds Common Shares on the open market or in private transactions, the making of a tender offer for such shares or the
conversion of the Fund to an open-end investment company or other actions. The Fund cannot assure you that the Board of Trustees will decide to take or propose any of these actions irrespective of the duration
or amount of any discount to NAV at which the Funds Common Shares may trade, or that any actions taken will actually reduce any such discount.
Unresolved Staff Comments
The Fund does not believe that there are any material unresolved written comments, received 180 days
or more before September 30, 2021 from the Staff of the SEC regarding any of the Funds periodic or current reports under the Securities Exchange Act or the Investment Company Act, or its registration statement.
|
|
|
|
|
|
|
|
|
|
|
48
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Updated Information Regarding the Fund
|
|
(Unaudited)
September 30, 2021
|
The following
information in this annual report is a summary of certain information about the Fund and changes since the Funds last annual report to shareholders, for the fiscal year ended September 30, 2020. This information may not reflect all of the
changes that have occurred since you invested in the Fund.
Investment Objectives and Strategies
There have been no material changes to the Funds investment objectives or principal investment strategies since the Funds last annual report to
shareholders.
The following summarizes the Funds current investment objectives and principal investment strategies:
Investment Objectives
The
Funds primary investment objective is to seek high current income and its secondary objective is to seek capital appreciation. The Fund cannot assure you that it will achieve its investment objectives. The Funds investment objectives may
be changed by the Funds Board of Trustees without prior notice to or approval of the Funds shareholders.
Principal
Investment Strategies
The Fund will seek to achieve its investment objectives by investing in a portfolio of investments selected for their
potential to provide high current income, growth of capital, or both. The Fund may invest in debt securities and other income-producing investments anywhere in the world, including in emerging markets. The Funds investment adviser, DoubleLine,
allocates the Funds assets among debt security market sectors, and among investments within those sectors, in an attempt to construct a portfolio providing the potential for a high level of current income and for capital appreciation
consistent with what DoubleLine considers an appropriate level of risk in light of market conditions prevailing at the time. In managing the Funds investments, the Adviser uses a controlled risk approach. The techniques of this approach
attempt to control the principal risk components of the fixed-income markets and include consideration of:
|
|
|
security selection within a given debt security market sector;
|
|
|
|
relative performance of the various market sectors;
|
|
|
|
the shape of the yield curve; and
|
|
|
|
fluctuations in the overall level of interest rates.
|
DoubleLine will select investments over time to implement its long-term strategic investment view. It also will buy and sell securities opportunistically in
response to short-term market, economic, political, or other developments or otherwise as opportunities may present themselves.
The Fund may invest in debt
securities and other income-producing investments based on DoubleLines assessment of the potential returns and risks of different sectors of the debt security markets and of particular securities and other investments. Such securities may
include, by way of example, U.S. Government securities; debt securities issued by domestic or foreign corporate or other issuers; obligations of foreign sovereigns or their agencies or instrumentalities; equity, mortgage, or hybrid real estate
investment trust (REIT) securities that trade on an exchange (i.e., the Fund may not purchase REIT securities that do not trade on an exchange); loans of any kind (including, among others, bank loans, senior loans, delayed funding
loans, revolving credit facilities, assignments, participations, subordinated loans, debtor-in-possession loans, and exit facilities); municipal securities and other
debt securities issued by states or local governments and their agencies, authorities and other government-sponsored enterprises; CLOs; payment-in-kind securities; zero-coupon bonds; inflation-indexed bonds; structured notes and other hybrid instruments; convertible securities; credit-linked trust certificates; preferred securities; commercial paper; and cash and cash
equivalents. The rate of interest on the debt and other income-producing investments that the Fund may purchase may be fixed, floating, or variable. DoubleLine expects that the Fund will normally invest at least 80% of its net assets (plus any
borrowings for investment purposes) in debt securities and other income-producing investments anywhere in the world, including emerging markets. DoubleLine expects that the Fund will normally not invest more than 50% of its total assets in a single
debt security market sector (excluding U.S. Government securities), as determined by the Adviser.
The Fund may invest in mortgage-backed securities of any
kind. Mortgage-backed securities may include, among other things, securities issued or guaranteed by the U.S. Government, its agencies, or its instrumentalities or sponsored corporations, or securities of domestic or foreign private issuers.
Mortgage-backed securities may be issued or guaranteed by banks or other financial institutions, special-purpose vehicles established for such purpose, or private issuers, or by government agencies or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
49
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
instrumentalities. Privately-issued mortgage-backed securities include any mortgage-backed security other than those issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities. Mortgage-backed securities may include, without limitation, interests in pools of residential mortgages or commercial mortgages, and may relate to domestic or non-U.S. mortgages.
Mortgage-backed securities include, but are not limited to, securities representing interests in, collateralized or backed by, or whose values are determined in whole or in part by reference to, any number of mortgages or pools of mortgages or the
payment experience of such mortgages or pools of mortgages, including Real Estate Mortgage Investment Conduits (REMICs), which could include resecuritizations of REMICs (Re-REMICs),
mortgage pass-through securities, credit risk transfer securities, inverse floaters, collateralized mortgage obligations (CMOs), multiclass pass-through securities, private mortgage pass-through securities, and stripped mortgage
securities (generally interest-only and principal-only securities).
The Fund may invest in asset-backed securities that are not mortgage-backed securities,
including securitizations of various non-mortgage-related receivables, such as credit card and automobile finance receivables, student loans, airplane leases, installment loan contracts, home equity loans, and
leases of various types of real and personal property.
The Fund may invest in any level of the capital structure of an issuer of mortgage-backed or
asset-backed securities, including in risk retention tranches of collateralized mortgage-backed securities or other eligible securitizations, which are eligible residual interests held by the sponsors of such securitizations subject to the final
rules implementing the credit risk retention requirements of Section 941 of the Dodd-Frank Act. The Fund may also invest in pools of loans through mortgage- or other asset-backed securities where a trust or other entity issues interests in
the loans. Alternatively, the Fund may invest directly in pools of loans, itself or with other clients of the Adviser or its related parties. The Funds investments in loans and the loans underlying the asset-backed securities and similar
obligations in which the Fund may invest may include loans that contain fewer or less restrictive constraints on the borrower than certain other types of loans (covenant-lite loans).
The Fund will not normally invest more than 10% of its total assets in CLOs, and will normally not invest in equity tranches of CLOs. The Fund will not normally
invest more than 10% of its total assets in asset-backed securities that are not mortgage-backed securities, CLOs or obligations issued or guaranteed by the U.S. Government, its agencies, or its instrumentalities or sponsored corporations. The Fund
will not normally invest in collateralized debt obligations (CDOs) that are not mortgage-backed securities, asset-backed securities or CLOs. The Fund may invest in CDOs (including CLOs and collateralized bond obligations
(CBOs)) and other structured products sponsored or managed by, or otherwise affiliated with, the Adviser or related parties of the Adviser. Such investments may include investments in debt or equity interests issued by the CDO or
structured product as well as investments purchased on the secondary market, and the Fund may invest in any tranche of the CDO or structured product, including an equity tranche.
Certain mortgage- and other asset-backed securities in which the Fund may invest may represent an inverse interest-only class of security for which the holders
are entitled to receive no payments of principal and are entitled only to receive interest at a rate that will vary inversely with a specified index or reference rate, or a multiple thereof.
The Fund may invest without limit in securities of issuers domiciled or organized in jurisdictions other than the United States, including securities of issuers
domiciled or organized in emerging market countries. As of September 30, 2021, the Fund intends to invest a significant portion of its assets in securities of issuers domiciled or organized in emerging market countries, although the composition
of the Funds portfolio may change over time and from time to time such that a significant portion of the Funds assets are not invested in securities of emerging markets issuers. The Fund may take positions in various foreign (non-U.S.) currencies, including by actual holdings of those currencies and through forward, futures, swap, and option contracts with respect to foreign currencies, for hedging, or as a substitute for actual
purchases or sales of the currencies in question; the Fund may also invest in investments denominated in currencies other than the U.S. dollar if DoubleLine determines that such investments present favorable investment opportunities. The Fund may
(but is not required to) attempt to hedge some of its exposure to foreign currencies in order to reduce the risk of loss due to fluctuations in currency exchange rates relative to the U.S. dollar.
The Fund may invest without limit in securities rated below investment grade (securities rated Ba1 or below by Moodys Investors Service, Inc.
(Moodys) and BB+ or below by Standard & Poors Rating Services (S&P) and Fitch, Inc. (Fitch)) or unrated
securities judged by DoubleLine to be of comparable quality. The Fund will not normally invest more than 20% of its total assets in corporate debt instruments
that are, at the time of purchase, rated lower than B3 by Moodys and lower than B- by S&P and Fitch (or, if unrated, determined by the Adviser to be of comparable quality). In addition, the Fund will
not normally invest more than 20% of its total assets in debt securities and other income-producing investments that are not rated by at least one nationally recognized statistical rating organization. The Fund may invest in securities at risk of
being in default as to the repayment of principal and/or interest at the time of acquisition by the Fund. However, the Fund will not normally invest in corporate debt
|
|
|
|
|
|
|
|
|
|
|
50
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
securities rated at the time of investment lower than Ca3 by Moodys and lower than C by S&P and Fitch (or, if unrated, determined by the Adviser to be of comparable quality). The Fund
will not normally invest in defaulted corporate securities. In the case of split ratings, DoubleLine will categorize the security according to the highest rating assigned.
The Fund may invest in securities of any or no maturity. The portfolio managers intend, under normal market conditions, to seek to construct an investment
portfolio with a weighted average effective duration of not less than two years and not more than ten years. Duration is a measure of the expected life of a debt instrument that is used to determine the sensitivity of a securitys price to
changes in interest rates. For example, the value of a portfolio of debt securities with an average duration of ten years would generally be expected to decline by approximately 10% if interest rates rose by one percentage point. Effective duration
is a measure of the Funds portfolio duration adjusted for the anticipated effect of interest rate changes on bond and mortgage pre-payment rates. The effective duration of the Funds investment
portfolio may from time to time vary materially from the range stated above, and there is no assurance that the effective duration of the Funds investment portfolio will not vary outside the range stated above.
The Fund may hold common stocks and other equity securities from time to time, including, among others, those it has received through the conversion of a
convertible security held by the Fund or in connection with the restructuring of a debt security. The Fund may invest in securities that have not been registered for public sale, including securities eligible for purchase and sale pursuant to Rule
144A or Regulation S under the Securities Act of 1933, as amended, and other securities issued in private placements. The Fund also may invest without limit in securities of other open- or closed-end
investment companies, including ETFs, which may include those sponsored or advised by DoubleLine or its affiliates. The Fund may invest in securities of companies with small and medium market capitalizations.
Portfolio securities may be sold at any time. Sales may occur when the Adviser determines to take advantage of what it considers to be a better investment
opportunity, when the portfolio managers believe the portfolio securities no longer represent relatively attractive investment opportunities, when there is perceived deterioration in the credit fundamentals of the issuer, or when the individual
security has reached the portfolio managers sell target.
Note regarding investment limitations
Where the foregoing states that the Fund or the Adviser will not, or does not intend to, make investments in excess of a stated percentage of the Funds
total assets, total assets includes amounts of leverage obtained through the use of reverse repurchase agreements, dollar roll transactions or similar transactions, borrowings, and/or issuances of preferred shares. With respect to any
reverse repurchase agreement, dollar roll transaction or similar transaction, total assets includes any proceeds from the sale of an asset of the Fund to a counterparty in such a transaction, in addition to the value of the asset so sold
as of the relevant measuring date. Except as otherwise noted, all percentages apply only at the time of investment.
Derivatives
The Fund may use various derivatives strategies for hedging purposes or to gain, or reduce, long or short exposure to one or more asset classes,
issuers, currencies or reference assets, or to manage the dollar-weighted average effective duration of the Funds portfolio. The Fund also may enter into derivatives transactions with the purpose or effect of creating investment leverage. The
Fund reserves the right to invest in derivatives of any kind and for any investment purpose, including, for example, the following: futures contracts and options on futures contracts, in order to gain efficient long or short investment exposures as
an alternative to cash investments or to hedge against portfolio exposures; interest rate swaps, in order to gain indirect long or short exposures to interest rates, issuers, or currencies or to hedge against portfolio exposures; and total return
swaps and credit derivatives, put and call options, and exchange-traded and structured notes, in order to take indirect long or short positions on indexes, securities, currencies, commodities or other indicators of value or to hedge against
portfolio exposures. The Fund may, for hedging purposes or as a substitute for direct long or short investments in debt securities, make use of credit default swaps. The Fund may engage in short sales, either to earn additional return or to hedge
existing investments.
Leverage
As of September 30, 2021, the Fund uses leverage through borrowings. The Fund also may determine to issue preferred shares to add leverage to its portfolio.
The Fund also may enter into other transactions that may give rise to a form of leverage or that have leverage embedded in them including, among others, reverse repurchase agreements, dollar roll transactions, transactions involving inverse floaters
and related securities, credit default swap contracts and other transactions. Other similar transactions include loans of portfolio securities, transactions involving derivative instruments, short sales and when-issued, delayed delivery, and forward
commitment transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
51
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
Under normal market conditions, the Fund will
not (i) enter into reverse repurchase agreements or dollar roll transactions, (ii) borrow money through loans or draw on lines of credit from banks or other credit facilities, (iii) issue preferred shares, or (iv) enter into
derivatives transactions with the intention on the part of the Adviser to create investment leverage, if as a result the amount of investment leverage the Adviser determines to be attributable to the activities listed in (i) through
(iv) above in the aggregate would exceed 50% of the Funds total assets (including, for purposes of the 50% limit, the amounts of leverage obtained through such activities) (the 50% leverage policy). Derivatives transactions
entered into by the Fund to hedge, manage or reduce risk or to equitize a cash position will not be considered to have been made for the purpose of creating investment leverage and therefore will not be subject to the 50% leverage policy; the
Adviser generally will determine whether an investment has the effect of creating investment leverage by evaluating the effect of the investment on the exposure and risk profile of the Fund as a whole. It is possible that following the incurrence of
any amount of investment leverage, the value of the assets of the Fund will decline due to market conditions or other factors and that the 50% leverage limit will as a result be exceeded.
Any line of credit, borrowings or other form of leverage used by the Fund is subject to renewal periodically, and there can be no assurance that the form of
leverage will be renewed in the future.
The Fund will use leverage opportunistically and may choose to increase, decrease, or eliminate its use of leverage
over time and from time to time based on DoubleLines assessment of the yield curve environment, interest rate trends, market conditions, and other factors.
The Fund may make secured loans of its portfolio securities, on either a short-term or long-term basis, amounting to not more than 331⁄3% of its total assets.
Effects of Leverage
The Liquidity Agreement between the Fund and State Street Bank & Trust Company (the Bank) provides for credit availability
for the Fund such that it may borrow up to $850 million. As of September 30, 2021, the amount of total outstanding borrowings was $770,000,000. Interest charged is at the rate of one-month LIBOR (London
Interbank Offered Rate) plus 0.70%, subject to certain conditions that may cause the rate of interest to increase. Alternatively, under certain conditions, interest can be charged at the rate of the federal funds rate plus 0.55%. This rate
represents a floating rate of interest that may change over time. The Fund will also be responsible for paying a non-usage fee of 0.25% of available credit when the average amount borrowed under the Liquidity
Agreement for a month is less than $725 million.
Assuming the Fund uses leverage in the form of borrowings representing 29.16% of the Funds total
managed assets (including the amounts of leverage obtained through such borrowings), which reflects approximately the percentage of the Funds total assets attributable to such borrowings as of September 30, 2021, at an annual effective
interest expense of 0.81% payable by the Fund on such borrowings (based on market interest rates as of September 30, 2021), the annual return that the Funds portfolio must experience in order to cover such costs of the borrowings would be
0.24%.
The information below is designed to illustrate the effects of leverage through the use of senior securities under the 1940 Act, and does not reflect
the Funds use of certain other forms of economic leverage achieved through the use of other instruments or transactions not considered to be senior securities under the 1940 Act, such as reverse repurchase agreements, dollar roll transactions,
credit default swaps, total return swaps or other derivative instruments. Of course, these figures are merely estimates based on current market conditions, used for illustration purposes only.
These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or
expected to be experienced by the Fund. Your actual returns may be greater or less than those appearing below. In addition, actual expenses associated with borrowings or other forms of leverage, if any, used by the Fund may vary frequently and may
be significantly higher or lower than the rate used for the example below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Portfolio Total Return
|
|
|
|
|
|
|
|
|
(10.00
|
)%
|
|
|
|
(5.00
|
)%
|
|
|
|
0.00
|
%
|
|
|
|
5.00%
|
|
|
|
|
10.00%
|
|
|
|
|
|
|
|
|
Common Share Total Return
|
|
|
|
|
|
|
|
|
(14.45
|
)%
|
|
|
|
(7.39
|
)%
|
|
|
|
(0.33
|
)%
|
|
|
|
6.73%
|
|
|
|
|
13.79%
|
|
Common Shares total return is composed of two elementsthe distributions paid by the Fund to holders of Common Shares (the
amount of which is largely determined by the net investment income of the Fund after paying interest expenses on the Funds leveraging transactions as described above and other Fund expenses) and gains or losses on the value of the securities
and other instruments the Fund owns. As required by SEC rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0%, the Fund must assume that the
income it receives on its investments is entirely offset by Fund expenses and losses in the value of those investments.
|
|
|
|
|
|
|
|
|
|
|
52
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
The Funds
willingness to use leverage, and the extent to which leverage is used at any time, will depend on many factors, including, among other things, DoubleLines assessment of the yield curve environment, interest rate trends, market conditions and
other factors.
Principal Risk Factors
Investing in the Fund involves risks, including the risk that you may receive little or no return on your investment or that you may lose part or even all of your
investment. The section below does not describe all risks associated with an investment in the Fund. Additional risks and uncertainties also may adversely affect and impair the Fund.
Market discount risk
As with any
stock, the price of the Funds common shares of beneficial interest (the Common Shares) will fluctuate with market conditions and other factors. If you sell your Common Shares, the price received may be more or less than your
original investment. The Common Shares are designed for long-term investors and should not be treated as trading vehicles. Shares of closed-end management investment companies frequently trade at a discount
from their net asset value (NAV). The Fund cannot assure you that Common Shares will trade at a price equal to or higher than NAV in the future, and they may trade at a price lower than NAV. In addition to the Funds NAV, the
Funds market price may be affected by factors related to the Fund such as dividend payments (which will in turn be affected by Fund expenses, including the costs of the Funds leverage, amounts of interest payments made by the Funds
portfolio holdings, appreciation/depreciation of the Funds portfolio holdings, regulations affecting the timing and character of Fund distributions, and other factors), portfolio credit quality, liquidity, call protection, market supply and
demand and similar factors relating to the Funds portfolio holdings. The Funds market price may also be affected by general market or economic conditions, including market trends affecting securities values generally or values of closed-end fund shares more specifically.
Issuer risk
Issuer risk is the risk that the market price of securities may go up or down, sometimes rapidly or unpredictably, including due to factors affecting securities
markets generally, particular industries represented in those markets, or the issuer itself.
Investment and market risk
An investment in Common Shares is subject to investment risk, including the possible loss of the entire principal amount invested.
An investment in Common Shares represents an indirect investment in the securities and other instruments owned by the Fund. The market price of securities and
other instruments may go up or down, sometimes rapidly or unpredictably. Securities may decline in value due to factors affecting markets generally, particular industries represented in those markets, or the issuer itself. The values of securities
may decline due to general market conditions that are not specifically related to a particular issuer, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency
rates or adverse investor sentiment generally. Equity securities generally have greater price volatility than bonds and other debt securities. Common Shares are subject to the risk that markets will perform poorly or that the returns from the
securities in which the Fund invests will underperform returns from the general securities markets or other types of investments. Markets may, in response to governmental actions or intervention, political, economic or market developments, or other
external factors, experience periods of high volatility and reduced liquidity. Certain securities may be difficult to value during such periods. The value of securities and other instruments traded in over-the-counter markets, like other market investments, may move up or down, sometimes rapidly and unpredictably. Further, the value of securities and other instruments held by the Fund may decline in value
due to factors affecting securities markets generally or particular industries. These risks may be heightened for fixed income securities due to the current historically low interest rate environment.
Credit risk
Credit risk is the
risk that an issuer or counterparty will fail to pay its obligations to the Fund when they are due. If an investments issuer or counterparty fails to pay interest or otherwise fails to meet its obligations to the Fund, the Funds income
might be reduced and the value of the investment might fall or be lost entirely. Financial strength and solvency of an issuer are the primary factors influencing credit risk. Changes in the financial condition of an issuer or counterparty, changes
in specific economic, social or political conditions that affect a particular type of security, other instrument or an issuer, and changes in economic, social or political conditions generally can increase the risk of default by an issuer or
counterparty, which can affect a securitys or other instruments credit quality or value and an issuers or counterpartys ability to pay interest and principal when due. The values of lower-quality debt securities (including
debt securities commonly referred to as high yield securities and junk bonds) and floating rate loans, tend to be particularly sensitive to these changes. The values of securities also may decline for a number of other
reasons that relate directly to the issuer, such as management performance, financial leverage and reduced demand for the issuers goods and services, as well as the historical and prospective earnings of the issuer and the value of its assets.
Credit risk is heightened to the extent the Fund has fewer counterparties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
53
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
In addition, lack of or inadequacy of
collateral or credit enhancements for a fixed income security may affect its credit risk. Credit risk of a security may change over time, and securities which are rated by rating agencies may be subject to downgrade, which may have an indirect
impact on the market price of securities. Ratings are only opinions of the agencies issuing them as to the likelihood of re-payment. They are not guarantees as to quality and they do not reflect market risk.
During periods of deteriorating economic conditions, such as recessions or periods of rising unemployment, delinquencies and losses generally increase,
sometimes dramatically, with respect to debt securities and other obligations of all kinds. The effects of the COVID-19 virus, and governmental responses to the effects of the virus, may result in increased
delinquencies and losses in respect of all investments held by the Fund, and have other, potentially unanticipated, adverse effects on such investments and the markets for those investments.
Interest rate risk
Interest rate
risk is the risk that debt instruments will change in value because of changes in interest rates. The value of an instrument with a longer duration (whether positive or negative) will be more sensitive to changes in interest rates than a similar
instrument with a shorter duration. Bonds and other debt instruments typically have a positive duration. The value of a debt instrument with positive duration will generally decline if interest rates increase. Certain other investments, such as
inverse floaters and certain derivative instruments, may have a negative duration. The value of instruments with a negative duration will generally decline if interest rates decrease. Inverse floaters, interest-only and principal-only securities are
especially sensitive to interest rate changes, which can affect not only their prices but can also change the income flows and repayment assumptions about those investments. In recent years, the U.S. has experienced historically low interest rates,
increasing the exposure of bond investors to the risks associated with rising interest rates. The prices of long-term debt obligations generally fluctuate more than prices of short-term debt obligations as interest rates change. Because the
Funds weighted average effective duration generally will fluctuate as interest rates change, the Common Share NAV and market price per share may tend to fluctuate more in response to changes in market interest rates than if the Fund invested
mainly in short- term debt securities. During periods of rising interest rates, the average life of certain types of securities may extend due to lower than expected rates of pre-payments, which could cause
the securities durations to extend and expose the securities to more price volatility. This may lock in a below market yield, increase the securitys duration and reduce the securities value. In addition to directly affecting debt
securities, rising interest rates also may have an adverse effect on the value of any equity securities held by the Fund. The Funds use of leverage will tend to increase Common Share interest rate risk. DoubleLine may use certain strategies,
including investments in structured notes or interest rate futures contracts or swap, cap, floor or collar transactions, for the purpose of reducing the interest rate sensitivity of the Funds portfolio, although there is no assurance that it
will do so or that such strategies will be successful.
Yield curve risk is the risk associated with either a flattening or steepening of the yield curve.
The yield curve is a representation of market interest rates of obligations with durations of different lengths. When the yield curve is steep, longer-term obligations bear higher rates of interest than similar shorter-term obligations;
when the curve flattens, the difference between those interest rates is reduced. If the yield curve is inverted, longer term obligations bear lower interest rates than shorter term obligations. If the Funds portfolio is
structured to perform favorably in a particular interest rate environment, a change in the yield curve could result in losses to the Fund.
Variable and
floating rate debt securities are generally less sensitive to interest rate changes, but may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating rate securities will not
generally increase in value at all or to the same extent as fixed rate instruments when interest rates decline. Inverse floating rate debt securities may decrease in value if interest rates increase.
Inverse floating rate debt securities also may exhibit greater price volatility than a fixed rate debt obligation with similar credit quality. When the Fund
holds variable or floating rate securities, a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities and the NAV of the Common Shares.
Debt securities risk
In addition
to certain of the other risks described herein such as interest rate risk and credit risk, debt securities generally also are subject to the following risks:
|
|
|
Redemption RiskDebt securities sometimes contain provisions that allow for redemption in the event of tax or
security law changes in addition to call features at the option of the issuer. In the event of a redemption, the Fund may not be able to reinvest the proceeds at comparable rates of return.
|
|
|
|
Liquidity RiskCertain debt securities may be substantially less liquid than many other securities, such as
U.S. Government securities or common shares or other equity securities.
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
|
|
|
Spread RiskWider credit spreads and decreasing market values typically represent a deterioration of the debt
securitys credit soundness and a perceived greater likelihood or risk of default by the issuer.
|
|
|
|
Limited Voting RightsDebt securities typically do not provide any voting rights, except in some cases when
interest payments have not been made and the issuer is in default. Even in such cases, such rights may be limited to the terms of the debenture or other agreements.
|
|
|
|
Extension RiskThis is the risk that if interest rates rise, repayments of principal on certain debt
securities, including, but not limited to, floating rate loans and mortgage-related securities, may occur at a slower rate than expected and the expected maturity of those securities could lengthen as a result. Securities that are subject to
extension risk generally have a greater potential for loss when prevailing interest rates rise, which could cause their values to fall sharply.
|
|
|
|
Prepayment/Reinvestment RiskMany types of debt securities, including floating rate loans, mortgage-backed
securities and asset-backed securities, may reflect an interest in periodic payments made by borrowers. Although debt securities and other obligations typically mature after a specified period of time, borrowers may pay them off sooner. When a
prepayment happens, all or a portion of the obligation will be prepaid. A borrower is more likely to prepay an obligation which bears a relatively high rate of interest. This means that in times of declining interest rates, there is a greater
likelihood that the Funds higher yielding securities will be pre-paid and the Fund will probably be unable to reinvest those proceeds in an investment with as great a yield, causing the Funds yield
to decline. Securities subject to prepayment risk generally offer less potential for gains when prevailing interest rates fall. If the Fund buys those investments at a premium, accelerated prepayments on those investments could cause the Fund to
lose a portion of its principal investment and result in lower yields to shareholders. The increased likelihood of prepayment when interest rates decline also limits market price appreciation, especially with respect to certain loans,
mortgage-backed securities and asset-backed securities. The effect of prepayments on the price of a security may be difficult to predict and may increase the securitys price volatility. Interest- only and principal-only securities are
especially sensitive to interest rate changes, which can affect not only their prices but can also change the income flows and repayment assumptions about those investments. Income from the Funds portfolio may decline when the Fund invests the
proceeds from investment income, sales of portfolio securities or matured, traded or called debt obligations. A decline in income received by the Fund from its investments is likely to have a negative effect on the dividend levels and market price,
NAV and/or overall return of the Common Shares.
|
The Funds investments in debt securities may include, but are not limited to,
senior, junior, secured and unsecured bonds, notes and other debt securities, and may be fixed rate, floating rate, zero coupon and inflation linked, among other things. The Fund may invest in convertible bonds, which are fixed income securities
that are exercisable into other debt or equity securities, and synthetic convertible securities, which are created through a combination of separate securities that possess the two principal characteristics of a traditional convertible
security, i.e., an income-producing security (income-producing component) and the right to acquire an equity security (convertible component). The market value of a debt security may be affected by the credit rating of
the issuer, the issuers performance, perceptions of the issuer in the market place, management performance, financials, leverage and reduced demand for the issuers goods and services. There is a risk that the issuers of the debt
securities in which the Fund may invest may not be able to meet their obligations on interest or principal payments at the time called for by an instrument.
Foreign investing risk
Investments in foreign securities or in issuers with significant exposure to foreign markets may involve greater risks than investments in domestic securities. To
the extent that investments are made in a limited number of countries, events in those countries will have a more significant impact on the Fund. As compared to U.S. companies, foreign issuers generally disclose less financial and other information
publicly and are subject to less stringent and less uniform accounting, auditing, and financial reporting standards. In addition, there may be limited information generally regarding factors affecting a particular foreign market, issuer, or
security.
Foreign countries typically impose less thorough regulations on brokers, dealers, stock exchanges, corporate insiders and listed companies than
does the United States and foreign securities markets may be less liquid and more volatile than domestic markets. Investment in foreign securities involves higher costs than investment in U.S. securities, including higher transaction and custody
costs as well as the imposition of additional taxes by foreign governments, and as a result investments in foreign securities may be subject to issues relating to security registration or settlement. In addition, security trading and custody
practices abroad may offer less protection to investors such as the Fund. Political, social or financial instability, civil unrest and acts of terrorism are other potential risks that could adversely affect an investment in a foreign security or in
foreign markets or issuers generally. Settlement of transactions in some foreign markets may be delayed or may be less frequent than in the United States which could affect the liquidity of the Funds portfolio. Custody practices and
regulations abroad may offer less protection to investors, such as the Fund, and the Fund may be limited in its ability to enforce contractual rights or obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
55
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
Because foreign securities generally are
denominated and pay dividends or interest in foreign currencies, and the Fund may hold various foreign currencies from time to time, the value of the Funds assets, as measured in U.S. dollars, can be affected unfavorably by changes in exchange
rates with respect to the U.S. dollar or with respect to other foreign currencies or by unfavorable currency regulations imposed by foreign governments. If the Fund invests in securities issued by foreign issuers, the Fund may be subject to these
risks even if the investment is denominated in United States dollars. This risk may be heightened with respect to issuers whose revenues are principally earned in a foreign currency but whose debt obligations have been issued in United States
dollars or other hard currencies.
Foreign issuers may become subject to sanctions imposed by the U.S. or another country or other governmental or non-governmental organizations, which could result in the immediate freeze of the foreign issuers assets or securities. The imposition of such sanctions could impair the market value of the securities of such
foreign issuers and limit the Funds ability to buy, sell, receive or deliver the securities.
Continuing uncertainty as to the status of the European
Economic and Monetary Union (EMU) and the potential for certain countries (such as those in the United Kingdom) to withdraw from the institution has created significant volatility in currency and financial markets generally. Any partial
or complete dissolution of the European Union (the EU) could have significant adverse effects on currency and financial markets, and on the values of the Funds portfolio investments. At a referendum in June 2016, the United Kingdom
(the UK) voted to leave the EU, thereby initiating the British exit from the EU (commonly known as Brexit). In March 2017, the UK formally notified the European Council of the UKs intention to withdraw from the EU
pursuant to Article 50 of the Treaty on European Union. This formal notification began a multi-year period of negotiations regarding the terms of the UKs exit from the EU, which formally occurred on January 31, 2020. A transition period
is taking place following the UKs exit where the UK remains subject to EU rules but has no role in the EU law-making process. During this transition period, UK and EU representatives are negotiating the
precise terms of their future relationship. There is still considerable uncertainty relating to the potential consequences associated with the exit, how the negotiations for the withdrawal and new trade agreements will be conducted, and whether the
UKs exit will increase the likelihood of other countries also departing the EU. Brexit may have a significant impact on the UK, Europe, and global economies, which may result in increased volatility and illiquidity, and potentially lower
economic growth in markets in the UK, Europe and globally, which may adversely affect the value of the Funds investments.
If one or more EMU countries
were to stop using the euro as its primary currency, the Funds investments in such countries may be redenominated into a different or newly adopted currency, possibly resulting in the value of those investments declining significantly and
unpredictably. In addition, securities or other investments that are redenominated may be subject to liquidity risk and the risk that the Fund may not be able to value investments accurately to a greater extent than similar investments currently
denominated in euros. To the extent a currency used for redenomination purposes is not specified in respect of certain EMU-related investments, or should the euro cease to be used entirely, the currency in
which such investments are denominated may be unclear, making such investments particularly difficult to value or dispose of. The Fund may incur additional expenses to the extent it is required to seek judicial or other clarification of the
denomination or value of such securities.
Emerging markets risk
Investing in emerging market countries, as compared to foreign developed markets, involves substantial additional risk due to more limited information about the
issuer and/or the security; higher brokerage costs; different accounting, auditing and financial reporting standards; less developed legal systems and thinner trading markets; the possibility of currency blockages or transfer restrictions; an
emerging market countrys dependence on revenue from particular commodities or international aid; and the risk of expropriation, nationalization or other adverse political or economic developments.
Political and economic structures in many emerging market countries may undergo significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristics of more developed countries. Some emerging market countries have a greater degree of economic, political and social instability than the U.S. and other developed countries. Such social,
political and economic instability could disrupt the financial markets in which the Fund invests and adversely affect the value of its investment portfolio. Some of these countries have in the past failed to recognize private property rights and
have at times nationalized or expropriated the assets of private companies. In addition, unanticipated political or social developments may affect the value of investments in emerging markets and the availability of additional investments in these
markets. The small size, limited trading volume and relative inexperience of the securities markets in these countries may make investments in securities traded in emerging markets illiquid and more volatile than investments in securities traded in
more developed countries, and the Fund may be required to establish special custodial or other arrangements before making investments in securities traded in emerging markets. There may be little financial or accounting information available with
respect to issuers of emerging market securities, and it may be difficult as a result to assess the value or prospects of an investment in such securities.
|
|
|
|
|
|
|
|
|
|
|
56
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
The securities
markets of emerging market countries may be substantially smaller, less developed, less liquid and more volatile than the major securities markets in the United States and other developed nations. The limited size of many securities markets in
emerging market countries and limited trading volume in issuers compared to the volume in U.S. securities or securities of issuers in other developed countries could cause prices to be erratic for reasons other than factors that affect the quality
of the securities and investments in emerging markets can become illiquid. In addition, emerging market countries exchanges and broker-dealers may generally be subject to less regulation than their counterparts in developed countries. Emerging
market securities markets, exchanges and market participants may lack the regulatory oversight and sophistication necessary to deter or detect market manipulation in such exchanges or markets, which may result in losses to the Fund to the extent it
holds investments trading in such exchanges or markets. Brokerage commissions and dealer mark-ups, custodial expenses and other transaction costs are generally higher in emerging market countries than in
developed countries. As a result, funds that invest in emerging market countries have operating expenses that are higher than funds investing in other securities markets.
The Public Company Accounting Oversight Board, which regulates auditors of U.S. public companies, is unable to inspect audit work papers in certain foreign
countries. Investors in foreign countries often have limited rights and few practical remedies to pursue shareholder claims, including class actions or fraud claims, and the ability of the Securities and Exchange Commission (the SEC),
the U.S. Department of Justice and other authorities to bring and enforce actions against foreign issuers or foreign persons is limited. Regulatory regimes outside of the U.S. may not require or enforce corporate governance standards comparable to
that of the U.S., which may result in less protections for investors in such issuers and make such issuers more susceptible to actions not in the best interest of the issuer or its investors.
Emerging market countries may have different clearance and settlement procedures than in the U.S., including significantly longer settlement cycles for purchases
and sales of securities, and in certain markets there may be times when settlements fail to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Further, custody practices abroad may offer less
protection generally to investors, such as the Fund, and satisfactory custodial services for investment securities may not be available in some emerging market countries, which may result in the Fund incurring additional costs and delays in
transporting and custodying such securities outside such countries. Delays in settlement or other problems could result in periods when the Funds assets are uninvested and no return is earned thereon. The Funds inability to make intended
security purchases due to settlement problems or the risk of intermediary counterparty failures could cause the Fund to miss attractive investment opportunities. The inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in the value of such portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. The currencies of certain
emerging market countries have experienced devaluations relative to the U.S. dollar, and future devaluations may adversely affect the value of assets denominated in such currencies. Many emerging market countries have experienced substantial, and in
some periods extremely high, rates of inflation or deflation for many years, and future inflation may adversely affect the economies and securities markets of such countries. When debt and similar obligations issued by foreign issuers are
denominated in a currency (e.g., the U.S. dollar or the Euro) other than the local currency of the issuer, the subsequent strengthening of the non-local currency against the local currency will
generally increase the burden of repayment on the issuer and may increase significantly the risk of default by the issuer.
Emerging market countries have
and may in the future impose capital controls, foreign currency controls and repatriation controls. In addition, some currency hedging techniques may be unavailable in emerging market countries, and the currencies of emerging market countries may
experience greater volatility in exchange rates as compared to those of developed countries.
Mortgage-backed securities risks
Mortgage-backed securities include, among other things, participation interests in pools of residential mortgage loans purchased from individual
lenders by a federal agency or originated and issued by private lenders and involve, among others, the following risks:
Credit and Market Risks of
Mortgage-Backed Securities. Investments by the Fund in fixed rate and floating rate mortgage-backed securities will entail credit risks (i.e., the risk of non-payment of interest and principal)
and market risks (i.e., the risk that interest rates and other factors could cause the value of the instrument to decline). Some issuers or servicers of mortgage-backed securities guarantee timely payment of interest and principal on the
securities, whether or not payments are made when due on the underlying mortgages. This kind of guarantee generally increases the quality of a security, but does not mean that the securitys market value and yield will not change. The values of
mortgage-backed securities may change because of changes in the markets perception of the credit quality of the assets held by the issuer of the mortgage-backed securities or an entity, if any, providing credit support in respect of the
mortgage-backed securities. In addition, an unexpectedly high rate of defaults on the mortgages held by a mortgage pool may limit substantially the pools ability to make payments of principal or interest to the Fund as a holder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
57
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
of such securities, reducing the values of those securities or in some cases rendering them worthless. The Fund also may purchase securities that are not guaranteed or subject to any credit
support. An investment in a privately issued mortgage-backed security is generally less liquid and subject to greater credit risks than an investment in a mortgage-backed security that is issued or otherwise guaranteed by a federal government agency
or sponsored corporation.
Mortgage-backed securities may be structured similarly to collateralized debt obligations (CDOs) and may be subject to
similar risks. For example, the cash flows from the collateral held by the mortgage-backed security may be split into two or more portions, called tranches, varying in risk and yield. Senior tranches are paid from the cash flows from the underlying
assets before the junior tranches and equity or first loss tranches. Losses are first borne by the equity tranches, next by the junior tranches, and finally by the senior tranches. Interest holders in senior tranches are entitled to the
lowest interest rates but are generally subject to less credit risk than more junior tranches because, should there be any default, senior tranches are typically paid first. The most junior tranches, such as equity tranches, typically are due to be
paid the highest interest rates but suffer the highest risk of loss should the holder of an underlying mortgage loan default. If some loans default and the cash collected by the issuer of the mortgage-backed security is insufficient to pay all of
its investors, those in the lowest, most junior tranches suffer losses first.
Like bond investments, the value of fixed rate mortgage-backed securities will
tend to rise when interest rates fall, and fall when rates rise. Floating rate mortgage-backed securities generally tend to have more moderate changes in price when interest rates rise or fall, but their current yield will generally be affected. In
addition, the mortgage-backed securities market in general may be adversely affected by changes in governmental legislation or regulation. Factors that could affect the value of a mortgage-backed security include, among other things, the types and
amounts of insurance which an individual mortgage or that specific mortgage- backed security carries, the default and delinquency rate of the mortgage pool, the amount of time the mortgage loan has been outstanding, the loan-to-value ratio of each mortgage and the amount of overcollateralization or undercollateralization of a mortgage pool. The Fund may invest in mortgage-backed securities
that are subordinate in their right to receive payment of interest and repayment of principal to other classes of the issuers securities.
The
residential mortgage market in the United States has experienced difficulties at times, and the same or similar events may adversely affect the performance and market value of certain of the Funds mortgage-related investments. Delinquencies
and losses on residential mortgage loans (especially subprime and second-lien mortgage loans) generally increase in a recession and potentially could begin to increase again. A decline in or flattening of housing values may exacerbate such
delinquencies and losses. Borrowers with adjustable rate mortgage loans may be more sensitive to changes in interest rates, which affect their monthly mortgage payments, and may be unable to secure replacement mortgages at comparably low interest
rates. Reduced investor demand for mortgage-related securities could result in limited new issuances of mortgage-related securities and limited liquidity in the secondary market for mortgage-related securities, which can adversely affect the market
value of mortgage-related securities and limit the availability of attractive investment opportunities for the Fund.
The values of mortgage-backed
securities may be substantially dependent on the servicing of the underlying mortgage pools, and therefore are subject to risks associated with the negligence or malfeasance by their servicers and to the credit risk of their servicers. In certain
circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying collateral.
Some government
sponsored mortgage-related securities are backed by the full faith and credit of the United States. The Government National Mortgage Association (Ginnie Mae), the principal guarantor of such securities, is a wholly owned United States
government corporation within the Department of Housing and Urban Development. Other government-sponsored mortgage-related securities are not backed by the full faith and credit of the United States government. Issuers of such securities include
Fannie Mae (formally known as the Federal National Mortgage Association) and Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation). Fannie Mae is a government-sponsored corporation which is subject to general regulation by the
Secretary of Housing and Urban Development. Pass-through securities issued by Fannie Mae are guaranteed as to timely payment of principal and interest by Fannie Mae. Freddie Mac is a stockholder-owned corporation chartered by Congress and subject to
general regulation by the Department of Housing and Urban Development. Participation certificates representing interests in mortgages from Freddie Macs national portfolio are guaranteed as to the timely payment of interest and ultimate
collection of principal by Freddie Mac. The U.S. government has provided financial support to Fannie Mae and Freddie Mac in the past, but there can be no assurances that it will support these or other government-sponsored entities in the future.
Under the Federal Housing Finance Agencys Single Security Initiative, Fannie Mae and Freddie Mac have entered into a joint initiative to
develop a common securitization platform for the issuance of Uniform Mortgage-Backed Securities (UMBS), which would generally align the characteristics of Fannie Mae and Freddie Mac participation certificates. In June 2019 Fannie Mae and
|
|
|
|
|
|
|
|
|
|
|
58
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
Freddie Mac began issuing UMBS in place of their offerings of to be announced- eligible mortgage-backed securities. The long- term effect of the issuance of UMBS on the market for
mortgage-backed securities is uncertain.
During periods of deteriorating economic conditions, such as recessions or periods of rising unemployment,
delinquencies and losses generally increase, sometimes dramatically, with respect to securitizations involving mortgage loans and other obligations underlying mortgage-backed securities. The effects of the
COVID-19 virus, and governmental responses to the effects of the virus, may result in increased delinquencies and losses and have other, potentially unanticipated, adverse effects on such investments and the
markets for those investments.
Commercial Mortgage-Backed Securities (CMBS) Risks. CMBS include securities that reflect an
interest in, or are secured by, mortgage loans on commercial real property. Many of the risks of investing in commercial mortgage-backed securities reflect the risks of investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments and the ability of a property to attract and retain tenants. Commercial mortgage-backed securities may be less liquid and
exhibit greater price volatility than other types of mortgage- or asset-backed securities.
Prepayment, Extension and Redemption Risks of
Mortgage-Backed Securities. Mortgage-backed securities may reflect an interest in monthly payments made by the borrowers who receive the underlying mortgage loans. Although the underlying mortgage loans are for specified periods of time,
such as 20 or 30 years, the borrowers can, and historically have often paid them off sooner. When a prepayment happens, a portion of the mortgage-backed security which represents an interest in the underlying mortgage loan will be prepaid. A
borrower is more likely to prepay a mortgage which bears a relatively high rate of interest. This means that in times of declining interest rates, a portion of the Funds higher yielding securities are likely to be redeemed and the Fund will
probably be unable to replace them with securities having as great a yield. Prepayments can result in lower yields to shareholders. The increased likelihood of prepayment when interest rates decline also limits market price appreciation. This is
known as prepayment risk. Mortgage-backed securities also are subject to extension risk. Extension risk is the possibility that rising interest rates may cause prepayments to occur at a slower than expected rate. This particular risk may effectively
change a security which was considered short or intermediate term into a long-term security. The values of long-term securities generally fluctuate more widely in response to changes in interest rates than short or intermediate-term securities. In
addition, a mortgage-backed security may be subject to redemption at the option of the issuer. If a mortgage-backed security held by the Fund is called for redemption, the Fund will be required to permit the issuer to redeem or pay-off the security, which could have an adverse effect on the Funds ability to achieve its investment objectives.
Liquidity Risk of Mortgage-Backed Securities. The liquidity of mortgage-backed securities varies by type of security; at certain times the Fund may
encounter difficulty in disposing of such investments. Investments in privately issued mortgage-backed securities may have less liquidity than mortgage-backed securities that are issued by a federal government agency or sponsored corporation.
Because mortgage-backed securities have the potential to be less liquid than other securities, the Fund may be more susceptible to liquidity risks than funds that invest in other securities. In the past, in stressed markets, certain types of
mortgage- backed securities suffered periods of illiquidity when disfavored by the market. It is possible that the Fund may be unable to sell a mortgage-backed security at a desirable time or at the value the Fund has placed on the investment.
Collateralized Mortgage Obligations (CMOs) Risks. CMOs are debt obligations collateralized by mortgage loans or mortgage pass-through
securities. The expected average life of CMOs is determined using mathematical models that incorporate prepayment assumptions and other factors that involve estimates of future economic and market conditions. These estimates may vary from actual
future results, particularly during periods of extreme market volatility. Further, under certain market conditions, the average weighted life of certain CMOs may not accurately reflect the price volatility of such securities. For example, in periods
of supply and demand imbalances in the market for such securities and/or in periods of sharp interest rate movements, the prices of CMOs may fluctuate to a greater extent than would be expected from interest rate movements alone. CMOs issued by
private entities are not obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and are not guaranteed by any government agency, although the securities underlying a CMO may be subject to a guarantee. Therefore,
if the collateral securing the CMO, as well as any third party credit support or guarantees, is insufficient to make payments when due, the holder could sustain a loss.
With respect to risk retention tranches (i.e., eligible residual interests initially held by the sponsors of collateralized mortgage-backed securities and other
eligible securitizations pursuant to the U.S. Risk Retention Rules), a third-party purchaser, such as the Fund, must hold its retained interest, unhedged, for at least five years following the closing of the securitization transaction, after which
it is entitled to transfer its interest in the securitization to another person that meets the requirements for a third-party purchaser. Even after the required holding period has expired, due to the limited market for such investments, no assurance
can be
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
59
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
given as to what, if any, exit strategies will ultimately be available for any given position. In addition, there is limited guidance on the application of the laws and regulations applicable to
such investments. There can be no assurance that the applicable federal agencies charged with the implementation of the Final U.S. Risk Retention Rules (the FDIC, the Comptroller of the Currency, the Federal Reserve Board, the SEC, the Department of
Housing and Urban Development, and the Federal Housing Finance Agency) could not take positions in the future that differ from the interpretation of such rules taken or embodied in such securitizations, or that the Final U.S. Risk Retention Rules
will not change. Furthermore, in situations where the Fund invests in risk retention tranches of securitizations structured by third parties, the Fund may be required to execute one or more letters or other agreements, the exact form and nature of
which will vary (each, a Risk Retention Agreement) under which it will make certain undertakings designed to ensure such securitization complies with the Final U.S. Risk Retention Rules. Such Risk Retention Agreements may include a
variety of representations, warranties, covenants and other indemnities, each of which may run to various transaction parties. If the Fund breaches any undertakings in any Risk Retention Agreement, it will be exposed to claims by the other parties
thereto, including for any losses incurred as a result of such breach.
Adjustable Rate Mortgages (ARMs) Risks. ARMs contain
maximum and minimum rates beyond which the mortgage interest rate may not vary over the lifetime of the security. In addition, many ARMs provide for additional limitations on the maximum amount by which the mortgage interest rate may adjust for any
single adjustment period. Alternatively, certain ARMs contain limitations on changes in the required monthly payment. In the event that a monthly payment is not sufficient to pay the interest accruing on an ARM, any excess interest is added to the
principal balance of the mortgage loan, which is repaid through future monthly payments. If the monthly payment for such an instrument exceeds the sum of the interest accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the remaining term of the loan, the excess is used to reduce the then-outstanding principal balance of the ARM. In addition, certain ARMs may provide for an initial fixed,
below-market or teaser interest rate. During this initial fixed-rate period, the payment due from the related mortgagor may be less than that of a traditional loan. However, after the teaser rate expires, the monthly payment required to be made by
the mortgagor may increase significantly when the interest rate on the mortgage loan adjusts. This increased burden on the mortgagor may increase the risk of delinquency or default on the mortgage loan and in turn, losses on the mortgage-backed
security into which that loan has been bundled.
Interest and Principal Only Securities Risks. Stripped mortgage-backed securities are usually
structured with two classes that receive different portions of the interest and principal distributions on a pool of debt instruments, such as mortgage loans. In one type of stripped mortgage-backed security, one class will receive all of the
interest from the mortgage assets (the interest-only, or IO class), while the other class will receive all of the principal from the mortgage assets (the principal-only, or PO class). The yield to maturity (the expected rate
of return on a bond if held until the end of its lifetime) on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage assets, and a rapid rate of principal payments may have a material
adverse effect on the Funds yield to maturity from these securities. If the assets underlying the IO class experience greater than anticipated prepayments of principal, the Fund may fail to recoup fully, or at all, its initial investment in
these securities. PO class securities tend to decline in value if prepayments are slower than anticipated.
Inverse Floaters and Related Securities
Risks. Investments in inverse floaters and similar instruments expose the Fund to the same risks as investments in debt securities and derivatives, as well as other risks, including those associated with increased volatility. An investment
in these securities typically will involve greater risk than an investment in a fixed rate security. Distributions on inverse floaters and similar instruments will typically bear an inverse relationship to short-term interest rates and typically
will be reduced or, potentially, eliminated as interest rates rise. The rate at which interest is paid on an inverse floater may vary by a magnitude that exceeds the magnitude of the change in a reference rate of interest (typically a short-term
interest rate). The effect of the reference rate multiplier in inverse floaters is associated with greater volatility in their market values. Investments in inverse floaters and similar instruments that have mortgage-backed securities underlying
them will expose the Fund to the risks associated with those mortgage-backed securities and the values of those investments may be especially sensitive to changes in prepayment rates on the underlying mortgage-backed securities.
Collateralized debt obligations risk
CDOs include CBOs, CLOs, and other similarly structured securities. A CBO is a trust which may be backed by a diversified pool of high risk, below investment
grade fixed income securities. A CLO is a trust typically collateralized by a pool of loans, which may include, among others, domestic and foreign senior secured loans, senior unsecured loans, second lien loans or other types of subordinate loans,
and mezzanine loans, including loans that may be rated below investment grade or equivalent unrated loans and including loans that may be covenant-lite. CDOs may charge management fees and administrative expenses. The cash flows from the CDO trust
are generally split into two or more portions, called tranches, varying in risk and yield. Senior tranches are paid from the cash flows from the underlying assets before the junior tranches and equity or first loss tranches. Losses are
first borne
|
|
|
|
|
|
|
|
|
|
|
60
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
by the equity tranches, next by the junior tranches, and finally by the senior tranches. Holders of interests in the senior tranches are entitled to the lowest interest rate payments but those
interests generally involve less credit risk as they are typically paid before junior tranches. The most junior tranches, such as equity tranches, typically are entitled to be paid the highest interest rate payments but suffer the highest risk of
loss should the holder of an underlying debt instrument default. If some debt instruments go into default and the cash collected by the CDO is insufficient to pay all of its investors, those in the lowest, most junior tranches suffer losses first.
Since it is partially protected from defaults, a senior tranche from a CDO trust typically has higher ratings and lower potential yields than the underlying securities, and can be rated investment grade. Despite the protection from the equity
tranche, more senior CDO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults and aversion to CDO
securities as a class.
The risks of an investment in a CDO depend largely on the quality and type of the collateral and the tranche of the CDO in which the
Fund invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus are not registered under the securities laws. As a result, there may be a limited secondary market for investments in CDOs and such investments may be
illiquid. In addition to the risks associated with debt instruments (e.g., interest rate risk and credit risk), CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral will not be
adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the possibility that the Fund may invest in CDOs that are subordinate to other classes of the issuers securities; and
(iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results.
Asset-backed securities investment risk
Asset-backed securities in which the Fund may invest include obligations backed by, among others, motor vehicle installment sales or installment loan contracts;
home equity loans; leases of various types of real, personal and other property (including those relating to aircrafts, telecommunication, energy, and/or other infrastructure assets and infrastructure-related assets); receivables from credit card
agreements; student loans; consumer loans; mobile home loans; boat loans; business and small business loans; project finance loans; airplane leases; and other non-mortgage-related income streams, such as
income from renewable energy projects and franchise rights. They may also include asset-backed securities backed by whole loans or fractions of whole loans issued by alternative lending platforms and securitized by those platforms or other entities
(such as third-party originators or brokers). Any of these loans may be of sub-prime quality or made to an obligor with a sub-prime credit history.
Asset-backed securities involve the risk that borrowers may default on the obligations backing them and that the values of and interest earned on such
investments will decline as a result. Loans made to lower quality borrowers, including those of sub-prime quality, involve a higher risk of default. Such loans, including those made by alternative lending
platforms, may be difficult to value, may have limited payment histories, and may be subject to significant changes in value over time as economic conditions change. Therefore, the values of asset-backed securities backed by lower quality loans,
including those of sub-prime quality, may suffer significantly greater declines in value due to defaults, payment delays or a perceived increased risk of default, especially during periods when economic
conditions worsen. In addition, most or all securities backed by the collateral described above do not involve any credit enhancement provided by the U.S. government or any other party, and certain asset-backed securities do not have the benefit of
a security interest in the related collateral.
Asset-backed securities tend to increase in value less than traditional debt securities of similar maturity
and credit quality when interest rates decline, but are subject to a similar risk of decline in market value during periods of rising interest rates. Certain assets underlying asset-backed securities are subject to prepayment, which may reduce the
overall return to asset-backed security holders. In a period of declining interest rates, pre-payments on asset-backed securities may increase and the Fund may be unable to reinvest those prepaid amounts in
investments providing the same rate of interest as the pre-paid obligations.
The values of asset-backed securities
may also be substantially dependent on the servicing of and diligence performed by their servicers or sponsors or the originating alternative lending platforms. For example, the Fund may suffer losses due to a servicers, sponsors or
platforms negligence or malfeasance, such as through the mishandling of certain documentation affecting security holders rights in and to underlying collateral or the failure to update or collect accurate and complete borrower
information. In addition, the values of asset-backed securities may be adversely affected by the credit quality of the servicer, sponsor or originating alternative lending platform, as applicable. Certain services, sponsors or originating
alternative lending platforms may have limited operating histories to evaluate. The insolvency of a servicer, sponsor or originating alternative lending platform may result in added costs and delays in addition to losses associated with a decline in
the value of underlying assets. The Fund also may experience delays in payment or losses on its investments if the full amount due on underlying collateral is not realized, which may occur because of unanticipated legal or administrative costs of
enforcing the contracts, depreciation or damage to the collateral securing certain contracts, under-collateralization or other factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
61
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
U.S. Government
securities risk
Some U.S. Government securities, such as Treasury bills, notes, and bonds and mortgage-backed securities guaranteed by the
Government National Mortgage Association (Ginnie Mae), are supported by the full faith and credit of the United States; others are supported by the right of the issuer to borrow from the U.S. Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agencys obligations; still others are supported only by the credit of the issuing agency, instrumentality, or enterprise. Although U.S. Government-sponsored enterprises may be chartered or
sponsored by Congress, they are not funded by Congressional appropriations, and their securities are not issued by the U.S. Treasury, their obligations are not supported by the full faith and credit of the U.S. Government, and so investments in
their securities or obligations issued by them involve greater risk than investments in other types of U.S. Government securities.
The events surrounding
the U.S. federal government debt ceiling and any resulting agreement (and similar political, economic and other developments) could adversely affect the Funds ability to achieve its investment objectives. For example, a downgrade of the
long-term sovereign credit rating of the U.S. could increase volatility in both stock and bond markets, result in higher interest rates and lower Treasury prices and increase the costs of all kinds of debt. These events and similar events in other
areas of the world could have significant adverse effects on the economy generally and could result in significant adverse impacts on issuers of securities held by the Fund and the Fund itself.
In the past, the values of U.S. Government securities have been affected substantially by increased demand for them around the world. Changes in the demand for
U.S. Government securities may occur at any time and may result in increased volatility in the values of those securities.
Sovereign debt obligations risk
Investments in countries government debt obligations involve special risks. Certain countries have historically experienced, and may continue to experience,
high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the
repayment of a countrys debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A debtors willingness or ability to repay principal and interest due in a timely manner
may be affected by, among other factors, its cash flow situation and, in the case of a government debtor, the extent of its foreign currency reserves or its inability to sufficiently manage fluctuations in relative currency valuations, the
availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the government debtors policy towards principal international lenders such as the International
Monetary Fund and the political and social constraints to which a government debtor may be subject. Government debtors may default on their debt and also may be dependent on expected disbursements from foreign governments, multilateral agencies and
others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a debtors implementation of economic reforms and/or
economic performance and the timely service of such debtors obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third
parties commitments to lend funds to the government debtor, which may further impair such debtors ability or willingness to service its debts on a timely basis.
As a result of the foregoing, a government obligor may default on its obligations. If such an event occurs, the Fund may have limited (or no) legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political
climate in the relevant country. In addition, no assurance can be given that the holders of more senior fixed income securities, such as commercial bank debt, will not contest payments to the holders of other foreign government debt securities in
the event of default under their commercial bank loan agreements. There is no bankruptcy proceeding by which sovereign debt on which governmental entities have defaulted may be collected in whole or in part. In addition, foreign governmental
entities may enjoy various levels of sovereign immunity, and it may be difficult or impossible to bring a legal action against a foreign governmental entity or to enforce a judgment against such an entity.
Government obligors in emerging market countries are among the worlds largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. The issuers of the government debt securities in which the Fund may invest have in the past experienced substantial difficulties in servicing their external debt obligations, which led to defaults on
certain obligations and the restructuring of certain indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements, and obtaining
new credit to finance interest payments. Holders of certain foreign government debt securities may be requested to participate in the restructuring of such obligations and to extend further loans to their issuers. There can be no
|
|
|
|
|
|
|
|
|
|
|
62
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
assurance that the foreign government debt securities in which the Fund may invest will not be subject to similar restructuring arrangements or to requests for new credit, which may adversely
affect the Funds holdings. Furthermore, certain participants in the secondary market for such debt may be directly involved in negotiating the terms of these arrangements and may therefore have access to information not available to other
market participants.
Loan risk
Investments in loans are generally subject to the same risks as investments in other types of debt obligations, including, among others, credit risk, interest
rate risk, prepayment risk, and extension risk. In addition, in many cases loans are subject to the risks associated with below-investment grade securities. This means loans are often subject to significant credit risks, including a greater
possibility that the borrower will be adversely affected by changes in market or economic conditions and may default or enter bankruptcy. This risk of default will increase in the event of an economic downturn or a substantial increase in interest
rates (which will increase the cost of the borrowers debt service).
The interest rates on floating rate loans typically adjust only periodically.
Accordingly, adjustments in the interest rate payable under a loan may trail prevailing interest rates significantly, especially if there are limitations placed on the amount the interest rate on a loan may adjust in a given period. Certain floating
rate loans have a feature that prevents their interest rates from adjusting if market interest rates are below a specified minimum level. When interest rates are low, this feature could result in the interest rates of those loans becoming fixed at
the applicable minimum level until interest rates rise above that level. Although this feature is intended to result in these loans yielding more than they otherwise would when interest rates are low, the feature might also result in the prices of
these loans becoming more sensitive to changes in interest rates should interest rates rise but remain below the applicable minimum level.
In addition,
investments in loans may be difficult to value and may be illiquid. Floating rate loans generally are subject to legal or contractual restrictions on resale. The liquidity of floating rate loans, including the volume and frequency of secondary
market trading in such loans, varies significantly over time and among individual floating rate loans. For example, if the credit quality of the borrower related to a floating rate loan unexpectedly declines significantly, secondary market trading
in that floating rate loan can also decline. The secondary market for loans may be subject to irregular trading activity, wide bid/ask spreads, and extended trade settlement periods, which may increase the expenses of the Fund or cause the Fund to
be unable to realize the full value of its investment in the loan, resulting in a material decline in the Funds NAV.
The Fund may make loans directly
to borrowers or may acquire an interest in a loan by means of an assignment or a participation. In an assignment, the Fund may be required generally to rely upon the assigning financial institution to demand payment and enforce its rights against
the borrower, but would otherwise be entitled to the benefit of all of the financial institutions rights in the loan. The Fund may also purchase a participating interest in a portion of the rights of a lending institution in a loan. In such
case, the Fund will generally be entitled to receive from the lending institution amounts equal to the payments of principal, interest and premium, if any, on the loan received by the institution, but generally will not be entitled to enforce its
rights directly against the agent bank or the borrower, and must rely for that purpose on the lending institution.
Investments in loans through a purchase
of a loan, loan origination or a direct assignment of a financial institutions interests with respect to a loan may involve additional risks to the Fund. For example, if a loan is foreclosed, the Fund could become owner, in whole or in part,
of any collateral, which could include, among other assets, real estate or other real or personal property, and would bear the costs and liabilities associated with owning and holding or disposing of the collateral. In addition, it is conceivable
that under emerging legal theories of lender liability, the Fund as holder of a partial interest in a loan could be held liable as co-lender for acts of the agent lender.
Loans and certain other forms of direct indebtedness may not be classified as securities under the federal securities laws and, therefore, when the
Fund purchases such instruments, it may not be entitled to the protections against fraud and misrepresentation contained in the federal securities laws.
Additional risks of investments in loans may include:
Agent/Intermediary Risk. If the Fund holds a loan through another financial intermediary, as is the case with a participation, or relies on another
financial intermediary to administer the loan, as is the case with most multi-lender facilities, the Funds receipt of principal and interest on the loan and the value of the Funds loan investment will depend at least in part on the
credit standing of the financial intermediary and therefore will be subject to the credit risk of the intermediary. The Fund will be required to rely upon the financial intermediary from which it purchases a participation interest to collect and
pass on to the Fund such payments and to enforce the Funds rights and may not be able to cause the financial intermediary to take what it considers to be appropriate action.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
63
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
As a result, an insolvency, bankruptcy or reorganization of the financial intermediary may delay or prevent the Fund from receiving principal, interest and other amounts with respect to the
Funds interest in the loan. In addition, if the Fund relies on a financial intermediary to administer a loan, the Fund is subject to the risk that the financial intermediary may be unwilling or unable to demand and receive payments from the
borrower in respect of the loan, or otherwise unwilling or unable to perform its administrative obligations.
Highly Leveraged Transactions Risk.
The Fund may invest in loans made in connection with highly leveraged transactions. Those loans are subject to greater credit and liquidity risks than other types of loans. If the Fund voluntarily or involuntarily sold those types of loans,
it might not receive the full value it expected.
Stressed, Distressed or Defaulted Borrowers Risk. The Fund can
also invest in loans of borrowers that are experiencing, or are likely to experience, financial difficulty. These loans are subject to greater credit and liquidity risks than other types of loans. In addition, the Fund can invest in loans of
borrowers that have filed for bankruptcy protection or that have had involuntary bankruptcy petitions filed against them by creditors. Various laws enacted for the protection of debtors may apply to loans. A bankruptcy proceeding or other court
proceeding could delay or limit the ability of the Fund to collect the principal and interest payments on that borrowers loans or adversely affect the Funds rights in collateral relating to a loan. If a lawsuit is brought by creditors of
a borrower under a loan, a court or a trustee in bankruptcy could take certain actions that would be adverse to the Fund.
Limited Information Risk.
Because there may be limited public or other information available regarding loan investments, the Funds investments in such instruments may be particularly dependent on the analytical abilities of the Funds portfolio managers.
Interest Rate Benchmarks Risk. Interest rates on loans typically adjust periodically often based on changes in a benchmark rate plus a premium
or spread over the benchmark rate. The benchmark rate may be LIBOR, the Prime Rate, or other base lending rates used by commercial lenders (each as defined in the applicable loan agreement).
Some benchmark rates may reset daily; others reset less frequently. The interest rate on LIBOR-based loans is reset periodically, typically based on a period
between 30 days and one year. Certain floating or variable rate loans may permit the borrower to select an interest rate reset period of up to one year or longer. Investing in loans with longer interest rate reset periods may increase fluctuations
in the Funds NAV as a result of changes in interest rates. Interest rates on loans with longer periods between benchmark resets will typically trail market interest rates in a rising interest rate environment.
Certain loans may permit the borrower to change the base lending rate during the term of the loan. One benchmark rate may not adjust to changing market or
interest rates to the same degree or as rapidly as another, permitting the borrower the option to select the benchmark rate that is most advantageous to it and less advantageous to the Fund. To the extent the borrower elects this option, the
interest income and total return the Fund earns on the investment may be adversely affected as compared to other investments where the borrower does not have the option to change the base lending or benchmark rate.
Restrictive Loan Covenants Risk. Borrowers must comply with various restrictive covenants that may be contained in loan agreements. They may
include restrictions on dividend payments and other distributions to stockholders, provisions requiring the borrower to maintain specific financial ratios, and limits on total debt. They may include requirements that the borrower prepay the loan
with any free cash flow. A break of a covenant that is not waived by the agent bank (or the lenders) is normally an event of default that provides the agent bank or the lenders the right to call the outstanding amount on the loan. If a lender
accelerates the repayment of a loan because of the borrowers violation of a restrictive covenant under the loan agreement, the borrower might default in payment of the loan.
Some of the loans in which the Fund may invest or to which the Fund may obtain exposure may be covenant-lite. Such loans contain fewer or less
restrictive constraints on the borrower than certain other types of loans. Such loans generally do not include terms which allow the lender to monitor the performance of the borrower and declare a default or force a borrower into bankruptcy
restructuring if certain criteria are breached. Under such loans, lenders typically must rely on covenants that restrict a borrower from incurring additional debt or engaging in certain actions. Such covenants can be breached only by an affirmative
action of the borrower, rather than by a deterioration in the borrowers financial condition. Accordingly, the Fund may have fewer rights against a borrower when it invests in or has exposure to such loans and so may have a greater risk of loss
on such investments as compared to investments in or exposure to loans with additional or more conventional covenants.
Senior Loan and Subordination
Risk. In addition to the risks typically associated with debt securities and loans generally, senior loans are also subject to the risk that a court could subordinate a senior loan, which typically holds a senior position in the capital
structure of a borrower, to presently existing or future indebtedness or take other action detrimental to the holders of senior loans.
|
|
|
|
|
|
|
|
|
|
|
64
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
Settlement
Risk. Transactions in many loans settle on a delayed basis, and the Fund may not receive the proceeds from the sale of such loans for a substantial period after the sale. As a result, sale proceeds related to the sale of such loans may not
be available to make additional investments until potentially a substantial period after the sale of the loans.
Inadequate Collateral or Guarantees
Risk. Even if a loan to which the Fund is exposed is secured, there can be no assurance that the collateral will, when recovered and liquidated, generate sufficient (or any) funds to offset any losses associated with a defaulting loan. It is
possible that the same collateral could secure multiple loans, in which case the liquidation proceeds of the collateral may be insufficient to cover the payments due on all the loans secured by that collateral. This risk is increased if the
Funds loans are secured by a single asset. There can be no guarantee that the collateral can be liquidated and any costs associated with such liquidation could reduce or eliminate the amount of funds otherwise available to offset the payments
due under the loan. Moreover, the Funds security interests may be unperfected for a variety of reasons, including the failure to make a required filing by the servicer and, as a result, the Fund may not have priority over other creditors as it
expected.
Unsecured Loans Risk. Subordinated or unsecured loans are lower in priority of payment to secured loans and are subject to the
additional risk that the cash flow of the borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior secured obligations of the borrower. This risk is generally higher
for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral.
Servicer Risk. The
Funds direct and indirect investments in loans are typically serviced by the originating lender or a third-party servicer. In the event that the servicer is unable to service the loan, there can be no guarantee that a backup servicer will be
able to assume responsibility for servicing the loans in a timely or cost-effective manner; any resulting disruption or delay could jeopardize payments due to the Fund in respect of its investments or increase the costs associated with the
Funds investments.
Foreign Loan Risk. Loans involving foreign borrowers may involve risks not ordinarily associated with exposure to
loans to U.S. entities and individuals. The foreign lending industry may be subject to less governmental supervision and regulation than exists in the U.S.; conversely, foreign regulatory regimes applicable to the lending industry may be more
complex and more restrictive than those in the U.S., resulting in higher costs associated with such investments, and such regulatory regimes may be subject to interpretation or change without prior notice to investors, such as the Fund. Foreign
lending may not be subject to accounting, auditing, and financial reporting standards and practices comparable to those in the U.S. Due to differences in legal systems, there may be difficulty in obtaining or enforcing a court judgment outside the
United States.
Lender Liability. A number of judicial decisions have upheld judgments of borrowers against lending institutions on the basis
of various evolving legal theories, collectively termed lender liability. Generally, lender liability is founded on the premise that a lender has violated a duty (whether implied or contractual) of good faith, commercial reasonableness
and fair dealing, or a similar duty owed to the borrower or has assumed an excessive degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. If a loan held by the
Fund were found to have been made or serviced under circumstances that give rise to lender liability, the borrowers obligation to repay that loan could be reduced or eliminated or the Funds recovery on that loan could be otherwise
impaired, which would adversely impact the value of that loan. In limited cases, courts have subordinated the loans of a senior lender to a borrower to claims of other creditors of the borrower when the senior lender or its agents, such as a loan
servicer, is found to have engaged in unfair, inequitable or fraudulent conduct with respect to the other creditors. If a loan held by the Fund were subject to such subordination, it would be junior in right of payment to other indebtedness of the
borrower, which could adversely impact the value of that loan.
Below investment grade/high yield securities risk
Debt instruments rated below investment grade and debt instruments that are unrated and of comparable or lesser quality are predominantly speculative and
considered vulnerable to nonpayment and their issuers to be dependent on favorable business, financial and economic conditions to meet their financial commitments. They are usually issued by companies without long track records of sales and earnings
or by companies with questionable credit strength. These instruments, which include debt securities commonly known as junk bonds, have a higher degree of default risk and may be less liquid than higher-rated bonds. These instruments may
be subject to greater price volatility due to such factors as specific corporate developments, interest rate sensitivity, negative perceptions of high yield investments generally, general economic downturn, and less secondary market liquidity. This
potential lack of liquidity may make it more difficult for the Fund to value these instruments accurately. An economic downturn could severely affect the ability of issuers (particularly those that are highly leveraged) to service their debt
obligations or to repay their obligations upon maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
65
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
Distressed and
defaulted securities risk
Distressed and defaulted securities risk refers to the uncertainty of repayment of defaulted securities (e.g., a
security on which a principal or interest payment is not made when due) and obligations of distressed issuers. Because the issuer of such securities is in default and/or is likely to be in distressed financial condition, repayment of defaulted
securities and obligations of distressed issuers (including insolvent issuers or issuers in payment or covenant default, in workout or restructuring or in bankruptcy or insolvency proceedings) is subject to significant uncertainties. Insolvency laws
and practices in foreign markets, and especially emerging market countries are different than those in the U.S. and the effect of these laws and practices cannot be predicted with certainty. Investments in defaulted securities and obligations of
distressed issuers are considered speculative and entail high risk.
Leverage risk
The Funds use of leverage (as described under Leverage in the Funds Investment Objectives and Strategies above) creates the opportunity
for increased net income and capital appreciation, but also creates special risks for the holders of common shares of beneficial interest (Common Shareholders). There is no assurance that the Funds leveraging strategies will be
successful. Leverage is a speculative technique that exposes the Fund to greater risk and increased costs. The interest expense payable by the Fund with respect to its reverse repurchase agreements, dollar roll transactions, borrowings and/or
dividends payable with respect to any outstanding preferred shares may be based on shorter-term interest rates that periodically reset. So long as the Funds portfolio investments provide a higher rate of return (net of applicable Fund
expenses) than the interest expenses, dividend expenses and other costs to the Fund of such leverage, the investment of the proceeds thereof should generate more income than will be needed to pay the costs of the leverage. If so, and all other
things being equal, the excess would be used to pay higher dividends to Common Shareholders than if the Fund were not so leveraged. If, however, interest rates rise relative to the rate of return on the Funds portfolio, the interest and other
costs to the Fund of leverage, including interest expenses on borrowings, the dividend rate on any outstanding preferred shares and/or the cost of the use of reverse repurchase agreements and dollar rolls, could exceed the rate of return on the debt
obligations and other investments held by the Fund, thereby reducing the return to Common Shareholders. When leverage is used, the NAV and market price of the Common Shares and the investment return to Common Shareholders will likely be more
volatile. There can be no assurance that the Funds use of leverage will result in a higher investment return on the Common Shares, and it may result in losses. In addition, fees and expenses of any form of leverage used by the Fund will be
borne entirely by the Common Shareholders and will reduce the investment return of the Common Shares.
Leverage creates several major types of risks for
Common Shareholders, including:
|
|
|
the likelihood of greater volatility of NAV and market price of Common Shares, and of the investment return to
Common Shareholders, than a comparable portfolio without leverage;
|
|
|
|
the possibility either that Common Share dividends will fall if the interest and other costs of leverage rise, or
that dividends paid on Common Shares will fluctuate because such costs vary over time; and
|
|
|
|
the effects of leverage in a declining market or a rising interest rate environment, as leverage is likely to cause
a greater decline in the NAV of the Common Shares than if the Fund were not leveraged and may result in a greater decline in the market value of the Common Shares.
|
In addition, the Funds creditors, counterparties to the Funds leveraging transactions and any preferred shareholders of the Fund will have priority
of payment over the Funds Common Shareholders.
The use by the Fund of reverse repurchase agreements and dollar roll transactions or similar
transactions to obtain leverage also involves special risks. For instance, the market value of the securities that the Fund is obligated to repurchase under a reverse repurchase agreement may decline below the repurchase price and the securities may
not be returned to the Fund.
In addition to borrowings, an issuance of preferred shares, reverse repurchase agreements and/or dollar roll transactions or
similar transactions, the Funds use of other transactions that may give rise to a form of leverage (including, among others, credit default swap contracts and other transactions, loans of portfolio securities, transactions involving derivative
instruments, short sales, and when issued, delayed delivery, and forward commitment transactions) gives rise to the associated leverage risks described above, and may adversely affect the Funds income, distributions, and total returns to
Common Shareholders. The Fund also may seek to offset derivatives positions against one another or against other assets in an attempt to manage effective market exposure resulting from derivatives in its portfolio. To the extent that any positions
do not behave in relation to one another as expected by the Adviser, the Fund may perform as if it is leveraged through use of these derivative strategies.
|
|
|
|
|
|
|
|
|
|
|
66
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
Counterparties
to the Funds other leveraging transactions (e.g., total return swaps, reverse repurchases, loans of portfolio securities, short sales and when-issued, delayed delivery and forward commitment transactions, credit default swaps, basis
swaps and other swap agreements, futures and forward contracts, call and put options or other derivatives), if any, would have seniority over the Funds Common Shares.
On October 28, 2020, the SEC adopted Rule 18f-4 under the 1940 Act, which, once effective, will apply to the
Funds use of derivative investments and certain financing transactions (e.g., reverse repurchase agreements). Among other things, Rule 18f-4 will require funds that invest in derivative instruments
beyond a specified limited amount to apply a value-at-risk based limit to their use of certain derivative instruments and financing transactions and to adopt and
implement a derivatives risk management program. Any funds that use derivative instruments (beyond certain currency and interest rate hedging transactions) in a limited amount will not be subject to the full requirements of Rule 18f-4. In connection with the adoption of Rule 18f-4, funds will no longer be required to comply with the asset segregation framework arising from prior SEC guidance.
Additional or other new regulations or guidance issued by the SEC or the Commodity Futures Trading Commission (the CFTC) or their staffs could, among
other things, restrict the Funds ability to engage in leveraging and derivatives transactions (for example, by making certain types of derivatives transactions no longer available to the Fund) and/or increase the costs of such leveraging and
derivatives transactions (for example, by increasing margin or capital requirements), and the Fund may be unable to execute its investment strategy as a result.
The Funds ability to utilize derivatives and leverage, invest in accordance with its principal investment strategies, and make distributions to Common
Shareholders may also be limited by asset coverage requirements applicable to the use of certain transactions that may involve leverage, restrictions imposed by the Funds creditors, and guidelines or restrictions imposed by rating agencies
that provide ratings for preferred shares or in connection with liquidity arrangements for preferred shares.
Because the fees received by the Adviser are
based on the total managed assets of the Fund (including assets attributable to any reverse repurchase agreements, dollar roll transactions or similar transactions, borrowings, and preferred shares that may be outstanding) minus accrued liabilities
(other than liabilities in respect of reverse repurchase agreements, dollar roll transactions or similar transactions, and borrowings), the Adviser has a financial incentive to cause the Fund to use leverage, which creates a conflict of interest
between the Adviser, on the one hand, and the Common Shareholders, on the other hand.
REIT risk
The Fund may invest in REITs. REITs are pooled investment vehicles that own, and typically operate, income-producing real estate. If a REIT meets certain
requirements, including distributing to shareholders substantially all of its taxable income (other than net capital gains), then it is not taxed on the income distributed to shareholders. REITs are subject to management fees and other expenses, and
so the Fund will bear its proportionate share of the costs of the REITs operations. There are three general categories of REITs: Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs, which invest primarily in direct fee ownership or
leasehold ownership of real property and derive most of their income from rents, are generally affected by changes in the values of and incomes from the properties they own. Mortgage REITs invest mostly in mortgages on real estate, which may secure,
for example, construction, development or long-term loans, and the main source of their income is mortgage interest payments. Mortgage REITs may be affected by the credit quality of the mortgage loans they hold. A hybrid REIT combines the
characteristics of equity REITs and mortgage REITs, generally by holding both ownership interests and mortgage interests in real estate, and thus may be subject to risks associated with both real estate ownership and investments in mortgage-related
investments. Along with the risks common to different types of real estate-related investments, REITs, no matter the type, involve additional risk factors, including poor performance by the REITs manager, adverse changes to the tax laws, and
the possible failure by the REIT to qualify for the favorable tax treatment applicable to REITs under the Internal Revenue Code of 1986, as amended (the Code), or an exemption under the 1940 Act. REITs are not diversified and are heavily
dependent on cash flow earned on the property interests they hold.
Mortgage REITs are exposed to the risks specific to the real estate market as well as the
risks that relate specifically to the way in which mortgage REITs are organized and operated. Mortgage REITs receive principal and interest payments from the owners of the mortgaged properties. Accordingly, mortgage REITs are subject to the credit
risk of the borrowers to whom they extend credit, and are subject to the risks described under Mortgage-Backed Securities Risk and Debt Securities Risk. Mortgage REITs are also subject to significant interest rate risk.
Mortgage REITs typically use leverage and many are highly leveraged, which exposes them to the risks of leverage.
Leverage risk refers to the risk that
leverage created from borrowing may impair a mortgage REITs liquidity, cause it to liquidate positions at an unfavorable time and increase the volatility of the values of securities issued by the mortgage REIT. The use of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
67
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
leverage may not be advantageous to a mortgage REIT. To the extent that a mortgage REIT incurs significant leverage, it may incur substantial losses if its borrowing costs increase or if the
assets it purchases with leverage decrease in value.
The Funds investment in a REIT may result in the Fund making distributions that constitute a
return of capital to Fund shareholders for federal income tax purposes. In addition, distributions attributable to REITs made by the Fund to Fund shareholders will not qualify for the corporate dividends-received deduction, or, generally, for
treatment as qualified dividend income. Certain distributions made by the Fund attributable to dividends received by the Fund from REITs may qualify as qualified REIT dividends in the hands of
non-corporate shareholders.
Municipal bond risk
Investing in the municipal bond market involves the risks of investing in debt securities generally and certain other risks. The amount of public information
available about the municipal bonds in the Funds portfolio is generally less than that for corporate equities or bonds, and the investment performance of the Funds investment in municipal bonds may therefore be more dependent on the
analytical abilities of the Adviser than its investments in taxable bonds. The secondary market for municipal bonds also tends to be less well developed or liquid than many other securities markets, which may adversely affect the Funds ability
to sell municipal bonds at attractive prices.
The ability of municipal issuers to make timely payments of interest and principal may be diminished during
general economic downturns, by litigation, legislation or political events, or by the bankruptcy of the issuer. Laws, referenda, ordinances or regulations enacted in the future by Congress or state legislatures or the applicable governmental entity
could extend the time for payment of principal and/or interest, or impose other constraints on enforcement of such obligations, or on the ability of municipal issuers to levy taxes. Issuers of municipal securities also might seek protection under
the bankruptcy laws. In the event of bankruptcy of such an issuer, the Fund could experience delays in collecting principal and interest and the Fund may not, in all circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of interest or repayment of principal, or both, the Fund may take possession of and manage the assets securing the issuers obligations on such securities, which may
increase the Funds operating expenses. Any income derived from the Funds ownership or operation of such assets may not be tax exempt.
The Fund
may invest in revenue bonds, which are typically issued to fund a wide variety of capital projects including: electric, gas, water and sewer systems; highways, bridges and tunnels; port and airport facilities; colleges and universities; and
hospitals. Because the principal security for a revenue bond is generally the net revenues derived from a particular facility or group of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source, there is
no guarantee that the particular project will generate enough revenue to pay its obligations, in which case the Funds performance may be adversely affected.
Interest on municipal obligations, while generally exempt from federal income tax, may not be exempt from federal alternative minimum tax. The Fund does not
expect to be eligible to pass the tax-exempt character of such interest through to Common Shareholders.
Foreign currency risk
Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of the
Funds investments. Currency risk includes both the risk that currencies in which the Funds investments are traded and/or in which the Fund receives income, or currencies in which the Fund has taken an active investment position, will
decline in value relative to other currencies. In the case of hedging positions, currency risk includes the risk that the currency the Fund is seeking exposure to will decline in value relative to the foreign currency being hedged. Currency exchange
rates fluctuate significantly for many reasons, including changes in supply and demand in the currency exchange markets, actual or perceived changes in interest rates, intervention (or the failure to intervene) by U.S. or foreign governments,
central banks, or supranational agencies such as the International Monetary Fund, and currency controls or other political and economic developments in the U.S. or abroad.
The currencies of certain emerging market countries have experienced devaluations relative to the U.S. dollar, and future devaluations may adversely affect the
value of assets denominated in such currencies. A devaluation of the currency in which portfolio securities are denominated will negatively impact the value of those securities. The Fund may use derivatives to acquire positions in currencies the
values to which the Fund is exposed through its investments. This presents the risk that the Fund could lose money on its exposure to a particular currency and also lose money on the derivative.
The Fund also may take overweighted or underweighted currency positions and/or hedge the currency exposure of the securities in which it has invested. As a
result, the Funds currency exposure may differ (in some cases significantly) from the currency exposure of its investments and/or its benchmarks.
|
|
|
|
|
|
|
|
|
|
|
68
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
Credit default swaps risk
A credit default swap is an agreement between the Fund and a counterparty that enables the Fund to
buy or sell protection against a credit event related to a particular issuer. One party, acting as a protection buyer, makes periodic payments, which may be based on, among other things, a fixed or floating rate of interest, to the other party, a
protection seller, in exchange for a promise by the protection seller to make a payment to the protection buyer if a negative credit event (such as a delinquent payment or default) occurs with respect to a referenced bond or group of bonds. Credit
default swaps may also be structured based on the debt of a basket of issuers, rather than a single issuer, and may be customized with respect to the default event that triggers purchase or other factors (for example, the Nth default within a
basket, or defaults by a particular combination of issuers within the basket, may trigger a payment obligation). As a credit protection seller in a credit default swap contract, the Fund would be required to pay the par (or other agreed-upon) value
of a referenced debt obligation to the counterparty following certain negative credit events as to a specified third-party debtor, such as default by a U.S. or non-U.S. corporate issuer on its debt
obligations. In return for its obligation, the Fund would receive from the counterparty a periodic stream of payments, which may be based on, among other things, a fixed or floating rate of interest, over the term of the contract provided that no
event of default has occurred. If no default occurs, the Fund would keep the stream of payments, and would have no payment obligations to the counterparty. The Fund may sell credit protection in order to earn additional income and/or to take a
synthetic long position in the underlying security or basket of securities.
The Fund may enter into credit default swap contracts as protection buyer in
order to hedge against the risk of default on the debt of a particular issuer or basket of issuers or attempt to profit from a deterioration or perceived deterioration in the creditworthiness of the particular issuer(s) (also known as buying credit
protection). This would involve the risk that the investment may expire worthless and would only generate gain in the event of an actual default by the issuer(s) of the underlying obligation(s) (or, as applicable, a credit downgrade or other
indication of financial instability). It would also involve the risk that the seller may fail to satisfy its payment obligations to the Fund. The purchase of credit default swaps involves costs, which will reduce the Funds return.
A protection seller may have to pay out amounts following a negative credit event greater than the value of the reference obligation delivered to it by its
counterparty and the amount of periodic payments previously received by it from the counterparty. When the Fund acts as a seller of a credit default swap, it is exposed to, among other things, leverage risk because if an event of default occurs the
seller must pay the buyer the full notional value of the reference obligation. Each party to a credit default swap is subject to the credit risk of its counterparty. The value of the credit default swap to each party will change, at times
significantly, based on changes in the actual or perceived creditworthiness of the underlying issuer.
A protection buyer may lose its investment and recover
nothing should an event of default not occur. The Fund may seek to realize gains on its credit default swap positions, or limit losses on its positions, by selling those positions in the secondary market. There can be no assurance that a liquid
secondary market will exist at any given time for any particular credit default swap or for credit default swaps generally.
The parties to a credit default
swap may be required to post collateral to each other. If the Fund posts initial or periodic collateral to its counterparty, it may not be able to recover that collateral from the counterparty in accordance with the terms of the swap. In addition,
if the Fund receives collateral from its counterparty, it may be delayed or prevented from realizing on the collateral in the event of the insolvency or bankruptcy of the counterparty. The Fund may exit its obligations under a credit default swap
only by terminating the contract and paying applicable breakage fees, or by entering into an offsetting credit default swap position, which may cause the Fund to incur more losses. There can be no assurance that the Fund will be able to exit a
credit default swap position effectively when it seeks to do so.
Hedging strategy risk
Certain of the investment techniques that the Fund may employ for hedging will expose the Fund to additional or increased risks. For example, there may be an
imperfect correlation between changes in the value of the Funds portfolio holdings and hedging positions entered into by the Fund, which may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. In addition,
the Funds success in using hedge instruments is subject to the Advisers ability to predict correctly changes in the relationships of such hedge instruments to the Funds portfolio holdings, and there can be no assurance that the
Advisers judgment in this respect will be accurate. Consequently, the use of hedging transactions might result in a poorer overall performance for the Fund, whether or not adjusted for risk, than if the Fund had not hedged its portfolio
holdings. The Adviser is under no obligation to engage in any hedging strategies, and may, in its discretion, choose not to. Even if the Adviser desires to hedge some of the Funds risks, suitable hedging transactions may not be available or,
if available, attractive. A failure to hedge may result in losses to the value of the Funds investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
69
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
Short sales and short
position risk
To the extent the Fund makes use of short sales or takes short positions for investment and/or risk management purposes, the Fund
may be subject to certain risks associated with selling short. Short sales are transactions in which the Fund sells securities or other instruments that the Fund does not own. Short exposure with respect to securities or market segments may also be
achieved through the use of derivative instruments, such as forwards, futures or swaps on indices or on individual securities. When the Fund engages in a short sale or short position on a security or other instrument, it may borrow the security or
other instrument sold short and deliver it to the counterparty. The Fund will ordinarily have to pay a fee or premium to borrow the security and will be obligated to repay the lender of the security any dividends or interest that accrues on the
security during the period of the loan. The amount of any gain from a short sale will be decreased, and the amount of any loss increased, by the amount of the premium, dividends, interest or expenses the Fund pays in connection with the short sale.
Short sales and short positions expose the Fund to the risk that it will be required to cover its short position at a time when the securities underlying the short position or exposure have appreciated in value, thus resulting in a loss to the Fund.
The Fund may engage in short sales when it does not own or have the right to acquire the security sold short at no additional cost. The Funds loss on a short sale or position theoretically could be unlimited in a case in which the Fund is
unable, for whatever reason, to close out its short position. In addition, the Funds short selling strategies may limit its ability to benefit from increases in the markets. Short selling involves a form of financial leverage that may
exaggerate any losses realized by the Fund. Also, there is the risk that the counterparty to a short sale may fail to honor its contractual terms, causing a loss to the Fund.
The Fund may borrow an instrument from a broker or other institution and sell it to establish a short position in the instrument. The Fund may also enter into a
derivative transaction in order to establish a short position with respect to a reference asset. The Fund may make a profit or incur a loss depending upon whether the market price of the instrument or the value of the position decreases or increases
between the date the Fund established the short position and the date on which the Fund must replace the borrowed instrument or otherwise close out the transaction. An increase in the value of an instrument, index or interest rate with respect to
which the Fund has established a short position will result in a loss to the Fund, and there can be no assurance that the Fund will be able to close out the position at any particular time or at an acceptable price. The loss to the Fund from a short
position is potentially unlimited.
Convertible securities risk
The Fund may invest in convertible securities. Convertible securities include bonds, debentures, notes, preferred stock and other securities that may be converted
into or exchanged for, at a specific price or formula within a particular period of time, a prescribed amount of common stock or other equity securities of the same or a different issuer. Convertible securities may entitle the holder to receive
interest paid or accrued on debt or dividends paid or accrued on preferred stock until the security matures or is redeemed, converted or exchanged. The market value of a convertible security is a function of its investment value and its conversion
value. A securitys investment value represents the value of the security without its conversion feature (i.e., a nonconvertible fixed income security). The investment value may be determined by reference to its credit quality and the
current value of its yield to maturity or probable call date. At any given time, investment value is dependent upon such factors as the general level of interest rates, the yield of similar nonconvertible securities, the financial strength of the
issuer and the seniority of the security in the issuers capital structure. A securitys conversion value is determined by multiplying the number of shares the holder is entitled to receive upon conversion or exchange by the current price
of the underlying security.
Preferred securities risk
In addition to many of the risks associated with both debt securities (e.g., interest rate risk and credit risk) and common shares or other equity
securities, preferred securities typically contain provisions that allow an issuer, under certain conditions, to skip (in the case of noncumulative preferred securities) or defer (in the case of cumulative preferred securities) dividend payments. If
the Fund owns a preferred security that is deferring its distributions, the Fund may be required to report income for tax purposes while it is not receiving any distributions.
In addition, preferred securities typically do not provide any voting rights, except in some cases in which dividends are in arrears beyond a certain time
period, which varies by issue. Preferred securities are generally subordinated to bonds and other debt instruments in a companys capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject
to greater credit risk than those debt instruments. Preferred securities may be substantially less liquid than many other securities.
Portfolio management risk
Portfolio management risk is the risk that an investment strategy may fail to produce the intended results. There can be no assurance that the Fund will achieve
its investment objectives. The Advisers judgments about the attractiveness, value and
|
|
|
|
|
|
|
|
|
|
|
70
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
potential appreciation of particular asset classes, sectors, securities, or other investments may prove to be incorrect and may not anticipate actual market movements or the impact of economic
conditions generally. No matter how well a portfolio manager evaluates market conditions, the investments a portfolio manager chooses may fail to produce the intended result, and you could lose money on your investment in the Fund.
Valuation risk
Valuation risk is
the risk that the Fund will not value its investments in a manner that accurately reflects their market values or that the Fund will not be able to sell any investment at a price equal to the valuation ascribed to that investment for purposes of
calculating the Funds NAV. The valuation of the Funds investments involves subjective judgment and some valuations may involve assumptions, projections, opinions, discount rates, estimated data points and other uncertain or subjective
amounts, all of which may prove inaccurate. In addition, the valuation of certain investments held by the Fund may involve the significant use of unobservable and non-market inputs. Certain securities in which
the Fund may invest may be more difficult to value accurately, especially during periods of market disruptions or extreme market volatility. As a result, there can be no assurance that fair value pricing will result in adjustments to the prices of
securities or other assets, or that fair value pricing will reflect actual market value, and it is possible that the fair value determined for a security or other asset will be materially different from quoted or published prices, from the prices
used by others for the same security or other asset and/or from the value that actually could be or is realized upon the sale of that security or other asset.
Focused investment risk
A fund
that invests a substantial portion of its assets in a particular market, industry, sector, group of industries or sectors, country, region, group of countries or asset class is subject to greater risk than a fund that invests in a more diverse
investment portfolio. In addition, the value of such a fund is more susceptible to any single economic, market, political, regulatory or other occurrence affecting, for example, the particular markets, industries, regions, sectors or asset classes
in which the fund is invested. This is because, for example, issuers in a particular market, industry, region, sector or asset class may react similarly to specific economic, market, regulatory, political or other developments. The particular
markets, industries, regions, sectors or asset classes in which the Fund may focus its investments may change over time and the Fund may alter its focus at inopportune times. To the extent the Fund invests in the securities of a limited number of
issuers, it is particularly exposed to adverse developments affecting those issuers, and a decline in the market value of a particular security held by the Fund may affect the Funds performance more than if the Fund invested in the securities
of a larger number of issuers. In addition, the limited number of issuers to which the Fund may be exposed may provide the Fund exposure to substantially the same market, industry, sector, group of industries or sectors, country, region, group of
countries, or asset class, which may increase the risk of loss as a result of focusing the Funds investments, as discussed above.
Derivatives risk
The Funds
use of derivatives may involve risks different from, or greater than, the risks associated with investing in more traditional investments, such as stocks and bonds. Derivatives can be highly complex and may perform in ways unanticipated by the
Adviser and may not be available at the time or price desired. Derivatives positions may also be improperly executed or constructed.
The Funds use of
derivatives involves counterparty risk. In the event a counterparty becomes insolvent, the Fund potentially could lose all or a large portion of the value of its investment in the derivative instrument. Because most derivatives involve contractual
arrangements with a counterparty, the Funds ability to enter into them requires a willing counterparty. The Funds ability to close out or unwind a derivatives position prior to expiration or maturity may also depend on the ability and
willingness of the counterparty to enter into a transaction closing out the position.
Derivatives may be difficult to value and highly illiquid and/or
volatile. The Fund may not be able to close out or sell a derivatives position at a particular time or at an anticipated price. Use of derivatives may affect the amount, timing and character of distributions to shareholders and, therefore, may
increase the amount of taxes payable by taxable shareholders.
The Fund may use derivatives to create investment leverage and the Funds use of
derivatives may otherwise cause its portfolio to be leveraged. Leverage increases the Funds portfolio losses when the value of its investments declines. Since many derivatives involve leverage, adverse changes in the value or level of the
underlying asset, rate, or index may result in a loss substantially greater than the amount invested in the derivative itself. Some derivatives have the potential for unlimited loss, regardless of the size of the initial investment.
When the Fund enters into a derivatives transaction as a substitute for or alternative to a direct cash investment, the Fund is exposed to the risk that the
derivative transaction may not provide a return that corresponds precisely or at all with that of the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
71
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
underlying investment. When the Fund uses a derivative for hedging purposes, it is possible that the derivative will not in fact provide the anticipated protection, and the Fund could lose money
on both the derivative transaction and the exposure the Fund sought to hedge. While hedging strategies involving derivatives can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable
price movements in other Fund investments.
When it takes a derivatives position, the Fund may be required to maintain assets as cover, maintain
segregated accounts, post collateral or make margin payments under current regulatory guidelines. Assets that are segregated or used as cover, margin or collateral may be required to be in the form of cash or liquid securities, and typically may not
be sold while the derivatives position is open unless they are replaced with other appropriate assets. If markets move against the Funds position, the Fund may be required to maintain or post additional assets and may have to dispose of
existing investments to obtain assets acceptable as collateral or margin. This may prevent the Fund from pursuing its investment objectives. Assets that are segregated or used as cover, margin or collateral typically are invested, and these
investments are subject to risk and may result in losses to the Fund. These losses may be substantial, and may be in addition to losses incurred by using the derivative in question. If the Fund is unable to close out its position, it may be required
to continue to maintain such assets or accounts or make such payments until the position expires or matures, and the Fund will continue to be subject to investment risk on the assets. In addition, the Fund may not be able to recover the full amount
of its margin from an intermediary if that intermediary were to experience financial difficulty. Segregation, cover, margin and collateral requirements may impair the Funds ability to sell a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or require the Fund to sell a portfolio security or close out a derivatives position at a disadvantageous time or price.
On October 28, 2020, the SEC adopted Rule 18f-4 under the 1940 Act, which, once effective, will apply to the
Funds use of derivative investments and certain financing transactions (e.g., reverse repurchase agreements). Among other things, Rule 18f-4 will require funds that invest in derivative instruments
beyond a specified limited amount to apply a value-at-risk based limit to their use of certain derivative instruments and financing transactions and to adopt and
implement a derivatives risk management program. Any funds that use derivative instruments (beyond certain currency and interest rate hedging transactions) in a limited amount will not be subject to the full requirements of Rule 18f-4. In connection with the adoption of Rule 18f-4, funds will no longer be required to comply with the asset segregation framework arising from prior SEC guidance. While
the full effect of the new rule on the Funds operations and its related costs are not known at this time, the rule could, among other things, restrict the Funds ability to use leverage, engage in derivatives transactions and/or increase
the cost of such derivatives transactions. These limitations may substantially curtail the Funds ability to use derivative instruments and inhibit the Advisers ability to establish what it views as the optimal investment exposure for the
Fund. In addition, the Fund might not be able to use derivative instruments, reverse repurchase agreements and other transactions involving leverage to the same extent as if the current regulatory structure had remained in place, and the ability of
the Adviser to pursue the Funds investment objective as currently anticipated, and the Funds investment performance, might be adversely affected.
Current and future regulation of the derivatives markets may make derivatives more costly, may limit the availability or liquidity of derivatives, or may
otherwise adversely affect the value or performance of derivatives. Any such adverse developments could impair the effectiveness of the Funds derivatives transactions and cause the Fund to lose value.
Risks related to the Funds clearing broker and central clearing counterparty
Transactions in some types of swaps (including interest rate swaps and index credit default swaps) are required to be centrally cleared. In a transaction
involving those swaps (cleared derivatives), the Funds counterparty is a clearing house, rather than a bank or broker. Since the Fund is not a member of clearing houses and only members of a clearing house (clearing
members) can participate directly in the clearing house, the Fund will hold cleared derivatives through accounts at clearing members. In cleared derivatives positions, the Fund will make payments (including margin payments) to and receive
payments from a clearing house through their accounts at clearing members. Clearing members guarantee performance of their clients obligations to the clearing house. There is a risk that assets deposited by the Fund with any swaps or futures
clearing member as margin for futures contracts or cleared swaps may, in certain circumstances, be used to satisfy losses of other clients of the Funds clearing member. In addition, the assets of the Fund might not be fully protected in the
event of the clearing members bankruptcy, as the Fund would be limited to recovering only a pro rata share of all available funds segregated on behalf of the clearing members customers for the relevant account class. Similarly, all
customer funds held at a clearing organization in connection with any futures contracts are held in a commingled omnibus account and are not identified to the name of the clearing members individual customers.
In some ways, cleared derivative arrangements are less favorable to funds than bilateral arrangements. For example, the Fund may be required to provide more
margin for cleared derivatives positions than for bilateral derivatives positions. Also, in contrast to a bilateral derivatives position, following a period of notice to the Fund, a clearing member generally can require termination of an
|
|
|
|
|
|
|
|
|
|
|
72
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
existing cleared derivatives position at any time or an increase in margin requirements above the margin that the clearing member required at the beginning of a transaction. Clearing houses also
have broad rights to increase margin requirements for existing positions or to terminate those positions at any time. Any increase in margin requirements or termination of existing cleared derivatives positions by the clearing member or the clearing
house could interfere with the ability of the Fund to pursue its investment strategy. Further, any increase in margin requirements by a clearing member could expose the Fund to greater credit risk to its clearing member because margin for cleared
derivatives positions in excess of a clearing houses margin requirements may be held by the clearing member. Also, the Fund is subject to risk if it enters into a derivatives transaction that is required to be cleared (or that the Adviser
expects to be cleared), and no clearing member is willing or able to clear the transaction on the Funds behalf. In those cases, the position might have to be terminated, and the Fund could lose some or all of the benefit of the position,
including loss of an increase in the value of the position and/or loss of hedging protection, or could realize a loss. In addition, the documentation governing the relationship between the Fund and clearing members is drafted by the clearing members
and generally is less favorable to the Fund than typical bilateral derivatives documentation. While futures contracts entail similar risks, the risks likely are more pronounced for cleared swaps due to their more limited liquidity and the short
market history of clearing houses.
Counterparty risk
The Fund will be subject to credit risk presented by another party (whether a clearing corporation in the case of exchange-traded or cleared instruments or
another third party in the case of over-the-counter instruments) that promises to honor an obligation to the Fund with respect to the derivative contracts and other
instruments, such as repurchase and reverse repurchase agreements, entered into by the Fund. If such a party becomes bankrupt or insolvent or otherwise fails or is unwilling to perform its obligations to the Fund due to financial difficulties or for
other reasons, the Fund may experience significant losses or delays in realizing on any collateral the counterparty has provided in respect of the counterpartys obligations to the Fund or recovering collateral that the Fund has provided and is
entitled to recover. In addition, in the event of the bankruptcy, insolvency or other event of default (e.g., cross-default) of a counterparty to a derivative transaction, the derivative transaction would typically be terminated at its fair
market value. If the Fund is owed this fair market value in the termination of the derivative transaction and its claim is unsecured, the Fund will likely be treated as a general creditor of such counterparty. The Fund may obtain only a limited
recovery or may obtain no recovery in such circumstances. Counterparty risk with respect to certain exchange-traded and over-the-counter derivatives may be further
complicated by U.S. financial reform legislation. Subject to certain U.S. federal income tax limitations, the Fund is not subject to any limit with respect to the number or the value of transactions they can enter into with a single counterparty.
Structured products and structured notes risk
Generally, structured investments are interests in entities organized and operated for the purpose of restructuring the investment characteristics of underlying
investment interests or securities. These investment entities may be structured as trusts or other types of pooled investment vehicles. This type of restructuring generally involves the deposit with or purchase by an entity of the underlying
investments and the issuance by that entity of one or more classes of securities backed by, or representing interests in, the underlying investments or referencing an indicator related to such investments. The cash flow or rate of return on the
underlying investments may be apportioned among the newly issued securities to create different investment characteristics, such as varying maturities, credit quality, payment priorities and interest rate provisions. Structured products include,
among other things, CDOs, mortgage-backed securities, other types of asset-backed securities and certain types of structured notes.
The cash flow or rate of
return on a structured investment may be determined by applying a multiplier to the rate of total return on the underlying investments or referenced indicator. Application of a multiplier is comparable to the use of financial leverage, a speculative
technique. Leverage magnifies the potential for gain and the risk of loss. As a result, a relatively small decline in the value of the underlying investments or referenced indicator could result in a relatively large loss in the value of a
structured product. Holders of structured products indirectly bear risks associated with the underlying investments, index or reference obligation, and are subject to counterparty risk. The Fund generally has the right to receive payments to which
it is entitled only from the structured product, and generally does not have direct rights against the issuer. While certain structured investment vehicles enable the investor to acquire interests in a pool of securities without the brokerage and
other expenses associated with directly holding the same securities, investors in structured vehicles generally pay their share of the investment vehicles administrative and other expenses.
Structured products are generally privately offered and sold, and thus, are not registered under the securities laws. Certain structured products may be thinly
traded or have a limited trading market and may have the effect of increasing the Funds illiquidity to the extent that the Fund, at a particular point in time, may be unable to find qualified buyers for these securities. In addition to the
general risks associated with fixed income securities discussed herein, structured products carry additional risks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
73
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
including, but not limited to: (i) the possibility that distributions from underlying investments will not be adequate to make interest or other payments; (ii) the quality of the
underlying investments may decline in value or default; (iii) the possibility that the security may be subordinate to other classes of the issuers securities; and (iv) the complex structure of the security may not be fully understood
at the time of investment and may produce disputes with the issuer or unexpected investment results.
Structured notes are derivative securities for which
the amount of principal repayment and/or interest payments is based on the movement of one or more factors. These factors may include, but are not limited to, currency exchange rates, interest rates (such as the prime lending rate or
LIBOR), referenced bonds and stock indices. Some of these factors may or may not correlate to the total rate of return on one or more underlying instruments referenced in such notes. In some cases, the impact of the movements of these factors may
increase or decrease through the use of multipliers or deflators.
Investments in structured notes involve risks including interest rate risk, credit risk
and market risk. Depending on the factor used and the use of multipliers or deflators, changes in interest rates and movement of the factor may cause significant price fluctuations. Additionally, changes in the reference instrument or security may
cause the interest rate on the structured note to be reduced to zero and any further changes in the reference instrument may then reduce the principal amount payable on maturity. In the case of structured notes where the reference instrument is a
debt instrument, such as credit-linked notes, the Fund will be subject to the credit risk of the issuer of the reference instrument and the issuer of the structured note.
Equity securities, small- and mid-capitalization companies and related market risk
The market price of common stocks and other equity securities may go up or down, sometimes rapidly or unpredictably. Equity securities may decline
in value due to factors affecting equity securities markets generally, particular industries represented in those markets, or the issuer itself. The values of equity securities may decline due to general market conditions that are not specifically
related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They also may decline due
to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. Equity securities generally have greater price volatility than bonds and other debt
securities.
Confidential information access risk
In managing the Fund, the Adviser may seek to avoid the receipt of material, non-public information (Confidential
Information) about the issuers of floating rate loans or other investments being considered for acquisition by the Fund or held in the Funds portfolio if the receipt of the Confidential Information would restrict one or more of the
Advisers clients, including, potentially, the Fund, from trading in securities they hold or in which they may invest. In many instances, issuers offer to furnish Confidential Information to prospective purchasers or holders of the
issuers loans or other securities. In circumstances when the Adviser declines to receive Confidential Information from these issuers, the Fund may be disadvantaged in comparison to other investors, including with respect to evaluating the
issuer and the price the Fund would pay or receive when it buys or sells those investments, and the Fund may not take advantage of investment opportunities that it otherwise might have if it had received such Confidential Information. Further, in
situations when the Fund is asked, for example, to grant consents, waivers or amendments with respect to such investments, the Advisers ability to assess such consents, waivers and amendments may be compromised. In certain circumstances, the
Adviser may determine to receive Confidential Information, including on behalf of clients other than the Fund. Receipt of Confidential Information by the Adviser could limit the Funds ability to sell certain investments held by the Fund or
pursue certain investment opportunities on behalf of the Fund, potentially for a substantial period of time.
Other investment
companies risk
As a shareholder in an investment company, the Fund will bear its ratable share of that investment companys expenses, and
would remain subject to payment of the Funds investment management fees with respect to the assets so invested. Common Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other investment
companies. In addition, these other investment companies may use leverage, in which case an investment would subject the Fund to additional risks associated with leverage.
Restricted securities, Rule 144A/Regulation S securities risk
The Fund may hold securities that the Fund is prevented or limited by law or the terms of an agreement from selling (a restricted security). To the
extent that the Fund is permitted to sell a restricted security, there can be no assurance that a trading market will exist at any particular time and the Fund may be unable to dispose of the security promptly at reasonable prices or at all. The
Fund may have to bear the expense of registering the securities for resale and the risk of substantial delays in effecting registration. Also, restricted securities may be difficult to value because market quotations may not be readily available,
and the values of restricted securities may have significant volatility. Limitations on the resale of restricted securities may have an adverse effect on their
|
|
|
|
|
|
|
|
|
|
|
74
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
marketability, and may prevent the Fund from disposing of them promptly at reasonable prices. The Fund may have to bear the expense of registering such securities for resale and the risk of
substantial delays in effecting such registration.
Inflation/deflation risk
Inflation risk is the risk that the value of assets or income from the Funds investments will be worth less in the future as inflation decreases the value
of payments at future dates. As inflation increases, the real value of the Funds portfolio could decline. Deflation risk is the risk that prices throughout the economy decline over time. Deflation may have an adverse effect on the
creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Funds portfolio.
Liquidity risk
Liquidity risk is the risk that the Fund may invest in securities that trade in lower volumes and may be less
liquid than other investments or that the Funds investments may become less liquid in response to market developments or adverse investor perceptions. Illiquidity may be the result of, for example, low trading volumes, lack of a market maker,
or contractual or legal restrictions that limit or prevent the Fund from selling securities or closing positions. When there is no willing buyer and investments cannot be readily sold or closed out, the Fund may have to sell an investment at a
substantially lower price than the price at which the Fund last valued the investment for purposes of calculating its NAV or may not be able to sell the investments at all, each of which would have a negative effect on the Funds performance
and may cause the Fund to hold an investment longer than the Adviser would otherwise determine. In addition, if the Fund sells investments with extended settlement times (e.g., certain kinds of loans), the settlement proceeds from the sales
will not be available to the Fund for a substantial period of time. The Fund may be forced to sell other investment positions with shorter settlement cycles when the Fund would not otherwise have done so, which may adversely affect the Funds
performance. Additionally, the market for certain investments may become illiquid under adverse market or economic conditions (e.g., if interest rates rise or fall significantly, if there is significant inflation or deflation, increased
selling of debt securities generally across other funds, pools and accounts, changes in investor perception, or changes in government intervention in the financial markets) independent of any specific adverse changes in the conditions of a
particular issuer. In such cases, shares of the Fund, due to the difficulty in purchasing and selling such securities or instruments, may decline in value or the Fund may be unable to achieve its desired level of exposure to a certain issuer or
sector. During periods of substantial market disruption, a large portion of the Funds assets could potentially experience significant levels of illiquidity. The values of illiquid investments are often more volatile and may be more difficult
to fair value than those of more liquid comparable investments.
Market disruption and geopolitical risk
Various market risks can affect the price or liquidity of an issuers securities in which the Fund may invest. Returns from the securities in which the Fund
invests may underperform returns from the various general securities markets. Different types of securities tend to go through cycles of outperformance and underperformance in comparison to the general securities markets. Adverse events occurring
with respect to an issuers performance or financial position can depress the value of the issuers securities. The liquidity in a market for a particular security will affect its value and may be affected by factors relating to the
issuer, as well as the depth of the market for that security. Other market risks that can affect value include a markets current attitudes about types of securities, market reactions to political or economic events, including litigation, and
tax and regulatory effects (including lack of adequate regulations for a market or particular type of instrument). During periods of severe market stress, it is possible that the market for certain investments held by the Fund, such as loans, may
become highly illiquid. In such an event, the Fund may find it difficult to sell the investments it holds, and, for those investments it is able to sell in such circumstances, the sale price may be significantly lower than, and the trade settlement
period may be longer than, anticipated.
Events surrounding the COVID-19 pandemic have contributed to, and may
continue to contribute to, significant market volatility, reductions in economic activity, market closures, and declines in global financial markets. These effects may be short term or may last for an extended period of time, and in either case
could result in a substantial economic downturn or recession. Governmental responses may exacerbate other pre-existing political, social, economic, market and financial risks. These events may have a
significant adverse effect on the Funds performance and on the liquidity of the Funds investments and have the potential to impair the ability of the Adviser or the Funds other service providers to serve the Fund and could lead to
operational disruptions that negatively impact the Fund.
Markets may, in response to governmental actions or intervention, political, economic or market
developments, or other external factors, experience periods of high volatility and reduced liquidity. During those periods, the Fund may have to sell securities at times when it would otherwise not do so, and potentially at unfavorable prices.
Securities may be difficult to value during such periods. Market risk involves the risk that the value of the Funds investment portfolio will change, potentially frequently and in large amounts, as the prices of its investments go up or down.
During periods of severe market stress, it is possible that the market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
75
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
for some or all of the Funds investments may become highly volatile and/or illiquid. In such an event, the Fund may find it difficult to sell some or all of its investments and, for certain
assets, the trade settlement period may be longer than anticipated. The fewer the number of issuers in which the Fund invests and/or the greater the use of leverage, the greater the potential volatility of the Funds portfolio. These risks may
be heightened for fixed income securities due to the current low interest rate environment. The United States and other governments and the Federal Reserve and certain foreign central banks have taken steps to support financial markets. The
withdrawal of support, failure of efforts in response to a financial crisis, or investor perception that those efforts are not succeeding could negatively affect financial markets generally as well as the values and liquidity of certain securities.
Federal, state, and other governments, their regulatory agencies, or self-regulatory organizations may take actions that affect the regulation of the securities in which the Fund invests or the issuers of such securities in ways that are
unforeseeable. Legislation or regulation also may change the way in which the Fund or the Adviser are regulated. Such legislation, regulation, or other government action could limit or preclude the Funds ability to achieve its investment
objectives and affect the Funds performance. Political, social or financial instability, civil unrest and acts of terrorism are other potential risks that could adversely affect an investment in a security or in markets or issuers generally.
In addition, political developments in foreign countries or the United States may at times subject such countries to sanctions from the U.S. government, foreign governments and/or international institutions that could negatively affect the
Funds investments in issuers located in, doing business in or with assets in such countries.
Portfolio turnover risk
The length of time the Fund has held a particular security is not generally a consideration in investment decisions. A change in the securities
held by the Fund is known as portfolio turnover. Portfolio turnover generally involves a number of direct and indirect costs and expenses to the Fund, including, for example, brokerage commissions, dealer
mark-ups and bid/ask spreads, and transaction costs on the sale of securities and reinvestment in other securities, and may result in the realization of taxable capital gains (including short-term capital
gains, which are generally taxable to shareholders subject to tax at ordinary income rates). Portfolio turnover risk includes the risk that frequent purchases and sales of portfolio securities may result in higher Fund expenses and may result in
larger distributions of taxable capital gains to investors as compared to a fund that trades less frequently.
Legal and regulatory
risk
Legal, tax and regulatory changes (which may apply with retroactive effect) could occur and may adversely affect the Fund and its ability to
pursue its investment strategies and/or increase the costs of implementing such strategies. New (or revised) laws or regulations may be imposed by the CFTC, the SEC, the Internal Revenue Service (IRS), the U.S. Federal Reserve or other
banking regulators, other governmental regulatory authorities or self-regulatory organizations that supervise the financial markets that could adversely affect the Fund. In particular, these agencies are implementing a variety of new rules pursuant
to financial reform legislation in the United States. The EU and some other countries are implementing similar requirements. The Fund also may be adversely affected by changes in the enforcement or interpretation of existing statutes and rules by
these governmental regulatory authorities or self-regulatory organizations.
In addition, the securities and futures markets are subject to comprehensive
statutes, regulations and margin requirements. The CFTC, the SEC, the Federal Deposit Insurance Corporation, other regulators and self-regulatory organizations and exchanges are authorized under these statutes, regulations and otherwise to take
extraordinary actions in the event of market emergencies. The Fund and the Adviser have historically been eligible for exemptions from certain regulations. However, there is no assurance that the Fund and the Adviser will continue to be eligible for
such exemptions.
The SEC has in the past adopted interim rules requiring reporting of all short positions above a certain de minimis threshold and may adopt
rules requiring monthly public disclosure in the future. In addition, other non-U.S. jurisdictions where the Fund may trade have adopted reporting requirements. If the Funds short positions or its
strategy become generally known, it could have a significant effect on the Advisers ability to implement its investment strategy. In particular, it would make it more likely that other investors could cause a short squeeze in the securities
held short by the Fund forcing the Fund to cover its positions at a loss. Such reporting requirements may also limit the Advisers ability to access management and other personnel at certain companies where the Adviser seeks to take a short
position. In addition, if other investors engage in copycat behavior by taking positions in the same issuers as the Fund, the cost of borrowing securities to sell short could increase drastically and the availability of such securities to the Fund
could decrease drastically. Such events could make the Fund unable to execute its investment strategy.
Rules implementing the credit risk retention
requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) for asset-backed securities require the sponsor of certain securitization vehicles (or a majority owned affiliate of such sponsor) to
retain, and to refrain from transferring, selling, conveying to a third party, or hedging the credit risk on a portion of the assets transferred, sold, or conveyed through the issuance of the asset-backed securities of such vehicle, subject to
certain exceptions. These requirements may increase the costs to originators, securitizers, and, in certain cases, collateral
|
|
|
|
|
|
|
|
|
|
|
76
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
managers of securitization vehicles in which the Fund may invest, which costs could be passed along to the Fund as an investor in such vehicles. In addition, the costs imposed by the risk
retention rules on originators, securitizers and/or collateral managers may result in a reduction of the number of new offerings of asset-backed securities and thus in fewer investment opportunities for the Fund. A reduction in the number of new
securitizations could also reduce liquidity in the markets for certain types of financial assets that are typically held by securitization vehicles, which in turn could negatively affect the returns on the Funds investment in asset-backed
securities.
Tax risk
The
Fund has elected to be treated as a regulated investment company (RIC) under the Code and intends each year to qualify and be eligible to be treated as such. If the Fund qualifies as a RIC, it generally will not be subject to U.S.
federal income tax on its net investment income or net short-term or long-term capital gains, distributed (or deemed distributed) to shareholders, provided that, for each taxable year, the Fund distributes (or is treated as distributing) to its
shareholders an amount equal to or exceeding 90% of its investment company taxable income as that term is defined in the Code (which includes, among other things, dividends, taxable interest and the excess of any net short-term capital
gains over net long-term capital losses, as reduced by certain deductible expenses). The Fund intends to distribute all or substantially all of its investment company taxable income and net capital gain each year. In order for the Fund to qualify as
a RIC in any taxable year, the Fund must meet certain asset diversification tests and at least 90% of its gross income for such year must be certain types of qualifying income. If for any taxable year the Fund were to fail to meet the income or
diversification test described above, the Fund could in some cases cure the failure, including by paying a fund-level tax and, in the case of a diversification test failure, disposing of certain assets. Some of the income and gain that the Fund may
recognize, such as income and gain from real estate assets received upon foreclosure of a loan held by the Fund, generally does not constitute qualifying income, and whether certain other income and gain that the Fund may recognize constitutes
qualifying income is not certain. The Funds investments therefore may be limited by the Funds intention to qualify as a RIC and may bear on the Funds ability to so qualify.
If the Fund were ineligible to or otherwise did not cure such failure for any year, or were otherwise to fail to qualify as a RIC accorded special tax treatment
in any taxable year, it would be treated as a corporation subject to U.S. federal income tax, thereby subjecting any income earned by the Fund to tax at the corporate level and, when such income is distributed, to a further tax as dividends at the
shareholder level to the extent of the Funds current or accumulated earnings and profits.
Repurchase agreements risk
In the event of a default or bankruptcy by a selling financial institution under a repurchase agreement, the Fund will seek to sell the underlying
security serving as collateral. However, this could involve certain costs or delays, and, to the extent that proceeds from any sale were less than the repurchase price, the Fund could suffer a loss.
Zero-coupon bond risk
Zero-coupon
bonds are issued at a significant discount from their principal amount in lieu of paying interest periodically. Because zero-coupon bonds do not pay current interest in cash, their value is subject to greater
fluctuation in response to changes in market interest rates than bonds that pay interest currently. Zero-coupon bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds paying interest currently in cash. The Fund is required to accrue interest income on such investments and to distribute such amounts at least annually to shareholders even though the investments do not make any current
interest payments. Thus, it may be necessary at times for the Fund to liquidate other investments in order to satisfy its distribution requirements under the Code.
Anti-takeover provisions risk
The
Funds Amended and Restated Agreement and Declaration of Trust (the Declaration of Trust) includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status. These provisions in the Declaration of Trust could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over the then-current market price
of the Common Shares or at NAV.
Real estate risk
To the extent that the Fund invests in real estate related investments, including REITs, real estate-related loans or real-estate linked derivative instruments,
it will be subject to the risks associated with owning real estate and with the real estate industry generally. These include difficulties in valuing and disposing of real estate, the possibility of declines in the value of real estate, risks
related to general and local economic conditions, the possibility of adverse changes in the climate for real estate, environmental liability risks, the risk of increases in property taxes and operating expenses, possible adverse changes in zoning
laws, the risk of casualty or condemnation losses, limitations on rents, the possibility of adverse changes in interest rates and in the credit markets and the possibility of borrowers paying off mortgages sooner than expected, which may lead to
reinvestment of assets at lower prevailing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
77
|
|
|
|
Summary of Updated Information Regarding the Fund (Cont.)
|
|
|
interest rates. To the extent that the Fund invests in REITs, it will also be subject to the risk that a REIT may default on its obligations or go bankrupt. By investing in REITs indirectly
through the Fund, a shareholder will indirectly bear his or her proportionate share of the expenses of the REITs. The Funds investments in REITs could cause the Fund to recognize income in excess of cash received from those securities and, as
a result, the Fund may be required to sell portfolio securities, including when it is not advantageous to do so, in order to make distributions. An investment in a REIT or a real estate-linked derivative instrument that is linked to the value of a
REIT is subject to additional risks, such as poor performance by the manager of the REIT, adverse changes to the tax laws or failure by the REIT to qualify for the favorable tax treatment applicable to REITs under the Code. In addition, some REITs
have limited diversification because they invest in a limited number of properties, a narrow geographic area, or a single type of property. Also, the organizational documents of a REIT may contain provisions that make changes in control of the REIT
difficult and time-consuming. Finally, private REITs are not traded on a national securities exchange. As such, these products may be illiquid. This reduces the ability of the Fund to redeem its investment
early. Private REITs are also generally harder to value and may bear higher fees than public REITs.
LIBOR risk
The terms of many investments, financings or other transactions to which the Fund may be a party have been historically tied to the London Interbank Offered Rate,
or LIBOR. LIBOR is the offered rate at which major international banks can obtain wholesale, unsecured funding, and LIBOR may be available for different durations (e.g., 1 month or 3 months) and for different currencies. LIBOR may
be a significant factor in determining the Funds payment obligations under a derivative investment, the cost of financing to the Fund or an investments value or return to the Fund, and may be used in other ways that affect the
Funds investment performance. In July 2017, the Financial Conduct Authority (FCA), the United Kingdoms financial regulatory body, announced that after 2021 it will cease its active encouragement of banks to provide the
quotations needed to sustain LIBOR. In March 2021, the FCA and LIBORs administrator, ICE Benchmark Administration Limited (IBA) announced that all Sterling, Japanese Yen, Swiss Franc and Euro and certain U.S. dollar LIBOR settings
will no longer be published after the end of 2021 and the remaining (being the majority of the) U.S. dollar LIBOR settings will no longer be published after June 30, 2023. It is possible that the FCA, using new statutory powers to be granted to
it, will compel the IBA to publish a subset of LIBOR settings after these dates on a synthetic basis. Various financial industry groups have been planning for that transition, but there are obstacles to converting certain securities and
transactions to new reference rates. Markets are developing slowly and questions around liquidity in these new rates and how to appropriately mitigate any economic value transfer at the time of transition remain a significant concern. Neither the
effect of the transition process nor its ultimate success can yet be known. The transition process might lead to increased volatility and illiquidity in markets for instruments whose terms currently include LIBOR. It could also lead to a reduction
in the value of some LIBOR-based investments and reduce the effectiveness of new hedges placed against existing LIBOR-based investments. While some LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing
for an alternative rate-setting methodology and/or increased costs for certain LIBOR-related instruments or financing transactions, not all may have such provisions and there may be significant uncertainty regarding the effectiveness of any such
alternative methodologies, resulting in prolonged adverse market conditions for the Fund. Since the usefulness of LIBOR as a benchmark could deteriorate during the transition period, these effects could occur prior to the end of 2021. There also
remains uncertainty and risk regarding the willingness and ability of issuers to include enhanced provisions in new and existing contracts or instruments. All of the aforementioned may adversely affect the Funds performance or NAV.
Unrated securities risk
Unrated
securities (which are not rated by a rating agency) may be less liquid than comparable rated securities and involve the risk that the Adviser may not accurately evaluate the securitys comparative credit rating and value. To the extent that the
Fund invests in unrated securities, the Funds success in achieving its investment objectives may depend more heavily on the Advisers creditworthiness analysis than if the Fund invested exclusively in rated securities. Some or all of the
unrated instruments in which the Fund may invest will involve credit risk comparable to or greater than that of rated debt securities of below investment grade quality.
Operational and information security risks
The Fund and its service providers depend on complex information technology and communications systems to conduct business functions, making them susceptible to
operational and information security risks. For example, design or system failures or malfunctions, human error, faulty software or data processing systems, power or communications outages, acts of God, or
cyber-attacks may lead to operational disruptions and potential losses to the Fund. Cyber-attacks include, among other behaviors, stealing or corrupting data maintained online or digitally, denial of service
attacks on websites, the unauthorized release of confidential information and causing operational disruption. Successful cyber-attacks against, or security breakdowns of, the Fund or its Adviser, custodian, fund accountant, fund administrator,
transfer agent, pricing vendors and/or other third party service providers may adversely impact the Fund and its shareholders. For instance, cyber-attacks or other operational issues may interfere
|
|
|
|
|
|
|
|
|
|
|
78
|
|
DoubleLine Income Solutions Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
September 30, 2021
|
with the processing of shareholder transactions, impact the Funds ability to calculate its NAV, cause the release of private shareholder information or confidential Fund information, impede
trading, cause reputational damage, and subject the Fund to regulatory fines, penalties or financial losses, reimbursement or other compensation costs, and/or additional compliance costs. The Fund also may incur substantial costs for cybersecurity
risk management in order to guard against any cyber incidents in the future. In general, cyber-attacks result from deliberate attacks but unintentional events may have effects similar to those caused by cyber- attacks. Similar types of risks also
are present for issuers of securities in which the Fund invests, which could result in material adverse consequences for such issuers, and may cause the Funds investment in such securities to lose value. In addition, cyber- attacks involving a
counterparty to the Fund could affect such a counterpartys ability to meet its obligations to the Fund, which may result in losses to the Fund and its shareholders. In addition, the adoption of work-from-home arrangements by the Fund, the
Adviser or its service providers could increase all of the above risks, create additional data and information accessibility concerns, and make the Fund, the Adviser or its service providers more susceptible to operational disruptions, any of which
could adversely impact their operations. While the Fund or its service providers may have established business continuity plans and systems designed to guard against such operational failures and cyber-attacks and the adverse effects of such events,
there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified, in large part because different or unknown threats or risks may emerge in the future. The Adviser and the Fund do not
control the business continuity and cybersecurity plans and systems put in place by third-party service providers, and such third-party service providers may have no or limited indemnification obligations to the Adviser or the Fund.
Fund Organizational Structure
Since the Funds last annual report to shareholders, there have been no changes in the Funds Declaration of Trust or
By-laws that would delay or prevent a change of control of the Fund.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Report
|
|
|
|
|
September 30, 2021
|
|
79
|
|
|
|
Portfolio Managers
|
|
(Unaudited)
September 30, 2021
|
The portfolio
managers of the Fund are Jeffrey E. Gundlach (since the Funds inception), Luz M. Padilla (since the Funds inception) and Robert Cohen (since September 2016). Since the Funds last annual report to shareholders, there have been no
changes in the persons who are primarily responsible for the day-to-day management of the Funds portfolio.
Information About Proxy Voting
Information about how the Fund voted proxies relating to portfolio securities held during the most recent twelve month period ended June 30th is available no
later than the following August 31st without charge, upon request, by calling 877-DLine11 (877-354-6311) or email
fundinfo@doubleline.com and on the Securities and Exchange Commissions (the SEC) website at www.sec.gov.
A description of the Funds
proxy voting policies and procedures is available (i) without charge, upon request, by calling 877-DLine11 (877-354-6311) or
email fundinfo@doubleline.com; and (ii) on the SECs website at www.sec.gov.
Information About
Portfolio Holdings
The Fund intends to disclose its portfolio holdings on a quarterly basis by posting the holdings on the Funds website.
The disclosure will be made by posting the Annual, Semi-Annual and Part F of Form N-PORT filings on the Funds website.
The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Part F of Form N-PORT. When available, the Funds Part F of Form N-PORT (and Form N-Q prior to March 31, 2019) is available on the SECs
website at www.sec.gov.
HouseholdingImportant Notice Regarding Delivery of Shareholder Documents
In an effort to conserve resources, the Fund intends to reduce the number of duplicate Annual and Semi-Annual Reports you receive by sending only
one copy of each to addresses where we reasonably believe two or more accounts are from the same family. If you would like to discontinue householding of your accounts, please call toll-free 877-DLine11 (877-354-6311) to request individual copies of these documents. We will begin sending individual copies thirty days after receiving your request to stop householding.