PIMCO Corporate & Income Strategy Fund

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

Investment Company Act file number: 811-10555

PIMCO Corporate & Income Strategy Fund

(Exact name of registrant as specified in charter)

1633 Broadway, New York, NY 10019

(Address of principal executive offices)

William G. Galipeau

Treasurer (Principal Financial & Accounting Officer)

650 Newport Center Drive

Newport Beach, CA 92660

(Name and address of agent for service)

Copies to:

David C. Sullivan

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

Registrant’s telephone number, including area code: (844) 337-4626

Date of fiscal year end: July 31

Date of reporting period: July 31, 2016

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.


Item  1. Reports to Shareholders.

The following is a copy of the report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30e-1).


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PIMCO Closed-End Funds

 

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Annual Report

 

July 31, 2016

 

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PIMCO Corporate & Income Opportunity Fund

PIMCO Corporate & Income Strategy Fund

PIMCO High Income Fund

PIMCO Income Strategy Fund

PIMCO Income Strategy Fund II

 

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Table of Contents

 

            Page  
     

Letter from the Chairman of the Board & President

        2   

Important Information About the Funds

        4   

Financial Highlights

        14   

Statements of Assets and Liabilities

        16   

Statements of Operations

        17   

Statements of Changes in Net Assets

        18   

Notes to Financial Statements

        63   

Report of Independent Registered Public Accounting Firm

        85   

Glossary

        86   

Federal Income Tax Information

        87   

Shareholder Meeting Results

        88   

Investment Strategy Updates

        89   

Dividend Reinvestment Plan

        90   

Management of the Funds

        92   

Approval of Investment Management Agreement

        95   

Privacy Policy

        101   
     
Fund    Fund
Summary
     Schedule of
Investments
 
     

PIMCO Corporate & Income Opportunity Fund

     9         20   

PIMCO Corporate & Income Strategy Fund

     10         29   

PIMCO High Income Fund

     11         37   

PIMCO Income Strategy Fund

     12         46   

PIMCO Income Strategy Fund II

     13         54   


Letter from the Chairman of the Board & President

 

Dear Shareholder,

 

The global financial markets generated mixed results during the reporting period. Investor sentiment fluctuated as investors reacted to incoming economic data, shifting monetary policy, volatile commodity prices and numerous geopolitical issues.

 

On July 19, 2016, PIMCO announced that the firm’s Managing Directors have appointed Emmanuel (Manny) Roman as PIMCO’s next Chief Executive Officer. PIMCO’s current CEO, Douglas Hodge, will assume a new role as Managing Director and Senior Advisor when Mr. Roman joins PIMCO on November 1st. The announcement of Mr. Roman as PIMCO’s CEO is the culmination of a process undertaken by the firm to hire a senior executive who would add leadership and strategic insights combined with a deep appreciation of PIMCO’s diversified global businesses, investment process and focus on superior investment performance and client service. Mr. Roman’s appointment has the full support of the firm’s leadership including Mr. Hodge, PIMCO’s President Jay Jacobs, the firm’s Executive Committee and its Managing Directors. Mr. Roman has nearly 30 years of experience in the investment industry, with expertise in fixed income and proven executive leadership, most recently as CEO of Man Group PLC, one of the world’s largest publicly traded alternative asset managers and a leader in liquid, high-alpha investment strategies.

 

For the 12-month reporting period ended July 31, 2016

 

Despite a number of headwinds, the U.S. economy was resilient and continued to expand during the reporting period. That being said, the pace was far from robust. Looking back, U.S. gross domestic product (“GDP”), which represents the value of goods and services produced in the country, the broadest measure of economic activity and the principal indicator of economic performance, expanded at a 2.0% annual pace during the third quarter of 2015. Economic activity then decelerated, as GDP grew at a 1.4% and 1.1% annual pace during the fourth quarter of 2015 and first quarter of 2016, respectively. Finally, the Commerce Department’s second reading — released after the reporting period had ended — showed that second quarter 2016 GDP grew at an annual pace of 1.1%.

 

At its meeting in December 2015, the Federal Reserve (“Fed”) took its initial step toward normalizing monetary policy. In particular, the Fed raised interest rates from a range between 0% and 0.25% to a range between 0.25% and 0.50%. However, since that time the Fed has remained on hold. In its official statement following the Fed’s July 2016 meeting it said, “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

 

Economic activity outside the U.S. was mixed during the reporting period. In the eurozone, underlying economies gradually improved from low levels due to better domestic demand, while low inflation remained a concern. Against this backdrop, the European Central Bank (“ECB”) introduced additional easing measures, including the purchase of corporate bonds in an attempt to stimulate growth and spur inflation. The Bank of Japan also continued to pursue highly accommodative monetary policy. While the Bank of England (“BoE”) kept rates on hold, British voters’ decision in June 2016 to leave the European Union (“Brexit”) led to speculation that the country’s central bank would lower rates in the near future. This occurred on August 4, 2016 — after the reporting period ended — as the BoE lowered interest rates from 0.50% to 0.25%, an all-time low, and announced that it would purchase government and corporate bonds in an attempt to stimulate the U.K. economy. Elsewhere, economic activity in China moderated, which impacted growth in many emerging market economies.

 

Commodity prices were highly volatile during the reporting period. Crude oil began the reporting period at roughly $49 a barrel and ended the period at approximately $42 a barrel. Its low of $26 occurred on February 11, 2016 and its peak of $52 took place on June 9, 2016. Finally, foreign exchange markets fluctuated given economic data, central bank policy and, most recently, Brexit, which sent the pound sharply lower.

 

 

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Outlook

 

Nine years since the financial crisis started, monetary easing is continuing with few signs of an end in sight. This appears to be especially true in a post-Brexit world rife with economic uncertainty and generally weak growth around the world. Against this backdrop, investor sentiment is likely to be challenged at times. Other questions facing investors are the upcoming November elections in the U.S. and a host of geopolitical issues, such as further moderating growth in China, instability in the Middle East, and further terrorist attacks, to name a few.

 

In such an environment, investors will be in for a choppy ride. However, in our view it won’t be without opportunity, especially for those with long-term outlooks, a healthy risk appetite and the latitude to invest actively. As always, we will continue to conduct extensive research and focus on quality and sustainability to help our shareholders navigate the many uncertainties around the globe.

 

In the following pages of this PIMCO Closed-End Funds Annual Report, please find specific details regarding investment performance and a discussion of factors that most affected the Funds’ performance over the 12 months ended July 31, 2016.

 

Thank you for investing with us. We value your trust and will continue to work diligently to meet your investment needs. If you have questions regarding any of your PIMCO Closed-End Funds investments, please contact your financial advisor or call the Funds’ shareholder servicing agent at (844) 33-PIMCO, or (844) 337-4626. We also invite you to visit our website at www.pimco.com to learn more about our views.

 

Sincerely,

 

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Hans W. Kertess   Peter G. Strelow
Chairman of the Board of Trustees   President

 

  ANNUAL REPORT   JULY 31, 2016   3


Important Information About the Funds

 

We believe that bond funds have an important role to play in a well- diversified investment portfolio. It is important to note, however, that in an environment where interest rates trend upward, rising rates would negatively impact the performance of most bond funds, and fixed- income securities held by a Fund are likely to decrease in value. A number of factors can cause interest rates to rise (e.g., central bank monetary policies, inflation rates, general economic conditions, etc.). Accordingly, changes in interest rates can be sudden, and there is no guarantee that Fund Management will anticipate such movement.

 

As of the date of this report, interest rates in the U.S. are at or near historically low levels. As such, bond funds may currently face an increased exposure to the risks associated with rising interest rates. This is especially true since the Federal Reserve Board has concluded its quantitative easing program and, at its meeting on December 16, 2015, raised interest rates for the first time since 2006 from a target range of 0% to 0.25% to a target range of 0.25% to 0.50%. Further, while the U.S. bond market has steadily grown over the past three decades, dealer inventories of corporate bonds have remained relatively stagnant. As a result, there has been a significant reduction in the ability of dealers to “make markets” in corporate bonds. All of the factors mentioned above, individually or collectively, could lead to increased volatility and/or lower liquidity in the fixed income markets, which could result in increased losses to a Fund. Bond funds and individual bonds with a longer duration (a measure of the sensitivity of a security’s price to changes in interest rates) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities or funds with shorter durations. In addition, in the current low interest rate environment, the market price of the Funds’ common shares may be particularly sensitive to changes in interest rates or the perception that there will be a change in interest rates.

 

The use of derivatives may subject the Funds to greater volatility than investments in traditional securities. The Funds may use derivative instruments for hedging purposes or as part of an investment strategy. Use of these instruments may involve certain costs and risks such as liquidity risk, interest rate risk, market risk, call risk, credit risk, management risk and the risk that a Fund could not close out a position when it would be most advantageous to do so. Certain derivative transactions may have a leveraging effect on a Fund. For example, a small investment in a derivative instrument may have a significant impact on a Fund’s exposure to interest rates, currency exchange rates or other investments. As a result, a relatively small price movement in a derivative instrument may cause an immediate and substantial loss or gain, which translates into heightened volatility in a Fund’s net asset value “NAV”. A Fund may engage in such transactions regardless of whether the Fund owns the asset, instrument or components of the index underlying a derivative instrument. A Fund

may invest a significant portion of its assets in these types of instruments. If it does, a Fund’s investment exposure could far exceed the value of its portfolio securities and its investment performance could be primarily dependent upon securities it does not directly own. Changes in regulation relating to a mutual fund’s use of derivatives and related instruments could potentially limit or impact a Fund’s ability to invest in derivatives, limit a Fund’s ability to employ certain strategies that use derivatives and adversely affect the value or performance of derivatives and a Fund. For instance, in December 2015, the SEC proposed new regulations applicable to a mutual fund’s use of derivatives and related instruments. If adopted as proposed, these regulations could significantly limit or impact a Fund’s ability to invest in derivatives and other instruments, limit a Fund’s ability to employ certain strategies that use derivatives and adversely affect a Fund’s performance, efficiency in implementing its strategy, liquidity and ability to pursue its investment objectives and generate income.

 

Certain Funds’ monthly distributions may include, among other sources, payments and premiums (characterized as capital for financial accounting purposes and as ordinary income for tax purposes) generated by certain types of interest rate derivatives.

 

Strategies involving interest rate derivatives may attempt to capitalize on differences between short-term and long-term interest rates as part of a Fund’s duration and yield curve active management strategies. For instance, in the event that long-term interest rates are higher than short-term interest rates, a Fund may elect to pay a floating short-term interest rate and to receive a long-term fixed interest rate for a stipulated period of time, thereby generating payments as a function of the difference between current short-term interest rates and long-term interest rates, so long as the floating short-term interest rate (which may rise) is lower than the fixed long-term interest rate.

 

A Fund may also enter into opposite sides of multiple interest rate swaps or other derivatives with respect to the same underlying reference instrument (e.g., a 10-year U.S. treasury) that have different effective dates with respect to interest accrual time periods for the principal purpose of generating distributable gains (characterized as ordinary income for tax purposes) and that are not part of the Fund’s duration or yield curve management strategies (“paired swap transactions”). In a paired swap transaction, a Fund would generally enter into one or more interest rate swap agreements whereby the Fund agrees to make regular payments starting at the time the Fund enters into the agreements equal to a floating interest rate in return for payments equal to a fixed interest rate (the “initial leg”). The Fund would also enter into one or more interest rate swap agreements on the same underlying instrument, but take the opposite position (i.e., in this example, the Fund would make regular payments equal to a fixed interest rate in return for receiving payments equal to a floating interest

 

 

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rate) with respect to a contract whereby the payment obligations do not commence until a date following the commencement of the initial leg (the “forward leg”).

 

A Fund’s income- and gain-generating strategies may generate current income and gains taxable as ordinary income sufficient to support monthly distributions even in situations when the Fund has experienced a decline in net assets due to, for example, adverse changes in the broad U.S. or non-U.S. equity markets or the Fund’s debt investments, or arising from its use of derivatives. For instance, a significant portion of a Fund’s monthly distributions may be sourced from paired swap transactions utilized to produce current distributable ordinary income for tax purposes on the initial leg, with the expectation that the Fund will later realize a corresponding capital loss and potential decline in its net asset value with respect to the forward leg (to the extent there are not corresponding offsetting capital gains being generated from other sources). Because some or all of these transactions may generate capital losses without corresponding offsetting capital gains, portions of a Fund’s distributions recognized as ordinary income for tax purposes (such as from paired swap transactions) may be economically similar to a taxable return of capital when considered together with such capital losses.

 

The notional exposure of a Fund’s interest rate derivatives may represent a multiple of the Fund’s total net assets. There can be no assurance a Fund’s strategies involving interest rate derivatives will work as intended and such strategies are subject to the risks related to the use of derivatives generally, as discussed above (see also Notes 6 and 7 in the Notes to Financial Statements for further discussion on the use of derivative instruments and certain of the risks associated therewith).

 

A Fund’s use of leverage creates the opportunity for increased income for the Fund’s common shareholders, but also creates special risks. Leverage is a speculative technique that may expose a Fund to greater risk and increased costs. If shorter-term interest rates rise relative to the rate of return on a Fund’s portfolio, the interest and other costs of leverage to the Fund could exceed the rate of return on the debt obligations and other investments held by the Fund, thereby reducing return to the Fund’s common shareholders. In addition, fees and expenses of any form of leverage used by a Fund will be borne entirely by its common shareholders (and not by preferred shareholders, if any) and will reduce the investment return of the Fund’s common shares. There can be no assurance that a Fund’s use of leverage will result in a higher yield on its common shares, and it may result in losses. Leverage creates several major types of risks for a Fund’s common shareholders, including: (1) the likelihood of greater volatility of net asset value and market price of the Fund’s common shares, and of the investment return to the Fund’s common shareholders, than a comparable portfolio without leverage; (2) the possibility either that the Fund’s common

share dividends will fall if the interest and other costs of leverage rise, or that dividends paid on the Fund’s common shares will fluctuate because such costs vary over time; and (3) 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 net asset value of the Fund’s common shares than if the Fund were not leveraged and may result in a greater decline in the market value of the Fund’s common shares.

 

A Fund’s investments in and exposure to foreign securities involve special risks. For example, the value of these investments may decline in response to unfavorable political and legal developments, unreliable or untimely information or economic and financial instability. Foreign securities may experience more rapid and extreme changes in value than investments in securities of U.S. issuers. The securities markets of certain foreign countries are relatively small, with a limited number of companies representing a small number of industries. Issuers of foreign securities are usually not subject to the same degree of regulation as U.S. issuers. Reporting, accounting, auditing and custody standards of foreign countries differ, in some cases significantly, from U.S. standards. Also, nationalization, expropriation or other confiscation, currency blockage, political changes or diplomatic developments could adversely affect a Fund’s investments in foreign securities. In the event of nationalization, expropriation or other confiscation, a Fund could lose its entire investment in foreign securities. Risks associated with investing in foreign securities may be increased when a Fund invests in emerging markets. For example, if a Fund invests in emerging market debt, it may face increased exposure to interest rate, liquidity, volatility, and redemption risk due to the specific economic, political, geographical, or legal background of the emerging market.

 

Investments in loans are generally subject to risks similar to those of investments in other types of debt obligations, including, among others, credit risk, interest rate risk, variable and floating rate securities risk, and, as applicable, risks associated with mortgage-related securities. In addition, in many cases loans are subject to the risks associated with below-investment grade securities. In the case of a loan participation or assignment, a Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, a Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. In the event of the insolvency of the lender selling a loan participation, a Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower. The Funds may be subject to heightened or additional risks and potential liabilities and costs by investing in mezzanine and other subordinated loans or acting as an originator of loans, including those arising under bankruptcy, fraudulent conveyance, equitable subordination, lender liability, environmental and other laws and regulations, and risks and costs associated with debt servicing and taking foreclosure actions

 

 

  ANNUAL REPORT   JULY 31, 2016   5


Important Information About the Funds (Cont.)

 

associated with the loans. To the extent that a Fund originates a loan, it may be responsible for all or a substantial portion of the expenses associated with initiating the loan, irrespective of whether the loan transaction is ultimately consummated or closed. This may include significant legal and due diligence expenses, which will be indirectly borne by a Fund and its shareholders.

 

Mortgage-related and other asset-backed securities often involve risks that are different from or more acute than risks associated with other types of debt instruments. Generally, rising interest rates tend to extend the duration of fixed rate mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, if a Fund holds mortgage-related securities, it may experience additional volatility since individual mortgage holders are less likely to exercise prepayment options, thereby putting additional downward pressure on the value of these securities and potentially causing the Fund to lose money. This is known as extension risk. Mortgage-backed securities can be highly sensitive to rising interest rates, such that even small movements can cause an investing Fund to lose value. Mortgage-backed securities, and in particular those not backed by a government guarantee, are subject to credit risk. In addition, adjustable and fixed rate mortgage-related securities are subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner than expected. This can reduce the returns of the Funds because the Funds may have to reinvest that money at the lower prevailing interest rates. The Funds’ investments in other asset-backed securities are subject to risks similar to those associated with mortgage-related securities, as well as additional risks associated with the nature of the assets and the servicing of those assets. Payment of principal and interest on asset-backed securities may be largely dependent upon the cash flows generated by the assets backing the securities, and asset-backed securities may not have the benefit of any security interest in the related assets.

 

High-yield bonds (commonly referred to as “junk bonds”) typically have a lower credit rating than other bonds. Lower-rated bonds generally involve a greater risk to principal than higher-rated bonds. Further, markets for lower-rated bonds are typically less liquid than for higher- rated bonds, and public information is usually less abundant in such markets. Thus, high yield investments increase the chance that a Fund will lose money on its investment. The Funds may also invest in bonds and other instruments that are not rated, but which PIMCO considers to be equivalent to high-yield investments. The Funds may hold defaulted securities that may involve special considerations including bankruptcy proceedings, other regulatory and legal restrictions affecting the Funds’ ability to trade, and the availability of prices from independent pricing services or dealer quotations. Defaulted securities are often illiquid and may not be actively traded. Sale of securities in

bankrupt companies at an acceptable price may be difficult and differences compared to the value of the securities used by the Funds could be material.

 

Variable and floating rate securities generally are 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 if interest rates decline. Inverse floating rate securities may decrease in value if interest rates increase. Inverse floating rate securities may also exhibit greater price volatility than a fixed rate obligation with similar credit quality. When a 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 Funds’ shares.

 

The global economic crisis brought several small economies in Europe to the brink of bankruptcy and many other economies into recession and weakened the banking and financial sectors of many European countries. For example, the governments of Greece, Spain, Portugal, and the Republic of Ireland have all experienced large public budget deficits, the effects of which are still yet unknown and may slow the overall recovery of the European economies from the global economic crisis. In addition, due to large public deficits, some European countries may be dependent on assistance from other European governments and institutions or other central banks or supranational agencies such as the International Monetary Fund. Assistance may be dependent on a country’s implementation of reforms or reaching a certain level of performance. Failure to reach those objectives or an insufficient level of assistance could result in a deep economic downturn which could significantly affect the value of a Fund’s European investments. It is possible that one or more Economic and Monetary Union of the European Union (“EMU”) member countries could abandon the euro and return to a national currency and/or that the euro will cease to exist as a single currency in its current form. The exit of any country out of the euro may have an extremely destabilizing effect on other eurozone countries and their economies and a negative effect on the global economy as a whole. Such an exit by one country may also increase the possibility that additional countries may exit the euro should they face similar financial difficulties. In June 2016, the United Kingdom approved a referendum to leave the European Union. Significant uncertainty remains in the market regarding the ramifications of that development, and the range and potential implications of possible political, regulatory, economic and market outcomes are difficult to predict.

 

As the use of technology has become more prevalent in the course of business, the Funds have become potentially more susceptible to operational risks through breaches in cyber security. A breach in cyber

 

 

6   PIMCO CLOSED-END FUNDS     


 

security refers to both intentional and unintentional cyber events that may cause a Fund to lose proprietary information, suffer data corruption, or lose operational capacity. Cyber security breaches may involve unauthorized access to a Fund’s digital information systems (e.g., through “hacking” or malicious software coding), but may also result from outside attacks such as denial-of-service attacks (i.e., efforts to make network services unavailable to intended users). In addition, cyber security breaches of a Fund’s third party service providers (including but not limited to advisers, sub-advisers, administrators, transfer agents, custodians, distributors and other third parties) or issuers that a Fund invests in can also subject a Fund to many of the same risks associated with direct cyber security breaches. Cyber security failures or breaches may result in financial losses to a Fund and its shareholders. These failures or breaches may also result in disruptions to business operations, potentially resulting in financial losses; interference with a Fund’s ability to calculate its net asset value, process shareholder transactions or otherwise transact business with shareholders; impediments to trading; violations of applicable privacy and other laws; regulatory fines; penalties; reputational damage; reimbursement or other compensation costs; or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. Like with operational risk in general, the Funds have established risk management systems designed to reduce the risks associated with cyber security. However, there is no guarantee that such efforts will succeed, especially since the Funds do not directly control the cyber security systems of issuers or third party service providers. The Funds and their shareholders could be negatively impacted as a result.

 

The Funds may invest in securities and instruments that are economically tied to Russia. Investments in Russia are subject to various risks such as political, economic, legal, market and currency risks. The risks include uncertain political and economic policies, short- term market volatility, poor accounting standards, corruption and crime, an inadequate regulatory system, and unpredictable taxation. Investments in Russia are particularly subject to the risk that economic sanctions may be imposed by the United States and/or other countries. Such sanctions — which may impact companies in many sectors, including energy, financial services and defense, among others — may negatively impact the Funds’ performance and/or ability to achieve their investment objectives. The Russian securities market is characterized by limited volume of trading, resulting in difficulty in obtaining accurate prices. The Russian securities market, as compared to U.S. markets, has significant price volatility, less liquidity, a smaller market capitalization and a smaller number of traded securities. There may be little publicly available information about issuers. Settlement, clearing and registration of securities transactions are subject to risks because of registration systems that may not be subject to effective government

supervision. This may result in significant delays or problems in registering the transfer of securities. Russian securities laws may not recognize foreign nominee accounts held with a custodian bank, and therefore the custodian may be considered the ultimate owner of securities they hold for their clients. Ownership of securities issued by Russian companies is recorded by companies themselves and by registrars instead of through a central registration system. It is possible that the ownership rights of the Funds could be lost through fraud or negligence. While applicable Russian regulations impose liability on registrars for losses resulting from their errors, it may be difficult for the Funds to enforce any rights it may have against the registrar or issuer of the securities in the event of loss of share registration. Adverse currency exchange rates are a risk and there may be a lack of available currency hedging instruments. Investments in Russia may be subject to the risk of nationalization or expropriation of assets. Oil, natural gas, metals, and timber account for a significant portion of Russia’s exports, leaving the country vulnerable to swings in world prices.

 

The common shares of the Funds trade on the New York Stock Exchange. As with any stock, the price of a Fund’s common shares will fluctuate with market conditions and other factors. If you sell your common shares of a Fund, the price received may be more or less than your original investment. Shares of closed-end management investment companies frequently trade at a discount from their net asset value. The common shares of a Fund may trade at a price that is less than the initial offering price and/or the net asset value of such shares. Further, if a Fund’s shares trade at a price that is more than the initial offering price and/or the net asset value of such shares, including at a substantial premium and/or for an extended period of time, there is no assurance that any such premium will be sustained for any period of time and will not decrease, or that the shares will not trade at a discount to net asset value thereafter.

 

The Funds may be subject to various risks in addition to those described above. Some of these risks may include, but are not limited to, the following: asset allocation risk, credit risk, stressed securities risk, distressed and defaulted securities risk, corporate bond risk, market risk, issuer risk, liquidity risk, equity securities and related market risk, mortgage-related and other asset-backed securities risk, extension risk, prepayment risk, privately issued mortgage-related securities risk, mortgage market/ subprime risk, foreign (non-U.S.) investment risk, emerging markets risk, currency risk, redenomination risk, non- diversification risk, management risk, municipal bond risk, inflation- indexed security risk, senior debt risk, loans, participations and assignments risk, reinvestment risk, real estate risk, U.S. Government securities risk, foreign (non-U.S.) government securities risk, valuation risk, segregation and cover risk, focused investment risk, credit default swaps risk, event-linked securities risk, counterparty risk, preferred securities risk, confidential information access risk, other investment

 

 

  ANNUAL REPORT   JULY 31, 2016   7


Important Information About the Funds (Cont.)

 

companies risk, private placements risk, inflation/deflation risk, regulatory risk, tax risk, recent economic conditions risk, market disruptions and geopolitical risk, potential conflicts of interest involving allocation of investment opportunities, repurchase agreements risk, securities lending risk, zero-coupon bond and payment-in-kind securities risk, portfolio turnover risk, smaller company risk, short sale risk and convertible securities risk. A description of certain of these risks is available in the Notes to Financial Statements of this Report.

 

On each Fund Summary page in this Shareholder Report, the Average Annual Total Return table measures performance assuming that all dividend and capital gain distributions were reinvested. Total return is calculated by determining the percentage change in NAV or market price (as applicable) in the specified period. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions. Total return for a period of more than one year represents the average annual total return. Performance at market price will differ from results at NAV. Although market price returns tend to reflect investment results over time, during shorter periods returns at market price can also be influenced by factors such as changing views about a Fund, market conditions, supply and demand for the Fund’s shares, or changes in the Fund’s dividends. Performance shown is net of fees and expenses.

 

The following table discloses the commencement of operations and diversification status of each Fund:

 

Fund Name         Commencement
of Operations
    Diversification
Status
 

PIMCO Corporate & Income Opportunity Fund

      12/27/02        Diversified   

PIMCO Corporate & Income Strategy Fund

      12/21/01        Diversified   

PIMCO High Income Fund

      04/30/03        Diversified   

PIMCO Income Strategy Fund

      08/29/03        Diversified   

PIMCO Income Strategy Fund II

      10/29/04        Diversified   

 

An investment in a Fund is not a deposit of a bank and is not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency. It is possible to lose money on investments in the Funds.

 

The Trustees are responsible generally for overseeing the management of the Funds. The Trustees authorize the Funds to enter into service agreements with the Investment Manager and other service providers in order to provide, and in some cases authorize service providers to procure through other parties, necessary or desirable services on behalf of the Funds. Shareholders are not parties to or third-party beneficiaries of such service agreements. Neither a Fund’s original or any subsequent prospectus or Statement of Additional Information (SAI), any press release or shareholder report, any contracts filed as exhibits to a Fund’s registration statement, nor any other communications,

disclosure documents or regulatory filings from or on behalf of a Fund creates a contract between or among any shareholder of a Fund, on the one hand, and the Fund, a service provider to the Fund, and/or the Trustees or officers of the Fund, on the other hand. The Trustees (or the Funds and their officers, service providers or other delegates acting under authority of the Trustees) may amend its most recent or use a new prospectus or SAI with respect to a Fund, adopt and disclose new or amended policies and other changes in press releases and shareholder reports and/or amend, file and/or issue any other communications, disclosure documents or regulatory filings, and may amend or enter into any contracts to which a Fund is a party, and interpret the investment objective(s), policies, restrictions and contractual provisions applicable to any Fund, without shareholder input or approval, except in circumstances in which shareholder approval is specifically required by law (such as changes to fundamental investment policies) or where a shareholder approval requirement was specifically disclosed in a Fund’s prospectus, SAI or shareholder report and is otherwise still in effect.

 

PIMCO has adopted written proxy voting policies and procedures (“Proxy Policy”) as required by Rule 206(4)-6 under the Investment Advisers Act of 1940. The Proxy Policy has been adopted by the Funds as the policies and procedures that PIMCO will use when voting proxies on behalf of the Funds. A description of the policies and procedures that PIMCO uses to vote proxies relating to portfolio securities of each Fund, and information about how each Fund voted proxies relating to portfolio securities held during the most recent twelve-month period ended June 30, are available without charge, upon request, by calling the Funds at (844) 33-PIMCO (844-337-4626), on the Funds’ website at www.pimco.com, and on the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.

 

Each Fund files a complete schedule of its portfolio holdings with the SEC for the first and third quarters of its fiscal year on Form N-Q. A copy of each Fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and is available without charge, upon request by calling the Funds at (844) 33-PIMCO (844-337-4626) and on the Funds’ website at www.pimco.com.

 

Updated portfolio holdings information about a Fund will be available at www.pimco.com approximately 15 calendar days after such Fund’s most recent fiscal quarter end, and will remain accessible until such Fund files a Form N-Q or a shareholder report for the period which includes the date of the information. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

 

 

8   PIMCO CLOSED-END FUNDS     


PIMCO Corporate & Income Opportunity Fund

 

  Symbol on NYSE - PTY

 

Allocation Breakdown

 

Corporate Bonds & Notes

    39.6%   

Non-Agency Mortgage-Backed Securities

    21.9%   

Asset-Backed Securities

    15.3%   

Short-Term Instruments

    10.0%   

Municipal Bonds & Notes

    6.4%   

Other

    6.8%   
   

% of Investments, at value as of 07/31/2016. Financial derivative instruments, if any, are excluded.

 

Fund Information (as of July 31, 2016)(1)

 

Market Price

    $14.75   

NAV

    $13.27   

Premium/(Discount) to NAV

    11.15%   

Market Price Distribution Yield(2)

    10.58%   

NAV Distribution Yield(2)

    11.76%   

Total Effective Leverage(3)

    42%   
 

 

Average Annual Total Return(1) for the period ended July 31, 2016  
    1 Year     5 Year     10 Year     Commencement
of Operations
(12/27/02)
 
Market Price     16.09%        9.04%        12.18%        13.35%   
NAV     5.26%        11.81%        13.75%        13.78%   

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO.

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Corporate & Income Opportunity Fund’s primary investment objective is to seek high current income, with capital preservation and capital appreciation as secondary objectives.

 

 

Fund Insights at NAV

 

Following are key factors impacting the Fund’s performance during the reporting period:

 

»  

The Fund’s exposure to U.S. interest rates was the primary contributor to performance, as interest rates rallied significantly.

 

»  

The Fund’s allocation to non-agency mortgage-backed securities contributed to returns. The sector continued to benefit from an improving U.S. housing market and limited outstanding supply.

 

»  

The Fund’s exposure to U.S. dollar-denominated Russian sovereign and quasi-sovereign bonds benefited returns. Spreads on these issues continued to retrace much of the widening that occurred in recent years, as geopolitical tensions in the region eased and investor sentiment improved.

 

»  

The Fund’s allocation to high yield corporate bonds was the primary detractor from performance. The asset class faced headwinds from lower energy prices, financial market volatility and mutual fund withdrawals.

 

»  

Exposure to local and hard currency-denominated Brazilian debt detracted from returns. Brazil was negatively impacted by its slowing economy, high inflation and an ongoing political crisis.

 

  ANNUAL REPORT   JULY 31, 2016   9


PIMCO Corporate & Income Strategy Fund

 

  Symbol on NYSE - PCN

 

Allocation Breakdown

 

Corporate Bonds & Notes

    46.8%   

Non-Agency Mortgage-Backed Securities

    24.0%   

Asset-Backed Securities

    15.9%   

Municipal Bonds & Notes

    3.7%   

Short-Term Instruments

    2.4%   

Other

    7.2%   
   

% of Investments, at value as of 07/31/2016. Financial derivative instruments, if any, are excluded.

Fund Information (as of July 31, 2016)(1)

 

Market Price

    $15.43   

NAV

    $14.28   

Premium/(Discount) to NAV

    8.05%   

Market Price Distribution Yield(2)

    8.75%   

NAV Distribution Yield(2)

    9.45%   

Total Effective Leverage(3)

    25%   
 

 

Average Annual Total Return(1) for the period ended July 31, 2016  
    1 Year     5 Year     10 Year     Commencement
of Operations
(12/21/01)
 
Market Price     24.21%        10.09%        11.75%        11.64%   
NAV     6.78%        11.08%        12.56%        11.90%   

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO.

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Corporate & Income Strategy Fund’s primary investment objective is to seek high current income, with a secondary objective of capital preservation and appreciation.

 

 

Fund Insights at NAV

 

Following are key factors impacting the Fund’s performance during the reporting period:

 

»  

The Fund’s exposure to U.S. interest rates was the primary contributor to performance, as interest rates rallied significantly.

 

»  

The Fund’s allocation to non-agency mortgage-backed securities contributed to returns. The sector continued to benefit from an improving U.S. housing market and limited outstanding supply.

 

»  

The Fund’s exposure to U.S. dollar-denominated Russian quasi-sovereign bonds benefited returns. Spreads on these issues continued to retrace much of the widening that occurred in recent years, as geopolitical tensions in the region eased and investor sentiment improved.

 

»  

The Fund’s allocation to high yield corporate bonds was the primary detractor from performance. The asset class faced headwinds from lower energy prices, financial market volatility and mutual fund withdrawals.

 

»  

Exposure to local and hard currency-denominated Brazilian debt detracted from returns. Brazil was negatively impacted by its slowing economy, high inflation and an ongoing political crisis.

 

10   PIMCO CLOSED-END FUNDS     


PIMCO High Income Fund

 

  Symbol on NYSE - PHK

 

Allocation Breakdown

 

Corporate Bonds & Notes

    56.6%   

Non-Agency Mortgage-Backed Securities

    14.7%   

Asset-Backed Securities

    14.6%   

Municipal Bonds & Notes

    6.9%   

Short-Term Instruments

    2.4%   

Other

    4.8%   
   

% of Investments, at value as of 07/31/2016. Financial derivative instruments, if any, are excluded.

 

Fund Information (as of July 31, 2016)(1)

 

Market Price

    $10.03   

NAV

    $6.63   

Premium/(Discount) to NAV

    51.28%   

Market Price Distribution Yield(2)

    12.38%   

NAV Distribution Yield(2)

    18.73%   

Total Effective Leverage(3)

    26%   
 

 

Average Annual Total Return(1) for the period ended July 31, 2016  
    1 Year     5 Year     10 Year     Commencement
of Operations
(04/30/03)
 
Market Price     19.92%        8.63%        10.80%        11.01%   
NAV     8.68%        13.11%        11.29%        11.34%   

 

All Fund returns are net of fees and expenses.

 

(1)

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO.

 

(2)

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3)

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO High Income Fund’s primary investment objective is to seek high current income, with capital appreciation as a secondary objective.

 

 

Fund Insights at NAV

 

Following are key factors impacting the Fund’s performance during the reporting period:

 

»  

The Fund’s exposure to U.S. interest rates was the primary contributor to performance, as interest rates rallied significantly.

 

»  

The Fund’s allocation to non-agency mortgage-backed securities contributed to returns. The sector continued to benefit from an improving U.S. housing market and limited outstanding supply.

 

»  

The Fund’s exposure to U.S. dollar-denominated Russian quasi-sovereign bonds benefited returns. Spreads on these issues continued to retrace much of the widening that occurred in recent years, as geopolitical tensions in the region eased and investor sentiment improved.

 

»  

The Fund’s allocation to high yield corporate bonds was the primary detractor from performance. The asset class faced headwinds from lower energy prices, financial market volatility and mutual fund withdrawals.

 

»  

Exposure to local and hard currency-denominated Brazilian debt detracted from returns. Brazil was negatively impacted by its slowing economy, high inflation and an ongoing political crisis.

 

»  

The Fund’s use of paired swap transactions during the reporting period supported the Fund’s monthly distributions, but generally resulted in a decline in the Fund’s net asset value.

 

  ANNUAL REPORT   JULY 31, 2016   11


PIMCO Income Strategy Fund

 

  Symbol on NYSE - PFL

 

Allocation Breakdown

 

Corporate Bonds & Notes

    49.3%   

Asset-Backed Securities

    23.9%   

Non-Agency Mortgage-Backed Securities

    14.3%   

Municipal Bonds & Notes

    4.5%   

Short-Term Instruments

    1.8%   

Other

    6.2%   
   

% of Investments, at value as of 07/31/2016. Financial derivative instruments, if any, are excluded.

 

Fund Information (as of July 31, 2016)(1)

 

Market Price

    $10.48   

NAV

    $10.53   

Premium/(Discount) to NAV

    (0.47)%   

Market Price Distribution Yield(2)

    10.31%   

NAV Distribution Yield(2)

    10.26%   

Total Effective Leverage(3)

    23%   
 

 

Average Annual Total Return(1) for the period ended July 31, 2016  
    1 Year     5 Year     10 Year     Commencement
of Operations
(08/29/03)
 
Market Price     12.41%        7.32%        5.31%        5.67%   
NAV     1.91%        9.24%        6.08%        6.17%   

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO.

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Income Strategy Fund’s primary investment objective is to seek high current income, consistent with the preservation of capital.

 

 

Fund Insights at NAV

 

Following are key factors impacting the Fund’s performance during the reporting period:

 

»  

The Fund’s exposure to U.S. interest rates was the primary contributor to performance, as interest rates rallied significantly.

 

»  

The Fund’s allocation to non-agency mortgage-backed securities contributed to returns. The sector continued to benefit from an improving U.S. housing market and limited outstanding supply.

 

»  

The Fund’s exposure to U.S. dollar-denominated Russian quasi-sovereign bonds benefited returns. Spreads on these issues continued to retrace much of the widening that occurred in recent years, as geopolitical tensions in the region eased and investor sentiment improved.

 

»  

The Fund’s allocation to high yield corporate bonds was the primary detractor from performance. The asset class faced headwinds from lower energy prices, financial market volatility and mutual fund withdrawals.

 

»  

Exposure to local and hard currency-denominated Brazilian debt detracted from returns. Brazil was negatively impacted by its slowing economy, high inflation and an ongoing political crisis.

 

12   PIMCO CLOSED-END FUNDS     


PIMCO Income Strategy Fund II

 

  Symbol on NYSE - PFN

 

Allocation Breakdown

 

Corporate Bonds & Notes

    45.4%   

Non-Agency Mortgage-Backed Securities

    21.8%   

Asset-Backed Securities

    16.3%   

Municipal Bonds & Notes

    7.0%   

Short-Term Instruments

    2.6%   

Other

    6.9%   
   

% of Investments, at value as of 07/31/2016. Financial derivative instruments, if any, are excluded.

 

Fund Information (as of July 31, 2016)(1)

 

Market Price

    $9.39   

NAV

    $9.42   

Premium/(Discount) to NAV

    (0.32)%   

Market Price Distribution Yield(2)

    10.22%   

NAV Distribution Yield(2)

    10.19%   

Total Effective Leverage(3)

    25%   
 

 

Average Annual Total Return(1) for the period ended July 31, 2016  
    1 Year     5 Year     10 Year     Commencement
of Operations
(10/29/04)
 
Market Price     11.92%        9.32%        4.72%        4.59%   
NAV     2.34%        9.78%        4.81%        5.01%   

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO.

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Income Strategy Fund II’s primary investment objective is to seek high current income, consistent with the preservation of capital.

 

 

Fund Insights at NAV

 

Following are key factors impacting the Fund’s performance during the reporting period:

 

»  

The Fund’s exposure to U.S. interest rates was the primary contributor to performance, as interest rates rallied significantly.

 

»  

The Fund’s allocation to non-agency mortgage-backed securities contributed to returns. The sector continued to benefit from an improving U.S. housing market and limited outstanding supply.

 

»  

The Fund’s exposure to U.S. dollar-denominated Russian quasi-sovereign bonds benefited returns. Spreads on these issues continued to retrace much of the widening that occurred in recent years, as geopolitical tensions in the region eased and investor sentiment improved.

 

»  

The Fund’s allocation to high yield corporate bonds was the primary detractor from performance. The asset class faced headwinds from lower energy prices, financial market volatility and mutual fund withdrawals.

 

»  

Exposure to local and hard currency-denominated Brazilian debt detracted from returns. Brazil was negatively impacted by its slowing economy, high inflation and an ongoing political crisis.

 

  ANNUAL REPORT   JULY 31, 2016   13


Financial Highlights

 

              
Investment Operations
          Less Distributions to Common Shareholders(b)  
                                                       
    Net Asset Value
Beginning of
Year or
Period
    Net  Investment
Income(a)
    Net Realized/
Unrealized
Gain (Loss)
    Distributions on
Preferred Shares
from Net
Investment
Income(b)
    Distributions on
Preferred Shares
from Realized
Gains(b)
    Total            From Net
Investment
Income
    From Net
Realized
Capital Gains
    Tax Basis
Return of
Capital
    Total  

PIMCO Corporate & Income Opportunity Fund

                     

07/31/2016

  $ 14.23      $ 1.30      $ (0.65   $ (0.02   $ 0.00      $ 0.63              $ (1.59   $ 0.00      $ 0.00      $ (1.59

12/01/2014 - 07/31/2015(f)

    15.41        0.68        (0.33     (0.00 )^      0.00        0.35                (1.69     0.00        0.00        (1.69 )(i) 

11/30/2014

    16.62        1.14        1.06        (0.00 )^      (0.01     2.19                (1.56     (1.84     0.00        (3.40

11/30/2013

    17.58        1.43        0.19        (0.00 )^      (0.00 )^      1.62                (1.82     (0.76     0.00        (2.58

11/30/2012

    14.22        1.68        3.87        (0.01     0.00        5.54                (2.18     0.00        0.00        (2.18

11/30/2011

    16.29        1.88        (1.87     (0.01     0.00        0.00                (2.07     0.00        0.00        (2.07

PIMCO Corporate & Income Strategy Fund

                     

07/31/2016

  $   14.75      $   1.24      $   (0.33   $   (0.01   $ 0.00      $ 0.90              $ (1.37   $ 0.00      $ 0.00      $ (1.37

11/01/2014 - 07/31/2015(g)

    15.60        0.73        (0.21     (0.00 )^      0.00        0.52                (1.37     0.00        0.00        (1.37 )(i) 

10/31/2014

    16.04        0.99        0.87        (0.00 )^        (0.00 )^      1.86                (1.35       (0.95     0.00        (2.30

10/31/2013

    15.90        1.28        0.44        (0.01     0.00        1.71                (1.57     0.00        0.00        (1.57

10/31/2012

    13.67        1.57        2.47        (0.01     0.00        4.03                (1.80     0.00        0.00        (1.80

10/31/2011

    15.51        1.72        (1.87     (0.01     0.00          (0.16               (1.68     0.00        0.00        (1.68

PIMCO High Income Fund

                     

07/31/2016

  $ 7.37      $ 0.74      $ (0.22   $ (0.00 )^    $ 0.00      $ 0.52              $ (1.18   $ 0.00      $ (0.08   $   (1.26

04/01/2015 - 07/31/2015(h)

    7.59        0.21        0.06        (0.00 )^      0.00        0.27                (0.33     0.00        (0.16     (0.49 )(i) 

03/31/2015

    8.23        0.94        (0.12     (0.00 )^      0.00        0.82                (1.46     0.00        0.00        (1.46

03/31/2014

    8.65        0.84        0.20        (0.00 )^      0.00        1.04                (1.35     0.00          (0.11     (1.46

03/31/2013

    7.87        0.81        1.43        (0.00 )^      0.00        2.24                (1.42     0.00        (0.04     (1.46

03/31/2012

    9.42        0.96        (1.05     (0.00 )^      0.00        (0.09             (1.39     0.00        (0.07     (1.46

PIMCO Income Strategy Fund

                     

07/31/2016

  $ 11.46      $ 0.88      $ (0.70   $ (0.03   $ 0.00      $ 0.15              $ (1.08   $ 0.00      $ 0.00      $ (1.08

07/31/2015

    12.15        0.79        (0.34     (0.03     0.00        0.42                (1.22     0.00        0.00        (1.22

07/31/2014

    11.70        0.79        0.78        (0.04     0.00        1.53                (1.08     0.00        0.00        (1.08

07/31/2013

    11.35        0.92        0.87        (0.04     0.00        1.75                (1.40     0.00        0.00        (1.40

07/31/2012

    11.39        1.16        (0.04     (0.05     0.00        1.07                (1.11     0.00        0.00        (1.11

PIMCO Income Strategy Fund II

                     

07/31/2016

  $ 10.27      $ 0.87      $ (0.67   $ (0.02   $ 0.00      $ 0.18              $ (1.03   $ 0.00      $ 0.00      $ (1.03

07/31/2015

    10.88        0.70        (0.29     (0.03     0.00        0.38                (1.11     0.00        0.00        (1.11

07/31/2014

    10.29        0.72        0.87        (0.04     0.00        1.55                (0.96     0.00        0.00        (0.96

07/31/2013

    10.23        0.88        0.68        (0.04     0.00        1.52                (1.46     0.00        0.00        (1.46

07/31/2012

    10.04        1.03        0.03        (0.04     0.00        1.02                (0.83     0.00        0.00        (0.83

 

* Annualized
^ Reflects an amount rounding to less than one cent.
(a) Per share amounts based on average number of common shares outstanding during the year or period.
(b) The tax characterization of distributions is determined in accordance with federal income tax regulations. See Note 2(c) in the Notes to Financial Statements for more information.
(c) Total investment return is calculated assuming a purchase of a common share at the market price on the first day and a sale of a common share at the market price on the last day of each year or period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Funds’ dividend reinvestment plan. Total investment return does not reflect brokerage commissions in connection with the purchase or sale of Fund shares.
(d) Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders. The expense ratio and net investment income do not reflect the effects of dividend payments to preferred shareholders.
(e) Interest expense primarily relates to participation in borrowing and financing transactions. See Note 5 in the Notes to Financial Statements for more information.
(f)

Fiscal year end changed from November 30th to July 31st.

(g)

Fiscal year end changed from October 31st to July 31st.

(h)

Fiscal year end changed from March 31st to July 31st.

(i) Total distributions for the period ended July 31, 2015 may be lower than prior fiscal years due to fiscal year end changes resulting in a reduction of the amount of days in the period ended July 31, 2015.
(j) See Note 12 in the Notes to Financial Statements.

 

14   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


Preferred Share
Transactions
          Common Share           Ratios/Supplemental Data  
                                          Ratios to Average Net Assets              
Increase Resulting
from Tender  and
Repurchase
of Auction-Rate
Preferred Shares(j)
           Net Assets
Value End of
Year or
Period
    Market Price
End of Year
or Period
    Total
Investment
Return(c)
           Net Assets
Applicable
to Common
Shareholders
(000s)
    Expenses(d)(e)     Expenses
Excluding
Interest
Expense(d)
    Net  Investment
Income(d)
    Preferred
Shares Asset
Coverage
Per Share
    Portfolio
Turnover
Rate
 
                     
                     
$ 0.00              $ 13.27      $ 14.75        16.09           $ 946,843        0.89     0.85     9.93   $ 124,468        45
  0.16                14.23        14.31        (13.61             1,006,484        0.91     0.90     7.01     130,743        34   
  0.00                15.41        18.50        26.04                1,082,000        0.91        0.91        7.36        108,229        44   
  0.00                16.62        17.75        (0.15             1,149,779        0.91        0.91        8.49        113,443        118   
  0.00                17.58        20.37        36.86                  1,205,090        1.05        0.93        10.63        117,697        29   
  0.00                14.22        16.78        9.24                967,195        1.09        0.94        11.76        99,399        53   
                     
                     
$   0.51              $   14.28      $   15.43        24.21           $ 553,569        1.10     1.02     8.91   $   274,223        43
  0.00                14.75        13.71        (7.12             570,122        1.07     1.07     6.51     109,336        40   
  0.00                15.60        16.18        8.84                599,980        1.09        1.09        6.32        113,753        48   
  0.00                16.04        17.15        3.48                612,225        1.10        1.09        7.91        115,565        108   
  0.00                15.90        18.17        33.21                603,483        1.32        1.14        11.03        114,270        28   
  0.00                13.67        15.27        4.78                515,041        1.30        1.16        11.56        101,188        32   
                     
$ 0.26              $ 6.63      $ 10.03        19.92           $ 841,102        1.08     0.95     11.20   $ 231,185        42
  0.00                7.37        9.71        (18.40             925,598        1.05     1.03     8.14     104,245        8   
  0.00                7.59        12.48        12.30                949,880        1.18        1.02        11.53        106,324        58   
  0.00                8.23        12.56        15.51                1,021,120        1.14        1.03        10.14        112,424        159   
  0.00                8.65        12.35        8.53                1,063,863        1.06        1.05        10.00        116,082        70   
  0.00                7.87        12.84        3.28                960,496        1.16        1.07        11.76        107,233        24   
                     
$ 0.00              $ 10.53      $ 10.48        12.41           $ 266,347        1.17     1.13     8.49   $ 154,837        38
  0.11                11.46        10.39        (2.62             289,909        1.30        1.25        6.67        166,328        67   
  0.00                12.15        11.87        9.95                306,475        1.19        1.18        6.71        122,004        113   
  0.00                11.70        11.83        5.69                294,017        1.24        1.21        7.59        118,058        63   
  0.00                11.35        11.52        12.02                283,285        1.85        1.65        10.93        114,654        23   
                     
                     
$ 0.00              $ 9.42      $ 9.39        11.92           $ 556,840        1.14     1.07     9.25   $ 175,544        38
  0.12                10.27        9.41        (0.12             606,974        1.16        1.13        6.58        189,105        63   
  0.00                10.88        10.50        12.39                642,119        1.14        1.14        6.79        124,695        119   
  0.00                10.29        10.24        6.80                605,843        1.16        1.14        8.20        119,060        71   
  0.00                10.23        10.96        16.33                597,683        1.48        1.37        10.87        117,792        17   

 

  ANNUAL REPORT   JULY 31, 2016   15


Statements of Assets and Liabilities

 

July 31, 2016

 

(Amounts in thousands, except per share amounts)   PIMCO
Corporate &
Income
Opportunity
Fund
    PIMCO
Corporate &
Income
Strategy
Fund
    PIMCO High
Income Fund
    PIMCO Income
Strategy
Fund
    PIMCO Income
Strategy
Fund II
 

Assets:

         

Investments, at value

                                       

Investments in securities*

  $ 1,271,246      $ 687,766      $ 1,084,625      $ 329,757      $ 694,980   

Financial Derivative Instruments

                                       

Exchange-traded or centrally cleared

    5,793        3,306        10,715        1,734        4,043   

Over the counter

    2,555        1,482        3,241        713        1,444   

Cash

    5        1        0        1        0   

Deposits with counterparty

    11,274        8,639        21,470        5,299        10,474   

Foreign currency, at value

    608        67        256        330        552   

Receivable for investments sold

    254        18,116        121        5,637        13,516   

Interest and/or dividends receivable

    11,635        6,132        12,872        2,815        6,179   

Other assets

    6        3        40        2        5   

Total Assets

    1,303,376        725,512        1,133,340        346,288        731,193   

Liabilities:

         

Borrowings & Other Financing Transactions

                                       

Payable for reverse repurchase agreements

  $ 24,805      $ 91,401      $ 145,880      $ 16,112      $ 54,148   

Financial Derivative Instruments

                                       

Exchange-traded or centrally cleared

    6,819        3,315        11,990        1,903        4,549   

Over the counter

    57,062        2,910        7,383        1,854        4,084   

Payable for investments purchased

    19,315        12,022        7,628        5,668        12,292   

Deposits from counterparty

    460        1,820        3,425        430        1,221   

Distributions payable to common shareholders

    9,274        4,362        13,122        2,277        4,728   

Distributions payable to preferred shareholders

    26        5        9        10        21   

Overdraft due to custodian

    0        0        23        0        0   

Accrued management fees

    647        413        600        239        484   

Other liabilities

    175        170        203        173        376   

Total Liabilities

    118,583        116,418        190,263        28,666        81,903   

Preferred Shares ($0.00001 par value and $25,000 liquidation preference per share)

    237,950        55,525        101,975        51,275        92,450   

Net Assets Applicable to Common Shareholders

  $ 946,843      $ 553,569      $ 841,102      $ 266,347      $ 556,840   

Net Assets Applicable to Common Shareholders Consist of:

         

Common Shares:

                                       

Par value ($0.00001 per share)

  $ 1      $ 0      $ 1      $ 0      $ 1   

Paid in capital in excess of par

    1,034,727        571,150        1,494,231        419,478        950,673   

Undistributed (overdistributed) net investment income

    11,608        8,897        (16,843     1,149        6,597   

Accumulated undistributed net realized (loss)

    (222,772     (80,679     (661,802       (182,275       (468,738

Net unrealized appreciation

    123,279        54,201        25,515        27,995        68,307   

Net Assets Applicable to Common Shareholders

  $ 946,843      $ 553,569      $ 841,102      $ 266,347      $ 556,840   

Net Asset Value Per Common Share

  $ 13.27      $ 14.28      $ 6.63      $ 10.53      $ 9.42   

Common shares issued and outstanding

    71,339        38,775        126,835        25,300        59,103   

Preferred shares issued and outstanding

    10        2        4        2        4   

Cost of investments in securities

  $   1,283,360      $   709,296      $   1,114,964      $ 340,091      $ 717,786   

Cost of foreign currency held

  $ 645      $ 67      $ 259      $ 348      $ 551   

Cost or premiums of financial derivative instruments, net

  $ (55,576   $ (1,166   $ (3,020   $ (801   $ (1,663

* Includes repurchase agreements of:

  $ 63,979      $ 13,671      $ 16,067      $ 3,824      $ 10,863   

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

16   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


Statements of Operations

 

Year Ended July 31, 2016                              
(Amounts in thousands)   PIMCO
Corporate &
Income
Opportunity
Fund
    PIMCO
Corporate &
Income
Strategy
Fund
    PIMCO High
Income Fund
    PIMCO Income
Strategy
Fund
    PIMCO Income
Strategy
Fund II
 

Investment Income:

         

Interest, net of foreign taxes*

  $ 98,049      $ 52,042      $ 101,646      $ 24,487      $ 55,445   

Dividends

    2,550        1,789        1,164        930        2,013   

Total Income

    100,599        53,831        102,810        25,417        57,458   

Expenses:

         

Management fees

    7,573        5,092        7,573        2,818        5,712   

Auction agent fees and commissions

    44        36        52        57        36   

Trustee fees and related expenses

    218        126        202        61        119   

Interest expense

    343        405        1,052        111        373   

Auction rate preferred shares related expenses

    136        196        201        55        52   

Miscellaneous expense

    31        10        15        3        3   

Total Expenses

    8,345        5,865        9,095        3,105        6,295   

Net Investment Income

    92,254        47,966        93,715        22,312        51,163   

Net Realized Gain (Loss):

         

Investments in securities

    10,111        4,508        5,172        61        1,695   

Exchange-traded or centrally cleared financial derivative instruments

      (117,740       (55,433     (2,606     (30,634     (74,148

Over the counter financial derivative instruments

    18,322        6,639        39,795        3,182        5,268   

Foreign currency

    (61     (234     (317     (83     222   

Net Realized Gain (Loss)

    (89,368     (44,520     42,044          (27,474       (66,963

Net Change in Unrealized Appreciation (Depreciation):

         

Investments in securities

    (54,576     (42,359     (68,804     (18,124     (36,894

Exchange-traded or centrally cleared financial derivative instruments

    99,803        54,264        (14,085     27,892        66,201   

Over the counter financial derivative instruments

    (1,450     35        (20,978     (42     (1,357

Foreign currency assets and liabilities

    137        (46     (95     (6     27   

Net Change in Unrealized Appreciation (Depreciation)

    43,914        11,894          (103,962     9,720        27,977   

Net Increase in Net Assets Resulting from Operations

  $ 46,800      $ 15,340      $ 31,797      $ 4,558      $ 12,177   

Distributions on Preferred Shares from Net Investment Income

  $ (1,253   $ (275   $ (528   $ (797   $ (1,437

Net Increase in Net Assets Applicable to Common Shareholders Resulting from Operations

  $ 45,547      $ 15,065      $ 31,269      $ 3,761      $ 10,740   

* Foreign tax withholdings

  $ 0      $ 2      $ 6      $ 0      $ 0   

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

  ANNUAL REPORT   JULY 31, 2016   17


Statements of Changes in Net Assets

 

    PIMCO
Corporate & Income Opportunity Fund
    PIMCO
Corporate & Income Strategy Fund
 
(Amounts in thousands)   Year Ended
July 31, 2016
    Period from
December 1, 2014 to
July 31, 2015(a)
    Year Ended
November 30, 2014
    Year Ended
July 31, 2016
    Period from
November 1, 2014 to
July 31,  2015(b)
    Year Ended
October 31, 2014
 

(Decrease) in Net Assets from:

           

Operations:

           

Net investment income

  $ 92,254      $ 47,744      $ 79,920      $ 47,966      $ 28,166      $ 37,968   

Net realized gain (loss)

    (89,368     (4,996     28,093        (44,520     3,953        17,611   

Net change in unrealized appreciation (depreciation)

    43,914        (18,369     42,688        11,894        (12,132     15,590   

Net increase in net assets resulting from operations

    46,800        24,379        150,701        15,340        19,987        71,169   

Distributions on preferred shares from net investment income(d)

    (1,253     (313     (125     (275     (160     (41

Distributions on preferred shares from net realized gains(d)

    0        0        (296     0        0        (122

Net Increase in Net Assets Applicable to Common Shareholders Resulting from Operations

    45,547        24,066        150,280        15,065        19,827        71,006   

Distributions to Common Shareholders:

           

From net investment income

    (112,955     (119,032     (109,083     (53,009     (52,644     (51,774

From net realized capital gains

    0        0        (127,359     0        0        (36,294

Tax basis return of capital

    0        0        0        0        0        0   

Total Distributions to Common Shareholders(d)

    (112,955     (119,032 )(e)      (236,442     (53,009     (52,644 )(e)      (88,068

Preferred Share Transactions:

           

Net Increase resulting from tender and repurchase of Auction-Rate Preferred Shares***

    0        11,317        0        19,858        0        0   

Common Share Transactions**:

           

Issued as reinvestment of distributions

    7,767        8,133        18,383        1,533        2,959        4,817   

Total (Decrease) in Net Assets

    (59,641     (75,516     (67,779     (16,553     (29,858     (12,245

Net Assets Applicable to Common Shareholders:

           

Beginning of year or period

      1,006,484        1,082,000        1,149,779        570,122        599,980        612,225   

End of year or period*

  $ 946,843      $   1,006,484      $   1,082,000      $   553,569      $   570,122      $   599,980   

* Including undistributed (overdistributed) net investment income of:

  $ 11,608      $ (8,639   $ 36,794      $ 8,897      $ (4,556   $ 11,115   

** Common Share Transactions:

           

Shares issued as reinvestment of distributions

    583        530        1,058        110        197        303   

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

(a) 

Fiscal Year end changed from November 30th to July 31st.

(b) 

Fiscal Year end changed from October 31st to July 31st.

(c) 

Fiscal Year end changed from March 31st to July 31st.

(d) 

The tax characterization of distributions is determined in accordance with federal income tax regulations. See Note 2(c) in the Notes to Financial Statements for more information.

(e)

Total distributions for the period ended July 31, 2015 may be lower than prior fiscal years due to fiscal year end changes resulting in a reduction of the amount of days in the period ended July 31, 2015.

*** See Note 12 in the Notes to Financial Statements.

 

18   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

PIMCO
High Income Fund
    PIMCO
Income Strategy Fund
    PIMCO
Income Strategy Fund II
 
Year Ended
July 31, 2016
    Period from
April 1, 2015 to
July 31,  2015(c)
    Year Ended
March 31, 2015
    Year Ended
July 31, 2016
    Year Ended
July 31, 2015
    Year Ended
July 31, 2016
    Year Ended
July 31, 2015
 
           
           
$ 93,715      $ 26,276      $ 117,468      $ 22,312      $ 19,896      $ 51,163      $ 41,101   
  42,044        (29,322     (29,862     (27,474     (3,515     (66,963     (3,754
  (103,962     35,957        10,866        9,720        (5,066     27,977        (12,764
  31,797        32,911        98,472        4,558        11,315        12,177        24,583   
  (528     (130     (356     (797     (815     (1,437     (1,538
  0        0        0        0        0        0        0   

 

31,269

  

    32,781        98,116        3,761        10,500        10,740        23,045   
           
    (149,487     (41,672     (182,280     (27,324     (30,835     (60,876     (65,838
  0        0        0        0        0        0        0   
  (9,562     (19,452     0        0        0        0        0   
  (159,049     (61,124 )(e)      (182,280     (27,324     (30,835     (60,876     (65,838
           
 
 
    
32,304
 
  
    0        0        0        2,770        0        6,855   
           
  10,980        4,061        12,924        1        999        2        793   
  (84,496     (24,282     (71,240     (23,562     (16,566     (50,134     (35,145
           
  925,598        949,880          1,021,120        289,909        306,475          606,974        642,119   
$ 841,102      $   925,598      $ 949,880      $   266,347      $   289,909      $ 556,840      $   606,974   

$

(16,843

  $ (39,740   $ (32,887   $ 1,149      $ (1,974   $ 6,597      $ (2,589
           
  1,307        374        1,088        0        86        0        79   

 

  ANNUAL REPORT   JULY 31, 2016   19


Schedule of Investments PIMCO Corporate & Income Opportunity Fund

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 134.3%   
BANK LOAN OBLIGATIONS 2.3%   

Fortescue Metals Group Ltd.

  

4.250% due 06/30/2019

  $     2,863      $     2,810   

iHeartCommunications, Inc.

  

7.246% due 01/30/2019

      8,198          6,389   

Sequa Corp.

  

5.250% due 06/19/2017

      8,748          7,015   

Westmoreland Coal Co.

  

7.500% due 12/16/2020

      7,364          5,670   
       

 

 

 

Total Bank Loan Obligations (Cost $25,559)

      21,884   
       

 

 

 
       
CORPORATE BONDS & NOTES 53.1%   
BANKING & FINANCE 25.5%   

AGFC Capital Trust

  

6.000% due 01/15/2067

      1,800          990   

Ally Financial, Inc.

  

8.000% due 11/01/2031

      4,067          4,973   

Banco Bilbao Vizcaya Argentaria S.A.

  

6.750% due 02/18/2020 (f)

  EUR     1,800          1,836   

Banco do Brasil S.A.

  

6.250% due 04/15/2024 (f)

  $     4,200          2,581   

9.000% due 06/18/2024 (f)

      9,298          7,536   

Banco Espirito Santo S.A.

  

2.625% due 05/08/2017 ^

  EUR     500          159   

4.000% due 01/21/2019 ^

      5,000          1,593   

4.750% due 01/15/2018 ^

      1,000          319   

Banco Santander S.A.

  

6.250% due 09/11/2021 (f)

      400          400   

Barclays Bank PLC

  

14.000% due 06/15/2019 (f)

  GBP     12,050          20,114   

Blackstone CQP Holdco LP

  

9.296% due 03/19/2019

  $     15,657          15,794   

BNP Paribas S.A.

  

7.375% due 08/19/2025 (f)

      11,000          11,234   

Cantor Fitzgerald LP

  

6.500% due 06/17/2022

      10,000          10,546   

Co-operative Group Holdings Ltd.

  

7.500% due 07/08/2026

  GBP     6,200          9,015   

Communications Sales & Leasing, Inc.

  

8.250% due 10/15/2023

  $     5,300          5,439   

Credit Agricole S.A.

  

7.500% due 06/23/2026 (f)

  GBP     300          382   

7.875% due 01/23/2024 (f)

  $     13,900          13,831   

Credit Suisse Group AG

  

7.500% due 12/11/2023 (f)

      2,936          3,050   

Flagstar Bancorp, Inc.

  

6.125% due 07/15/2021

      6,000          6,160   

GSPA Monetization Trust

  

6.422% due 10/09/2029 (i)

      9,108          10,421   

HSBC Holdings PLC

  

5.250% due 09/16/2022 (f)

  EUR     585          627   

6.000% due 09/29/2023 (f)

      5,477          6,254   

Jefferies Finance LLC

  

7.375% due 04/01/2020

  $     300          282   

7.500% due 04/15/2021

      591          546   

Jefferies LoanCore LLC

  

6.875% due 06/01/2020

      10,500          9,424   

Lloyds Bank PLC

  

12.000% due 12/16/2024 (f)

      5,150          7,058   

Lloyds Banking Group PLC

  

7.625% due 06/27/2023 (f)

  GBP     6,298          8,370   

7.875% due 06/27/2029 (f)

      400          529   

MPT Operating Partnership LP

  

5.250% due 08/01/2026

  $     2,203          2,321   

National Bank of Greece S.A.

  

3.875% due 10/07/2016

  EUR     2,550          2,851   

Nationwide Building Society

  

10.250% (f)

  GBP     21          3,570   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Navient Corp.

  

5.500% due 01/15/2019

  $     4,950      $     5,105   

5.625% due 08/01/2033

      230          180   

Novo Banco S.A.

  

5.000% due 04/04/2019

  EUR     371          315   

5.000% due 04/23/2019

      152          129   

5.000% due 05/14/2019

      315          268   

5.000% due 05/21/2019

      73          62   

5.000% due 05/23/2019

      213          181   

Omega Healthcare Investors, Inc.

  

4.375% due 08/01/2023

  $     2,600          2,634   

OneMain Financial Holdings LLC

  

6.750% due 12/15/2019

      2,116          2,150   

PHH Corp.

  

6.375% due 08/15/2021

      280          260   

7.375% due 09/01/2019

      1,050          1,071   

Rio Oil Finance Trust

  

9.250% due 07/06/2024

      1,834          1,586   

Royal Bank of Scotland Group PLC

  

7.500% due 08/10/2020 (f)

      6,840          6,669   

8.000% due 08/10/2025 (f)

      9,835          9,798   

Santander UK Group Holdings PLC

  

7.375% due 06/24/2022 (f)

  GBP     7,650          10,031   

Sberbank of Russia Via SB Capital S.A.

  

6.125% due 02/07/2022

  $     500          546   

Springleaf Finance Corp.

  

5.250% due 12/15/2019

      1,680          1,636   

8.250% due 12/15/2020

      6,680          6,931   

Tesco Property Finance PLC

  

5.411% due 07/13/2044

  GBP     8,560          10,839   

6.052% due 10/13/2039

      2,691          3,764   

TIG FinCo PLC

  

8.500% due 03/02/2020

      1,154          1,558   

8.750% due 04/02/2020 (i)

      7,339          7,454   
       

 

 

 
            241,372   
       

 

 

 
       
INDUSTRIALS 21.8%   

Altice Financing S.A.

  

7.500% due 05/15/2026

  $     6,700          6,784   

BMC Software Finance, Inc.

  

8.125% due 07/15/2021

      3,031          2,485   

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

  

9.000% due 10/15/2019 (c)(i)

      8,226          6,992   

Caesars Entertainment Operating Co., Inc.

  

9.000% due 02/15/2020 ^

      27,145          26,222   

Chesapeake Energy Corp.

  

3.930% due 04/15/2019

      157          132   

8.000% due 12/15/2022

      300          272   

Diamond 1 Finance Corp.

  

5.450% due 06/15/2023

      219          232   

6.020% due 06/15/2026

      202          217   </