The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part of these
financial statements.
The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part of these financial
statements.
Note 1 − Significant Accounting
Policies – The Insight Select Income Fund (the “Fund”), a Delaware statutory trust, is registered under the
Investment Company Act of 1940, as amended (“1940 Act”), as a diversified closed-end, management investment company. The Fund’s
investment objective is to seek a high rate of return, primarily from interest income and trading activity, from a portfolio principally
consisting of debt securities. The Fund follows the accounting and reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, “Financial Services – Investment Companies”. The following is a summary of significant
accounting policies consistently followed by the Fund in preparation of its financial statements. The policies are in conformity with
generally accepted accounting principles within the United States of America (“GAAP”).
| A. | Security Valuation – In valuing the Fund’s net assets, all securities for which
representative market quotations are available will be valued at the last quoted sales price on the security’s principal exchange
on the day of valuation. If there are no sales of the relevant security on such day, the security will be valued at the bid price at the
time of computation. For securities traded in the over-the-counter market, including listed debt and preferred securities, whose primary
market is believed to be over-the-counter, the Fund uses recognized industry pricing services which are unaffiliated with Insight North
America LLC (“INA” or the “Adviser”) - and uses broker quotes provided by market makers of securities not valued
by these and other recognized pricing sources. |
In the event that market quotations are
not readily available, or when such quotations are deemed not to reflect current market value, the securities will be valued at their
respective fair value as determined by the Fund’s Valuation Designee pursuant to its procedures and subject to oversight by the
Board of Trustees (the “Board”). The Valuation Designee considers all relevant facts that are reasonably available when determining
the fair value of a security, including but not limited to the last sale price or initial purchase price (if a when-issued security) and
subsequently adjusting the value based on changes in company specific fundamentals, changes in an appropriate securities index, or changes
in the value of similar securities which may be further adjusted for any discounts related to security-specific resale restrictions. When
possible, observable market inputs such as unadjusted quoted prices of similar securities, observable interest rates, currency rates and
yield curves are utilized. At March 31, 2023, there were no securities valued using fair value procedures.
The Fund adopted policies to comply with
the SEC’s Rule 2a-5 under the 1940 Act, which established a new regulatory framework for registered investment company fair valuation
practices. The Fund’s fair value policies and procedures and valuation practices were updated prior to the rule’s required
compliance date of September 8, 2022. Under Rule 2a-5, the Board designated the Adviser as the Fund’s “Valuation Designee”
to make fair value determinations.
Fair Value Measurements – The
Fund has adopted authoritative fair value accounting standards which establish a definition of fair value and set out a hierarchy for
measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop
the measurements of fair value, a discussion in changes in valuation techniques and related inputs during the period and expanded disclosure
of valuation levels for major security types. These inputs are summarized in the three broad levels listed below:
| |
• |
Level 1 – |
Unadjusted quoted prices
in active markets for identical assets or liabilities that the Fund has the ability to access. |
NOTES TO FINANCIAL STATEMENTS — continued
| |
•
|
Level
2 – |
Observable inputs
other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These
inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates,
prepayment speeds, credit risk, yield curves, default rates and similar data. |
| |
|
|
|
| |
• |
Level 3 –
|
Unobservable
inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own
assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best
information available. |
At the end of each calendar quarter, management
evaluates the Level 1, 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing
to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable
trades in the market. Additionally, management evaluates Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings
or delistings on national exchanges. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily
available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value
of investments may differ significantly from the values that would have been used had a ready market existed for such investments and
may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions
on resale or otherwise less liquid than publicly traded securities.
Level 3 investments are categorized as Level
3 with values derived utilizing prices from prior transactions or third party pricing information without adjustment (broker quotes, pricing
services and net asset values). A significant change in third party pricing information could result in a significantly lower or higher
value in such Level 3 investments. As of March 31, 2023, the Fund did not hold any Level 3 securities.
When-Issued Securities — The
Fund may enter into commitments to purchase securities on a forward or when-issued basis. When-issued securities are securities purchased
for delivery beyond the normal settlement date at a stated price and yield. In the Fund’s case, these securities are subject to
settlement within 45 days of the purchase date. The interest rate realized on these securities is fixed as of the purchase date. The Fund
does not pay for such securities prior to the settlement date and no interest accrues to the Fund before settlement. These securities
are subject to market fluctuation due to changes in market interest rates. The Fund will enter into these commitments with the intent
of buying the security but may dispose of such security prior to settlement. At the time the Fund makes the commitment to purchase securities
on a when-issued basis, it will record the transaction and thereafter reflect the value of such security purchased in determining its
net asset value (“NAV”). At the time of delivery of the security, its value may be more or less than the fixed purchase price.
Futures Contracts — The Fund
uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against,
changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified
price on a specified date.
Upon entering into a futures contract, the
Fund is required to deposit cash or cash equivalents with a broker in an amount equal to a certain percentage of the contract amount.
This is known as the “initial margin” and
NOTES TO FINANCIAL STATEMENTS — continued
subsequent payments (“variation margin”)
are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For certain futures, including
foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. The
daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Fund recognizes a realized
gain or loss when the contract is closed.
Futures contracts involve, to varying degrees,
risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able
to enter into a closing transaction because of an illiquid secondary market.
Swap Contracts — Fund may enter
into swap transactions to help enhance the value of its portfolio or manage its exposure to different types of investments. Swaps are
financial instruments that typically involve the exchange of cash flows between two parties on specified dates (settlement dates), where
the cash flows are based on agreed-upon prices, rates, indexes, etc. The nominal amount on which the cash flows are calculated is called
the notional amount. Swaps are individually negotiated and structured to include exposure to a variety of different types of investments
or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices, indexes
or inflation rates.
Swap agreements may increase or decrease the
overall volatility of the investments of the Fund and its share price. The performance of swap agreements may be affected by a change
in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from a Fund. If a swap agreement
calls for payments by a Fund, the Fund must be prepared to make such payments when due. In addition, if the counterparty’s creditworthiness
declines, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, bilateral swap agreements, OTC
swaps have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date only
under limited circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only
with the prior written consent of the other party. A Fund may be able to eliminate its exposure under a swap agreement either by assignment
or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the
counterparty is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, a Fund may not
be able to recover the money it expected to receive under the contract.
Cleared swaps are transacted through futures
commission merchants that are members of central clearing-houses with the clearinghouses serving as a central counterparty. Pursuant to
rules promulgated under the Dodd-Frank Act, central clearing of swap agreements is currently required for certain market participants
trading certain instruments, and central clearing for additional instruments is expected to be implemented by regulators until the majority
of the swaps market is ultimately subject to central clearing.
Swaps are marked-to-market daily based upon
values received from third party vendors or quotations from market makers. For OTC swaps, any upfront premiums paid or received are recorded
as assets or liabilities, respectively, and are shown as premium paid on swap agreements or premium received on swap agreements in the
Statements of Assets and Liabilities. For swaps that are centrally cleared, initial margins, determined by each relevant clearing agency,
are posted and are segregated at a broker account registered with the Com-
NOTES TO FINANCIAL STATEMENTS — continued
modity Futures Trading Commission, or
the applicable regulator. The change in value of swaps, including accruals of periodic amounts of interest to be paid or received on swaps,
is recorded as unrealized appreciation or depreciation. Daily changes in the value of centrally cleared swaps are recorded in the Statements
of Assets and Liabilities as receivable or payable for variation margin on swap agreements and settled daily. Upfront premiums and liquidation
payments received or paid are recorded as realized gains or losses at the termination or maturity of the swap. Net periodic payments received
or paid by the Fund are recorded as realized gain or loss.
A swap agreement can be a form of leverage,
which can magnify the Fund’s gains or losses. In order to reduce the risk associated with leveraging, the Fund may cover its current
obligations under swap agreements.
The following table sets forth the fair
value and the location of the Fund’s derivative financial instruments within the Statement of Assets and Liabilities by primary
risk exposure as of March 31, 2023:
Fair Value of Derivative Instruments as of March 31, 2023:
Derivatives not accounted for as
hedging instruments
under ASC 815 |
Assets |
Liabilities |
| Futures — Interest Rate Contracts |
$779,103 |
$(216,681) |
The following table sets forth the effect
of the Fund’s derivative financial instruments by primary risk exposure on the Statements of Operations for the year ended March
31, 2023:
The Effect of Derivative Investments on the Statement of Operations
for the year ended March 31, 2023:
Derivatives not accounted for as
hedging instruments under ASC 815 |
Realized
Gain (Loss)
on Derivatives |
Change in Net Unrealized
Appreciation (Depreciation)
on Derivatives |
| Futures — Interest Rate Contracts |
$(750,357) |
$511,508 |
| Swaps — Interest Rate Contracts |
$ (29,404) |
$ — |
The average notional amounts of long and
short futures contracts held by the Fund throughout the period was $25,193,584 and $24,529,745, respectively. This is based on amounts
held as of each quarter-end throughout the fiscal year.
The average notional amounts of buy and
sell protection credit default swaps contracts held by Fund throughout the period was $61,516 and $71,768, respectively. This is based
on amounts held daily throughout the fiscal year.
| B. | Determination of Gains or Losses on Sale of Securities — Gains
or losses on the sale of securities are calculated for financial reporting purposes and for federal tax purposes using the identified
cost basis. The identified cost basis for financial reporting purposes differs from that used for federal tax purposes in that the amortized
cost of the securities sold is used for financial reporting purposes and the original cost of the securities sold is used for federal
tax purposes, except for those instances where tax regulations require the use of amortized cost. |
NOTES TO FINANCIAL STATEMENTS — continued
| C. | Federal Income Taxes — It is the Fund’s policy to continue
to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no federal income tax provision is required. |
Management has analyzed the Fund’s
tax positions taken on federal income tax returns for all open tax years (tax years March 31, 2020-2022) or expected to be taken on the
Fund’s 2023 tax return, and has concluded that no provision for federal income tax is required in the Fund’s financial statements.
The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations
have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
| D. | Other — Security transactions are accounted for on the trade date.
Interest income is accrued daily. Premiums and discounts are amortized using the interest method. Paydown gains and losses on mortgage-
backed and asset-backed securities are presented as an adjustment to interest income. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. |
| E. | Distributions to Shareholders and Book/Tax Differences – Distributions
of net investment income will be made quarterly. Distributions of any net realized capital gains will be made annually. Income and capital
gain distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. These differences are
primarily due to differing treatments for amortization of market premium and accretion of market discount. |
Distributions during the fiscal years
ended March 31, 2023 and 2022 were characterized as follows for tax purposes:
| | |
Ordinary Income | |
Return of Capital | |
Capital Gain | |
Total Distribution |
| FY 2023 | |
$ | 7,713,566 | | |
$ | — | | |
$ | 645,037 | | |
$ | 8,358,603 | |
| FY 2022 | |
$ | 10,167,036 | | |
$ | — | | |
$ | 2,032,765 | | |
$ | 12,199,801 | |
At March 31, 2023, the components of distributable earnings on
a tax basis were as follows:
| Total | |
Accumulated Ordinary
Income | |
Capital Loss Carryforward | |
Post October Loss | |
Net Unrealized Depreciation |
| $(19,062,342) | |
$116,038 | |
$(3,131,802) | |
$(536,356) | |
$(15,510,222) |
Realized net capital gains can be offset
by capital loss carryforwards from prior years. As of March 31, 2023, the capital loss carryforwards were as follows:
| Short-Term | |
Long-Term | |
Total |
| $1,420,048 | |
$1,711,754 | |
$3,131,802 |
Under current laws, certain capital losses
realized after October 31 and certain ordinary losses realized after December 31 may be deferred and treated as occurring on the first
day of the following fiscal year. For the year ended March 31, 2023, the Fund elected to defer long-term and short-term capital losses
of $445,824 and $90,532, respectively.
At March 31, 2023, the following table
shows for federal tax purposes the aggregate cost of investments, the net unrealized appreciation of those investments, the aggregate
gross unrealized appreciation of all securities
NOTES TO FINANCIAL STATEMENTS — continued
with an excess of market value over tax cost and the aggregate
gross unrealized depreciation of all securities with an excess of tax cost over market value:
| | |
Cost | |
Gross Unrealized Appreciation | |
Gross Unrealized Depreciation | |
Net Unrealized Appreciation
(Depreciation) |
| Securities | |
$199,684,125 | |
$6,206,621 | |
$(21,716,843) | |
$(15,510,222) |
The difference between book basis and
tax-basis unrealized appreciation is attributable primarily to the differing treatments for wash sales, amortization of market premium
and accretion of market discount.
| F. | Use of Estimates in the Preparation of Financial Statements —
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates. |
Note 2 − Portfolio Transactions
— The following is a summary of the security transactions, other than short-term investments, for the year ended March 31, 2023:
| | |
Cost of Purchases | |
Proceeds from Sales or
Maturities |
| U.S. Government Securities | |
$32,736,354 | |
$37,034,963 |
| Other Investment Securities | |
$32,403,474 | |
$28,506,873 |
Note 3 − Capital Stock —
At March 31, 2023, there were an unlimited number of shares of beneficial interest ($0.01 par value) authorized, with 10,713,411 shares
issued and outstanding.
Note 4 − Investment Advisory
Contract, Accounting and Administration, Custodian, Transfer Agent and Trustee Compensation — INA serves as investment adviser
to the Fund. The Adviser is entitled to a monthly investment advisory fee at the annualized rate of 0.50% of the first $100,000,000 of
the Fund’s average daily Managed Assets and 0.40% of the Fund’s average daily Managed Assets in excess of $100,000,000. Effective
December 1, 2022, the annualized rate will be 0.50% of the first $100,000,000 of the Fund’s average daily Managed Assets, 0.40%
of the Fund’s average daily Managed Assets in excess of $100,000,000 but less than $200,000,000, and 0.30% of the Fund’s average
daily Managed Assets in excess of $200,000,000. The “Managed Assets” of the Fund shall be defined as the total assets of the
Fund, less its liabilities other than Fund liabilities incurred for investment purposes.
BNY Mellon Investment Servicing (US) Inc.
(“BNY Mellon”), an indirect wholly-owned subsidiary of The Bank of New York Mellon Corporation, provides accounting and administrative
services to the Fund. The Bank of New York Mellon is the Fund’s custodian responsible for the custody of Fund’s assets. Computershare
Investor Services (“Computershare”) is the contractual Transfer Agent to the Fund.
The Adviser is a wholly owned subsidiary
of The Bank of New York Mellon Corporation. The Adviser works closely with and is administered by Insight Investment Management (Global)
Limited (“Insight”), another of The Bank of New York Mellon Corporation’s investment management subsidiaries. The Adviser
is subject to The Bank of New York Mellon Corporation’s Code of Conduct and various policies and procedures designed to address
the potential for conflicts of interest that may arise in connection with the Adviser’s status as an affiliated person of The Bank
of New York Mellon Corporation and its subsidiaries.
NOTES TO FINANCIAL STATEMENTS — continued
The Trustees of the Fund receive an annual retainer,
meeting fees and out of pocket expenses for meetings attended. The aggregate remuneration paid to the Trustees by the Fund during the
year ended March 31, 2023 was $159,500. All officers of the Fund are also officers and/or employees of the investment adviser. None of
the Fund’s officers on the Statement of Operations receives compensation from the Fund.
Note 5 − Dividend and Distribution Reinvestment
— In accordance with the terms of the Amended and Restated Automatic Dividend Investment Plan (the “Plan”), for shareholders
who so elect, dividends and distributions are made in the form of previously unissued Fund shares at the net asset value if on the Friday
preceding the payment date (the “Valuation Date”) the closing New York Stock Exchange price per share, plus the brokerage
commissions applicable to one such share equals or exceeds the net asset value per share. However, if the net asset value is less than
95% of the market price on the Valuation Date, the shares issued will be valued at 95% of the market price. If the net asset value per
share exceeds market price plus commissions, the dividend or distribution proceeds are used to purchase Fund shares on the open market
for participants in the Plan. During the year ended March 31, 2023, the Fund did not issue any shares under this Plan.
Note 6 − Committed Facility Agreement
— On November 19, 2021, the Fund entered into a Committed Facility Agreement (the “Credit Agreement”) with BNP Paribas
Prime Brokerage International, under which the Fund may borrow up to $125,000,000 on a revolving basis. The credit facility is secured
by certain assets of the Fund in amounts required by the Credit Agreement, which are maintained in a segregated account by the Fund Custodian.
As of March 31, 2023, there was no outstanding balance. All borrowings under the Credit Agreement constitute financial leverage. The Credit
Agreement contains customary representations, warranties, covenants, and default provisions. The Fund is charged interest based on the
Overnight Bank Funding Rate plus (i) 72 basis points (in respect of investment grade corporate bonds and US Government Securities), or
(ii) 92 basis points (in respect of other securities). The Fund is at all times subject to the asset coverage requirements imposed by
the Investment Company Act. For the year ended March 31, 2023, the maximum principal loan balance outstanding was $5,000,000, and for
the period during which such balance was outstanding from April 1, 2022 to April 13, 2022, the average daily loan balance was also $5,000,000
and the weighted average interest rate was 1.32%. With respect to these borrowings, interest expense of $1,834 is included in the Statement
of Operations. On April 13, 2022, the Fund paid off the outstanding loan balance and the accrued interest of $5,004,218.
Note 7 − Principal
Risks — An investment in the Fund is not a bank deposit. It is not insured or guaranteed by the Federal Deposit Insurance
Corporation (FDIC) or any other government agency. It is not a complete investment program. The Fund’s share price fluctuates,
sometimes dramatically, which means an investor in the Fund could incur a loss.
Fixed-income market risk. The market value of
a fixed-income security may decline due to general market conditions that are not specifically related to a particular company, such as
real or perceived adverse economic conditions, changes in the outlook for corporate earnings, changes in interest or currency rates or
adverse investor sentiment generally. The fixed-income securities market can be susceptible to increases in volatility and decreases in
liquidity. Liquidity can decline unpredictably in response to overall economic conditions or credit tightening. Increases in volatility
and decreases in liquidity may be caused by a rise in interest rates (or the expectation of a rise in interest rates). Federal Reserve
policy in response to market conditions, including with respect to interest rates, may adversely affect the value, volatility and liquidity
of dividend and interest paying securities. Policy and legislative changes worldwide are affecting many aspects of financial regulation.
The impact of these changes on the markets and the practical implications for market participants may not be fully known for some time.
NOTES TO FINANCIAL STATEMENTS — continued
Interest rate risk. Prices of bonds and other
fixed rate fixed-income securities tend to move inversely with changes in interest rates. Typically, a rise in rates will adversely affect
fixed-income securities and, accordingly, will cause the value of the Fund’s investments in these securities to decline. During
periods of very low interest rates, which occur from time to time due to market forces or actions of governments and/or their central
banks, including the Board of Governors of the Federal Reserve System in the U.S., the Fund may be subject to a greater risk of principal
decline from rising interest rates. When interest rates fall, the Fund’s investments in new securities may be at lower yields and
may reduce the Fund’s income. The magnitude of these fluctuations in the market price of fixed-income securities is generally greater
for securities with longer effective maturities and durations because such instruments do not mature, reset interest rates or become callable
for longer periods of time. The change in the value of a fixed-income security or portfolio can be approximated by multiplying its duration
by a change in interest rates. For example, the market price of a fixed-income security with a duration of three years would be expected
to decline 3% if interest rates rose 1%. Conversely, the market price of the same security would be expected to increase 3% if interest
rates fell 1%.
Credit risk. Failure of an issuer of a security
to make timely interest or principal payments when due, or a decline or perception of a decline in the credit quality of the security,
can cause the security’s price to fall. The lower a security’s credit rating, the greater the chance that the issuer of the
security will default or fail to meet its payment obligations.
Coronavirus and Pandemic risk. The outbreak
of COVID-19 resulted in border restrictions, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations,
disruptions to supply chains, workflow operations and customer activity, as well as general concern and uncertainty. The lasting effects
of the COVID-19 out-break and responses are unknown at this time and may negatively affect the performance of the Fund. Similarly, the
effects of other widespread health events that may arise in the future, could negatively affect the worldwide economy, as well as the
economies of individual countries, individual companies (including Fund service providers) and the market in general in significant and
unforeseen ways. Any such impact could adversely affect the Fund’s performance.
Cybersecurity and operational risk. Cybersecurity
breaches may allow an unauthorized party to gain access to Fund assets, customer data, or proprietary information, or cause the Fund or
its service providers to suffer data corruption or lose operational functionality. Similar incidents affecting issuers of the Fund’s
securities may negatively impact performance. Operational risk may arise from human error, error by third parties, communication errors,
or technology failures, among other causes.
Derivatives risk. The Fund may utilize a variety
of derivative instruments. Generally, derivatives are financial contracts whose values depend on, or are derived from, the value of an
underlying asset, reference rate or index. The underlying security, measure or other instrument on which a derivative is based, or the
derivative itself, may not perform as expected. In addition, derivatives are subject to a number of risks, such as liquidity risk, interest
rate risk, credit risk and management risk. Derivatives are also subject to counterparty risk, which is the risk that the other party
in the transaction will not fulfill its contractual obligation. Changes in the credit quality of the companies that serve as the Fund’s
counterparties with respect to its derivative transactions will affect the value of those instruments. If the Fund invests in a derivative
instrument, it could lose more than the principal amount invested.
Economic and market events risk. Events in the
U.S. and global financial markets, including actions taken by the U.S. Federal Reserve or foreign central banks to stimulate or stabilize
economic growth, may at times result in unusually high market volatility, which could negatively impact performance. Reduced liquidity
in credit and fixed-income markets could adversely affect issuers worldwide. Banks and financial services companies could suffer losses
if interest rates rise or economic conditions deteriorate.
NOTES TO FINANCIAL STATEMENTS — continued
As a result of continued political tensions and armed
conflicts, including the Russian invasion of Ukraine commencing in February of 2022, the extent and ultimate result of which are unknown
at this time, the United States and the European Union, along with the regulatory bodies of a number of countries, have imposed economic
sanctions on certain Russian corporate entities and individuals, and certain sectors of Russia’s economy. Such sanctions have included,
among other things, freezing the assets of particular entities and persons. The imposition of sanctions and other similar measures could,
among other things, cause a decline in the value and/or liquidity of securities issued by Russia or companies located in or economically
tied to Russia, downgrades in the credit ratings of Russian securities or those of companies located in or economically tied to Russia,
devaluation of Russia’s currency, and increased market volatility and disruption in Russia and throughout the world. Sanctions could
also result in Russia taking counter measures or retaliatory actions which may further impair the value and liquidity of Russian securities.
ETF and other investment company risk. To the
extent the Fund invests in pooled investment vehicles, such as ETFs and other investment companies, the Fund will be affected by the investment
policies, practices and performance of such entities in direct proportion to the amount of assets the Fund has invested therein. The risks
of investing in other investment companies, including ETFs, typically reflect the risks associated with the types of instruments in which
the investment companies invest. When the Fund invests in an ETF or other investment company, shareholders of the Fund will bear indirectly
their proportionate share of the expenses of the ETF or other investment company (including management fees) in addition to the expenses
of the Fund.
Foreign investment risk. To the extent the Fund
invests in foreign securities, the Fund’s performance will be influenced by political, social and economic factors affecting investments
in foreign issuers. Special risks associated with investments in foreign issuers include exposure to currency fluctuations, less liquidity,
less developed or less efficient trading markets, lack of comprehensive company information, political and economic instability and differing
auditing and legal standards. Investments denominated in foreign currencies are subject to the risk that such currencies will decline
in value relative to the U.S. dollar and affect the value of these investments held by the Fund.
Government securities risk. Not all obligations
of the U.S. government, its agencies and instrumentalities are backed by the full faith and credit of the U.S. Treasury. Some obligations
are backed only by the credit of the issuing agency or instrumentality, and in some cases there may be some risk of default by the issuer.
Any guarantee by the U.S. government or its agencies or instrumentalities of a security held by the Fund does not apply to the market
value of such security or to shares of the Fund itself.
High yield securities risk. High yield (“junk”)
securities involve greater credit risk, including the risk of default, than investment grade securities, and are considered predominantly
speculative with respect to the issuer’s ability to make principal and interest payments. The prices of high yield securities can
fall in response to bad news about the issuer or its industry, or the economy in general, to a greater extent than those of higher rated
securities.
Issuer risk. A security’s market value
may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage and reduced
demand for the issuer’s products or services, or factors that affect the issuer’s industry, such as labor shortages or increased
production costs and competitive conditions within an industry.
Leverage risk. The use of leverage (borrowing
money to purchase properties or securities) will cause the Fund to incur additional expenses and significantly magnify losses in the event
of underperformance of the assets purchased with
NOTES TO FINANCIAL STATEMENTS — continued
borrowed money. In addition, a lender may terminate
or refuse to renew any credit facility. If the Fund is unable to access additional credit, it may be forced to sell investments at inopportune
times, which may further depress the returns of the Fund.
Liquidity risk. When there is little or no active
trading market for specific types of securities, it can become more difficult to sell the securities in a timely manner at or near their
perceived value. In such a market, the value of such securities and the Fund’s share price may fall dramatically. Investments that
are illiquid or that trade in lower volumes may be more difficult to value. The market for below investment grade securities may be less
liquid and therefore these securities may be harder to value or sell at an acceptable price, especially during times of market volatility
or decline. Investments in foreign securities tend to have greater exposure to liquidity risk than domestic securities.
Management risk. The investment process used
by the Fund’s portfolio managers could fail to achieve the Fund’s investment goal and cause your fund investment to lose value.
Market risk. The value of the securities in
which the Fund invests may be affected by political, regulatory, economic and social developments, and developments that impact specific
economic sectors, industries or segments of the market. In addition, turbulence in financial markets and reduced liquidity in equity,
credit and/or fixed income markets may negatively affect many issuers, which could adversely affect the Fund. Global economies and financial
markets are becoming increasingly interconnected, and conditions and events in one country, region or financial market may adversely impact
issuers in a different country, region or financial market. These risks may be magnified if certain events or developments adversely interrupt
the global supply chain; in these and other circumstances, such risks might affect companies world-wide. Recent examples include pandemic
risks related to coronavirus outbreaks and aggressive measures taken world-wide in response by governments, and by businesses, including
changes to operations and reducing staff.
The impact of pandemic risks may last for an extended
period of time and result in a substantial economic downturn. Any such impact could adversely affect the Fund’s performance.
Risk of market price discount from net asset value.
Shares of closed-end funds frequently trade at a market price that is below their NAV. This is commonly referred to as “trading
at a discount.” This characteristic of shares of closed-end funds is a risk separate and distinct from the risk that the Fund’s
NAV may decrease. The risk of purchasing shares of a closed-end fund that might trade at a discount or unsustainable premium is more pronounced
for investors who wish to sell their shares in a relatively short period of time after purchasing them because, for those investors, realization
of a gain or loss on their investments is likely to be more dependent upon the existence of a premium or discount than upon portfolio
performance.
Valuation risk. When market quotations are not
readily available or are deemed to be unreliable, the Fund values its investments at fair value as determined in good faith pursuant to
policies and procedures approved by the Board of Trustees. Fair value pricing may require subjective determinations about the value of
a security or other asset. As a result, there can be no assurance that fair value pricing will result in adjustments to the prices of
securities or other assets, or that fair value pricing will reflect actual market value, and it is possible that the fair value determined
for a security or other asset will be materially different from quoted or published prices, from the prices used by others for the same
security or other asset and/or from the value that actually could be or is realized upon the sale of that security or other asset.
NOTES TO FINANCIAL STATEMENTS — continued
Note 8 − Regulatory Updates —
Effective August 19, 2022, the Fund was required to comply with Rule 18f-4 under the 1940 Act, which governs the use of derivatives by
registered investment companies. Rule 18f-4 permits funds to enter into derivatives transactions (as defined in Rule 18f-4) and certain
other transactions notwithstanding the restrictions on the issuance of “senior securities” under Section 18 of the 1940 Act.
Rule 18f-4 requires a fund to establish and maintain a comprehensive derivatives risk management program (“DRMP”), appoint
a derivatives risk manager and comply with a relative or absolute limit on fund leverage risk calculated based on value-at-risk (“VaR”),
unless the fund uses derivatives in only a limited manner. The Fund has established and maintains a DRMP and has appointed a derivatives
risk manager to administer the DRMP and provide periodic reports to the Board.
Note 9 − Recent Accounting Pronouncements
— In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Facilitation
of the Effects of Reference Rate Reform on Financial Reporting,” which provides optional, temporary relief with respect to the financial
reporting of contracts subject to certain types of modifications due to the planned discontinuation of the LIBOR and other interbank-offered
reference rates. The temporary relief provided by ASU 2020-04 was effective immediately for certain reference rate-related contract modifications
that occur through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06 “Deferral of the Sunset Date of Topic 848,”
which extended the temporary relief period provided by ASU No. 2020-04 through December 31, 2024. Management does not expect ASU 2020-04
or ASU 2022-06 to have a material impact on the financial statements.
Note 10 − Other Matters —
Many credit instruments, derivatives and other financial instruments, including those in which the fund may invest, utilize LIBOR as the
reference or benchmark rate for variable interest rate calculations. However, the use of LIBOR started to come under pressure following
manipulation allegations in 2012. Despite increased regulation and other corrective actions since that time, concerns have arisen regarding
its viability as a benchmark, due largely to reduced activity in the financial markets that it measures. In July 2017, the Financial
Conduct Authority announced plans to phase out the use of LIBOR by the end of 2021. It was subsequently announced that tenors of US Dollar
LIBOR would continue to be published through June 30, 2023, other than one week and two month USD LIBOR settings which ceased publication
on December 31, 2021. Various financial industry groups around the world have been planning the transition to the use of different benchmarks.
In the United States, the Federal Reserve Board and the New York Fed convened the Alternative Reference Rates Committee, comprised of
a group of private-market participants, which recommended the Secured Overnight Financing Rate as an alternative reference rate to USD
LIBOR. Neither the effect of the transition process, in the United States or elsewhere, nor its ultimate success, can yet be known. While
some instruments tied to LIBOR may include a replacement rate in the event LIBOR is discontinued, not all instruments have such fallback
provisions and the effectiveness of such replacement rates remains uncertain. The transition process might lead to increased volatility
and illiquidity in markets that currently rely on the LIBOR to determine interest rates. The potential cessation of LIBOR could affect
the value and liquidity of investments tied to LIBOR, especially those that do not include fallback provisions, and may result in costs
incurred in connection with closing out positions and entering into new trades.
Note 11 − Subsequent Event —
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has
determined that there were no additional subsequent events requiring recognition or disclosure in the financial statements.
Fees and Expenses (unaudited)
As a shareholder of the Fund, you incur two types of
cost: (1) transaction costs, including brokerage commissions paid on purchases and sales of fund shares, and (2) ongoing costs, including
management fees and other fund expenses. The expense examples below are intended to help you understand your ongoing costs (in dollars)
of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The examples in the table is based on the investment
of $1,000 invested at the beginning of the six-month period and held for the entire period (October 1, 2022 to March 31, 2023).
Actual expenses
The first line in the following table provides information
about actual account values and actual expenses. You may use the information in this line, together with the amount you invest to estimate
the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by
$1,000= 8.6), then multiply the result by the number in the first line under the heading Expenses Paid During the Period to estimate the
expenses you paid on your account during this period.
Hypothetical example for comparison purposes
The second line in the following table provides information
about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratios and an assumed rate of return
of 5% per year before expenses (which is not the Fund’s actual return). The hypothetical account values and expenses may not be
used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing
costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholders’ reports of the other funds.
Please note that the expenses shown in the tables are
meant to highlight your ongoing costs only, and do not reflect any transactional costs. Therefore, the second line in the table is useful
for comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if
these transactional costs were included, your costs would have been higher.
| | |
Beginning Account Value
October 1, 2022 | |
Ending Account Value
March 31, 2023 | |
Annualized Expense Ratio | |
Expenses Paid During
the Period Per $1,000 |
| Insight Select Income Fund | |
| |
| |
| |
|
| Actual | |
$1,000.00 | |
$1,067.60 | |
0.88% | |
$4.54 |
| Hypothetical (5% return before expenses) | |
$1,000.00 | |
$1,020.54 | |
0.88% | |
$4.43 |
SHAREHOLDER INFORMATION (Unaudited)
The following information in this annual report is
a summary of certain information about the Fund and changes that occurred during the prior fiscal year. (the “prior disclosure date”).
This information may not reflect all of the changes that have occurred since you purchased the Fund.
Summary of information regarding the Fund (unaudited)
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
There have been no changes in the Fund’s investment objective since
the prior disclosure date.
The Fund’s investment objective is to seek a
high rate of return, primarily from interest income and trading activity, from a portfolio principally consisting of debt securities.
The Fund’s investment objective may be changed by the Board of Trustees of the Fund without shareholder approval. There can be no
assurance that the Fund will achieve its objective.
Principal Investment Strategies and Policies
There have been no material changes in the Fund’s
Principal Investment Strategies and Policies since the prior disclosure that have not been approved by shareholders.
Under normal market conditions, the Fund invests at
least 80% of its Managed Assets (defined below) in debt securities (the “80% Policy”). Seventy-five percent of the Fund’s
Managed Assets will be invested in following types of higher quality, non-convertible debt securities (including bonds and debentures):
| • | debt securities (with or without attached warrants) rated, at the time of purchase, within the four highest
grades as determined by a nationally recognized statistical ratings organization, such as Moody’s (i.e., Aaa, Aa, A or Baa) or Standard
& Poor’s (i.e., AAA, AA, A or BBB) (collectively, the “NRSRO Rated Securities”); |
| • | short-term debt securities (“debentures”) which are not NRSRO Rated Securities, but which
are obligations of issuers having, at the time of purchase, any NRSRO Rated Securities and which debentures are considered by the Adviser
to have an investment quality comparable to NRSRO Rated Securities; |
| • | obligations of the United States Government, its agencies or instrumentalities; and |
| • | bank debt securities (with or without attached warrants) which, although not NRSRO Rated Securities, are
considered by the Adviser to have an investment quality comparable NRSRO Rated Securities. |
“Managed Assets” means net assets, plus
the proceeds from borrowings and the issuance of senior securities for investment purposes. The ratings criteria described above apply
at the time of acquisition of the security. In the event that a security held in this portion of the Fund’s portfolio is downgraded
to below Baa or BBB, the Fund will no longer include such security in this portion of the Fund’s portfolio. The Fund does not expect
that the value of warrants in this part of its portfolio will often be significant.
The balance of the Fund’s investments is expected
to be principally in debt securities that do not meet the standards described above and in preferred stocks which may be convertible or
may be accompanied by warrants or other equity securities. Any securities in this part of the portfolio may be of lower quality and may
not be rated by any NRSRO.
SHAREHOLDER INFORMATION (Unaudited) — continued
Fixed-income securities rated below Baa/BBB are considered
below investment grade (“high yield” or “junk” bonds). All warrants remaining after sale of the securities to
which they were attached and common stocks acquired on conversion or exercise of warrants will be included in this part of the Fund’s
portfolio. Any such warrants or common stocks may be held until a long-term holding period has been established for tax purposes, after
which they ordinarily will be sold.
From time to time, the Fund may also purchase futures
contracts, including interest rate futures, (“futures contracts”) and related options thereon, to hedge the Funds interest
rate risk and/or duration risk. A futures contract sale creates an obligation by the Fund, as a seller, to deliver the specific type of
instrument called for in the contract at a specified future time for a specified price. A futures contract purchase creates an obligation
by the Fund, as purchaser, to take delivery of the specific type of financial instrument at a specified future time at a specified price.
The Fund has established a credit facility secured
by the Fund’s assets from which the Fund will be able to borrow money to be invested pursuant to the Fund’s investment strategy.
The Fund is permitted to borrow up to the limit permitted under the 1940 Act.
The Fund focuses on a relative value strategy. The
Fund seeks to identify opportunities to purchase securities with high risk-adjusted yields across various fixed income sectors in order
to maintain and increase the Fund’s income, and therefore the Fund’s dividend payment. In constructing the Fund’s portfolio,
the Adviser relies primarily on proprietary, internally-generated credit research. This credit research focuses on both industry/sector
analysis and detailed individual security selection. The fund’s Adviser seeks to identify investment opportunities for the Fund
based on its evaluation of the relative value of securities. The Adviser analyzes individual issuer credit risk based on factors such
as management depth and experience, competitive advantage, market and product position and overall financial strength. The Adviser may
supplement its internal research with external, third-party credit research and related credit tools.
The Fund’s average duration is expected to be
near the duration of the Bloomberg U.S. Credit Index which is the Fund’s benchmark. On March 31, 2023, the Fund’s duration
was 7.08 years and the duration of the Fund’s benchmark was 7.08 years. The Adviser expects that the Fund’s duration will
remain between 4 and 8 years; however, the Fund’s duration may be lengthened or shortened depending on market conditions. Duration
is a measure of the expected life of a debt security that is used to determine the sensitivity of the security’s price to changes
in interest rates. Generally, the longer the Fund’s duration, the more sensitive the Fund will be to changes in interest rates.
For example, the price of a fixed income fund with a duration of five years would be expected to fall approximately 5% if interest rates
rose 1%.
The type of fixed-income securities in which the Fund
may invest include: (i) securities issued or guaranteed by the U.S. government, its agencies or government sponsored enterprises (U.S.
government securities); (ii) corporate debt securities, including bonds, notes, debentures, convertible securities, preferred stock and
corporate commercial paper; issued by U.S. and non-U.S. corporations and other entities, such as master limited partnerships; (iii) mortgage-related
securities; (iv) asset-backed securities; (v) inflation indexed bonds issued by governments or corporations; (vi) structured notes (i.e.,
specially designed debt instruments whose return is determined by reference to an index or security); (vii) bank loans, including participations
and assignments; (viii) delayed funding loans and revolving credit facilities; (ix) bank certificates of deposit, fixed time deposits
and bankers’ acceptances; (x) repurchase agreements and reverse repurchase agreements; (xi) debt securities issued by states or
local governments or their agencies, authorities or other government sponsored enterprises (municipal securities); (xii) obligations of
foreign governments or their subdivisions, agencies or government sponsored enterprises; and (xiii) obligations of international agencies
or supranational entities. These securities may have all types of interest rate payment and reset terms, including fixed rate, adjustable
rate, floating rate, zero coupon, contingent, deferred, payment in kind and auction rate features.
SHAREHOLDER INFORMATION (Unaudited) — continued
The Fund’s 80% policy set forth above may be changed upon 60 days
written notice to shareholders.
When the Adviser believes that market conditions make
it appropriate, for temporary, defensive purposes the Fund may invest up to 100% of its assets in cash, high quality short-term money
market instruments, and in bills, notes or bonds issued by the U.S. Treasury Department or by other agencies of the U.S. Government. When
the Fund makes investments for defensive purposes, it may not achieve its investment objective.
Investment Restrictions
The Fund is subject to a number of investment restrictions,
some of which are deemed fundamental and may not be changed without the affirmative vote of a majority of the outstanding voting securities
of the Fund, and some of which are not fundamental and may be changed by the Fund’s Board. The Fund’s fundamental investment
policies may be changed only with the approval of the holders of a “majority of the Fund’s outstanding voting securities,”
which, as used in this prospectus, means the lesser of (1) 67% of the Shares represented at a meeting at which more than 50% of the outstanding
Shares are present in person or by proxy, or (2) more than 50% of the outstanding Shares. Any investment policy or restriction which involves
a maximum percentage of securities or assets is not considered to be violated unless an excess over the percentage occurs immediately
after an acquisition of securities or utilization of assets and results therefrom. The Fund’s fundamental policies are set forth
below.
| 1. | The Fund will not borrow money, except to the extent permitted under the 1940 Act, as such may be interpreted
or modified by regulatory authorities having jurisdiction, from time to time. |
| 2. | The Fund will not issue senior securities, except to the extent permitted under the 1940 Act, as such
may be interpreted or modified by regulatory authorities having jurisdiction, from time to time. |
| 3. | The Fund will not act as an underwriter of securities within the meaning of the Securities Act of 1933,
as amended, except to the extent permitted under the 1940 Act, as such may be interpreted or modified by regulatory authorities having
jurisdiction, from time to time. |
| 4. | The Fund will not “concentrate” its investments in an industry, except to the extent permitted
under the 1940 Act, as such may be interpreted or modified by regulatory authorities having jurisdiction, from time to time. |
| 5. | The Fund will not purchase or sell real estate, except to the extent permitted under the 1940 Act, as
such may be interpreted or modified by regulatory authorities having jurisdiction, from time to time. |
| 6. | The Fund will not purchase or sell commodities, except to the extent permitted under the 1940 Act, as
such may be interpreted or modified by regulatory authorities having jurisdiction, from time to time. |
| 7. | The Fund will not make loans to other persons, except to the extent permitted under the 1940 Act, as such
may be interpreted or modified by regulatory authorities having jurisdiction, from time to time. |
The foregoing policies are fundamental and may not be changed without shareholder
approval.
The Fund’s policies which are not deemed fundamental and which may
be changed by the Board without shareholder approval are set forth below:
| 1. | The Fund will not invest in companies for the purpose of exercising control or management. |
SHAREHOLDER INFORMATION (Unaudited) — continued
| 2. | The Fund may not invest in the securities of other investment companies, except that it may invest in
securities of no-load open-end money market investment companies and investment companies that invest in high yield debt securities if,
immediately after any purchase of the securities of any such investment company: (i) securities issued by such investment company and
all other investment companies owned by the Fund do not have an aggregate value in excess of 10% of the value of the total assets of the
Fund; (ii) the Fund does not own more than three percent of the total outstanding voting stock of such investment company; and (iii) the
Fund does not own securities issued by such investment company having an aggregate value in excess of 5% of the value of the total assets
of the Fund. The Fund’s investment in securities of other investment companies will be subject to the proportionate share of the
management fees and other expenses attributable to such securities of other investment companies. |
| 3. | The Fund will not invest in the securities of foreign issuers, except for (i) those securities of the
Canadian Government, its provinces and municipalities which are payable in United States currency, and (ii) securities of foreign issuers
which are payable in United States dollars (“Yankee Bonds”). The Fund may also invest in Euro-dollar obligations with maturities
up to one year, but the Fund will not acquire Yankee Bonds or Euro-dollar obligations if the acquisition would cause more than 15% of
the Fund’s assets to be invested in Yankee Bonds and Euro-dollar obligations. |
| 4. | The Fund will not invest more than 2% of the value of its total assets in warrants (valued at the lower
of cost or market), except warrants acquired on initial issuance where the warrants are attached to or otherwise in a unit with other
securities. |
Principal Risks
An investment in the Fund is not a bank deposit. It
is not insured or guaranteed by the FDIC or any other government agency. It is not a complete investment program. The Fund’s share
price fluctuates, sometimes dramatically, which means an investor in the Fund could incur a loss.
For a discussion of the principal risk factors associated
with an investment in the Fund, refer to Note 7 to the Fund’s financial statements in this Annual Report.
SHAREHOLDER INFORMATION (Unaudited) — continued