CLOSED-END DIVERSIFIED FIXED INCOME SECURITIES MUTUAL FUND
Name of Offering – TCW/DW TERM TRUST 2000 11-22-93
$500,000,000 (50,000,000 shs. of benef. int. @ $10) ($.01 par value) Objective – The Trust seeks to return a high level of current income and return $10/sh. to shrldrs. in 7 yrs. – – by 12-31-2000 (The initial dollar weighted average maturity of Trust’s assets is expected to be 5-10 years). The trusts shares have been approved for listing on the NYSE under the symbol TDT.
Sponsors – Manager – Dean Witter InterCapital, Inc. Adviser – TCW Funds Management, Inc.
Description – The Trust will invest in high quality fixed income securities which are either 1. Issued or guaranteed by the U.S. Govt. or its agencies or instrumentalities, 2. Rated Aaa by Moody’s or AAA by Standard & Poors OR IF UNRATED, ARE DETERMINED (BY THE MANAGER/ADVISER) TO BE OF COMPARABLE QUALITY TO SUCH RATED SECURITIES. The securities will consist primarilly of a variety of mtg. backed securities, asset backed secutieies, zero-coupon securities munic. issuers, other munic. securities and debt securities of NON-U.S. ISSUERS (10%). The trust expects that aprox. 80-85% of its total assets will be invested in mtg. backed securities, i.e. GNMA, FNMA, FHMLC, ARMS, RTC securities, private mtg. pas sthru securities, CMO’s, including INVERSE FLOATERS (25-40%), STRIPPED MTG. BACK SECURITIES, ASSET BACKED SECURITIES & APPROX. 15%-20% IN ZERO-COUPON SECURITIES OF MUNICIPAL ISSUERS & other municipal securities. As a diversified inv’t. company, there is a limit of 5% to any one issuer and 25% limited to one industry.
1. Sponsor Experience – The Manager, DW Intercapital, Inc. was formed in 1983, as the DWR InterCapital Division – 10 years. The prospectus is misleading when it refers to 20 yrs. of experience. This may relate to principals but not to the entity itself! TCW, the adviser was organized in 1987 – 6 years.
2. Track Record – Pg. 5 – The manager, DW InterCapital acts as inv’t mgr., mgr., inv’t. adviser, sub-adviser or sub-administrator to a total of 77 investment co.’s, 26 of which are listed on the NYSE. Combined assets total $70 billion as of 10-31-93, and includes 3 million investor accounts. The investment adviser, TCW serves as adviser to 8 other TCW/DW funds. It curr. has $44 billion under mgmt.
3. Compensation – The manager will receive a monthly asset mgmt. fee at an annual rate of .36% of Trust’s ave. weekly net assets. The adviser will rec. a monthly asset mgmt. fee of .24% of the Trust’s ave. weekly net assets. Other expenses are projected to be .12% for total of .72% annually. However, portfolio turnover is projected to be up to 100% annually. Mr. John Bogle, President of the Vanguard family of mutual funds attributes an annual charge of .70 for each 100% turnover due to commissions and transaction charges to the mutual fund. This would equate to another .70% expenses annually for a potential total of 1.42% per year in expenses, very high.
4. Load Factors – Selling commission – 5.0%, Org. & off. costs. .2% for a total of 5.2%, about average for this type of offering.
5. Liquidity (incl. any guarantees) – No dealer, salesman of other person has been authorized to give any information or to make any representation not contained in this Prospectus and , if given or made, such information or representation must not be relied upon as having been authorized by the Trust or the Underwriter. SHARES OF CLOSED-END INVESTMENT CO.’S. FREQUENTLY TRADE AT A DISCOUNT TO NET ASSET VALUE. FURTHER, THE TRUST’S DIVIDENDS AND INCOME ARE EXPECTED TO DECLINE OVER THE LIFE OF THE TRUST. Prior to this offering, there has been no public market for the Trusts’ shares. Income dividends will be paid monthly and capital gains will be distrib. at least annually. Dividends may be automatically reinvested. While the Trust will have liquidity if it is in fact listed on the NYSE (approved only), the Trusts’ investments bear some illiquidity. – “The Trust’s ability to establish and close out positions in futures contracts and options on futures contracts will be subject to the dev’t. and maint. of a liquid secondary mkt. Although the Trust generally will purchase only those futures contracts and options theron for which there appears to be a liquid mkt., there is no assur. that a liquid mkt. on an exchange will exist at any particular time for any particular futures contract or option”. The illiquid nature of the investments is summarized,” Although the Investment Adviser expects that substantially all of the Trust’s inv’ts. will be in securities for which an established resale mkt. will exist, THERE IS NO OVERALL LIMITATION ON THE % OF ILLIQUID SECURITIES WHICH MAY BE HELD IN THE TRUST AND AS SUCH, SUBSTANTIALLY ALL THE TRUST’S ASSETS MAY BE INV’D IN ILLIQUID SECURITIES.”! Pg. 6 – The trustees may auth. the Trust to repurch. the common shs. at NAV. Trustees will also CONSIDER, annually, the making of a tender offer for the common shs. THE TRUST WILL RETAIN UP TO 10% OF TRUST’S NET INV’T. INCOME/YR., TILL THE FINAL DISTRIBUTION!
6. Self-Dealing-Conflicts of interest – 1. Lead underwriter is Dean Witter Distributors, Inc. (wholly owned by DWR) – No indep. due dilig. 2. A lge. % of Trustees seem related to Dean Witter. 3. Pg. 24 – Turnover rate of up to 100% annually – DWR gets commissions and transaction costs. 4. Unsubordinated inv. advis. fee & administ. fee to DWR. 1.42%
7. Shareholder Rights – Declaration of Trust includes anti-takeover provisions and a staggered vote for trustees. 80% sharehldr. vote for certain mergers, share issuances & asset acquisitions. Pg. 23 – Invest. practices may be changed by the trustees w/o shrldr. approval includ. hedging techniques, options & int. rate trans., forward for. currency exch. contracts & short sales. Trustees apparently may change objectives, although major amendments req. only 50% +. 80% to vote for converting from closed-end to open-end inv’t co. These democratic rights are typically by simple majority! The trust does provide for removal of trustees , under certain circumstances. Pg. 47 – Prior to termination, the trustees WITHOUT SHAREHOLDER APPROVAL, will consider if the trust liquidation/termination is in the best interest of shareholders. Then, a majority would be asked to extend. This makes the 7 years seem rather tenuous!
8. Leverage – Trust can borrow money for financing repurchases or tendering shares. Maximum – 33 1/3 of value of assets, INCLUDE. AMT. BORROWED + AN ADD’L 5% (pg. 9) FOR TEMPORARY PURCHASES AND SHARE REPURCHASES. FURTHER, THE TRUST MAY UTILIZE LEVERAGE INCLUDE. REVERSE REPO’S AND DOLLAR ROLLS!
9. Assumptions – Pg. 1 – Trust will attempt to meet its objective of maintaining $10/sh. by purch. a portfolio of high qual. fixed income securities that have a final or expected maturity of 7 yrs. (12-31-2000) & through retaining tax exempt income from invesments in zero coupon securities of munic. issuers and in other munic. securities. Trust may engage in various strategies to enhance income & hedge its portrolio against inv’t. & interest rate risk include. utiliz. of leverage & use of options & futures. These investment practices involve special risks. Pg. 4 – The Trust may enter into repo. agrmts., purch. or sell futures & listed OTC options contracts on securities & indices, utilize interest rate swaps (25%) caps, floors, make short sales, purch. Eurodollar instruments, lend securities, make forward committments & invest in restricted or illiquid securities. No overall limitation – pg. 32. Finally, the biggest risk of this trust stems from interest rate risk. Since 1987, interests rates have declined (thru fall ot 1993). It is normally better to buy bonds in a period where interests rates are high as opposed to low. The attached chart shows that if the Trust were to buy bonds with interest rates of 5-6 % and maturities of 7 years (as stated here), and interest rates were to increase 1 %, investors would lose approx. 6% of principal value if selling prior to maturity. If int. rates were to rise 2%, investors when selling could lose approx. 15% – 16%. The accompanying article from AAII gives the background for this scenario. Further, GNMA, FNMA & FHLMC are typically 20 yr.+ instruments and as such could decline substantially more with those longer maturities.
10. Risk Factors – 1. Trust newly formed, no operating history. 2. Secties. may in certain cases possess speculative characteristics i.e. certain futures, options trans. for hedging purposes and the fact that the Trust may purch. or sell options on ptfol. secties., to ach. add’l return or to hedge ptfol. 3. Trust may enter into repurch. agrmts.. These inv’ts. may involve speculative risks. 4. Prepayment risk. 5. Foreign investment risk. 6. Options on foreign currencies risk. 7. Risk. of inverse floaters (25%-40%) that exhibit greater price volatility than mtg. pass through securities or CMO’s. 8. Interest rate risk. 9. Leverage risk. 10. Risk of options & futures trans. 11. Risks of cert. muni. obligs. 12. Liquidity risk.
Total______ 25 of 50 = 50%
* (Min. Accept. 35 of 50 = 70%) Note: Ratings are 5 being best, 1 being worst.