N-Q 1 d262427dnq.htm FORM N-Q FORM N-Q

 

 

UNITED STATES

SECURITES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-Q

 

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number: 811-21680

 

 

DCA Total Return Fund

(Exact name of registrant as specified in charter)

 

 

518 17th Street, Suite 1200, Denver, Colorado 80202

(Address of principal executive offices) (Zip code)

 

 

Jeffrey W. Taylor, President

DCA Total Return Fund

518 17th Street, Suite 1200

Denver, Colorado 80202

(Name of address of agent for service)

 

 

Registrant’s telephone number, including area code: (303) 228-2200

Date of fiscal year end: December 31

Date of reporting period: September 30, 2011

 

 

 


Statement of Investments

 

September 30, 2011 (Unaudited)

 

DCA Total Return Fund

 
     Shares      Market
Value
 

COMMON STOCK 69.91%

     

Consumer Discretionary 7.82%

     

Adidas AG

     10,800       $ 662,331   

Amazon.com Inc.*

     11,850         2,562,326   

Deckers Outdoor Corp.*

     5,300         494,278   

DIRECTV*

     6,600         278,850   

New Oriental Education & Technology Group Inc.—ADR*

     12,789         293,763   

priceline.com Inc.*

     3,880         1,743,905   

Swatch Group AG

     28,500         1,723,080   

Wynn Macau Ltd.

     140,000         337,622   
     

 

 

 
        8,096,155   
     

 

 

 

Consumer Staples 6.10%

     

Cia De Bebidas Das Americas

     52,000         1,563,111   

Coca-Cola Co.

     11,500         776,940   

Hansen Natural Corp.*

     10,000         872,900   

Henkel AG & Co. KGaA

     12,100         648,437   

Herbalife Ltd.

     14,800         793,280   

Mead Johnson Nutrition Co.

     13,500         929,205   

Wal-Mart de Mexico SAB de CV

     320,000         733,752   
     

 

 

 
        6,317,625   
     

 

 

 

Energy 7.85%

     

Apache Corp.

     7,800         625,872   

Baker Hughes Inc.

     12,000         553,920   

Calfrac Well Services Ltd.

     17,100         399,636   

Chesapeake Energy Corp.

     41,500         1,060,325   

Complete Production Services, Inc.*

     37,000         697,450   

Ensign Energy Services Inc.

     49,000         642,952   

Helmerich & Payne Inc.

     18,500         751,100   

Occidental Petroleum Corp.

     8,000         572,000   

Patterson-UTI Energy Inc.

     32,000         554,880   

Schlumberger Ltd.

     9,500         567,435   

Subsea 7 SA*

     33,549         648,108   

Technip SA

     13,000         1,054,233   
     

 

 

 
        8,127,911   
     

 

 

 

Financials 1.51%

     

Franklin Resources Inc.

     10,800         1,032,912   

T. Rowe Price Group Inc.

     11,100         530,247   
     

 

 

 
        1,563,159   
     

 

 

 

Health Care 11.81%

     

Agilent Technologies Inc.*

     27,700         865,625   

Cerner Corp.*

     23,000         1,575,960   

Coloplast A/S—Class B

     5,800         839,021   

CR Bard Inc.

     7,500         656,550   

Elekta AB—Class B

     22,800         864,302   

Illumina Inc.*

     9,900         405,108   

Intuitive Surgical Inc.*

     5,530         2,014,468   

Novo Nordisk A/S—Class B

     30,000         3,002,998   

 

2


     Shares      Market
Value
 

Shire PLC

     36,500       $ 1,144,058   

Watson Pharmaceuticals, Inc.*

     12,600         859,950   
     

 

 

 
        12,228,040   
     

 

 

 

Industrials 2.70%

     

ABB Ltd.*

     28,100         488,898   

Eaton Corp.

     13,200         468,600   

Komatsu Ltd.

     26,400         581,532   

Parker Hannifin Corp.

     10,200         643,926   

Siemens AG

     6,700         611,466   
     

 

 

 
        2,794,422   
     

 

 

 

Information Technology 25.26%

     

Accenture PLC—Class A

     32,900         1,733,172   

Apple Inc.*

     9,310         3,548,786   

ARM Holdings PLC

     371,000         3,262,963   

Avago Technologies Ltd.

     14,000         458,780   

Aveva Group PLC

     31,000         680,166   

Check Point Software Technologies Ltd.*

     35,500         1,872,980   

EMC Corp.*

     30,000         629,700   

Genpact Ltd.*

     39,500         568,405   

Google Inc.—Class A*

     3,125         1,607,437   

HTC Corp.—GDR

     17,640         1,428,840   

Intuit Inc.*

     12,000         569,280   

Mastercard Inc.

     2,000         634,320   

Mellanox Technologies Ltd.*

     25,000         780,500   

MercadoLibre Inc.

     14,800         795,500   

Oracle Corp.

     43,000         1,235,820   

QUALCOMM Inc.

     39,100         1,901,433   

Salesforce.com, Inc.*

     10,200         1,165,656   

SAP AG

     31,100         1,596,437   

Tencent Holdings Ltd.

     26,000         548,219   

Teradata Corp.*

     7,500         401,475   

VMware, Inc.*

     9,200         739,496   
     

 

 

 
        26,159,365   
     

 

 

 

Materials 5.49%

     

Anglo American PLC

     15,100         524,863   

Barrick Gold Corp.

     35,700         1,665,405   

Cliffs Natural Resources Inc.

     5,100         260,967   

Freeport-McMoRan Copper & Gold Inc.

     20,000         609,000   

Goldcorp Inc.

     36,650         1,681,234   

Syngenta AG*

     1,200         315,755   

Yara International ASA

     16,300         631,996   
     

 

 

 
        5,689,220   
     

 

 

 

Telecommunication Services 1.37%

     

Millicom International Cellular SA

     6,700         674,262   

Tim Participacoes SA

     160,205         739,572   
     

 

 

 
        1,413,834   
     

 

 

 

TOTAL COMMON STOCK

(Cost $68,314,457)

      $ 72,389,731   
     

 

 

 

 

3


     Bond Rating
Moody’s/S&P
(Unaudited)
   Shares      Market
Value
 

PREFERRED STOCK 14.49%

        

Financials 14.49%

        

Aegon NV,

        

Series 1, 4.000%(1)

   Baa1/BBB      23,078       $ 429,251   

American Home Mortgage Investment Corp.:

        

Series A, 9.750%(2)*

   NR/NR      266,950         27   

Series B, 9.250%(2)*

   NR/NR      29,700         29   

Bank of America Corp.:

        

Series 4, 4.000%(1)

   Ba3/BB+      32,500         438,750   

Series 5, 4.000%(1)

   Ba3/BB+      14,500         193,285   

Series E, 4.000%(1)

   Ba3/BB+      21,547         288,730   

Series H, 3.000%(1)

   Ba3/BB+      4,516         53,244   

BioMed Realty Trust Inc.,

        

Series A, 7.375%

   NR/NR      5,543         137,799   

BRE Properties Inc.,

        

Series D, 6.750%

   Baa3/BB+      2,147         54,104   

Corporate Office Properties Trust:

        

Series H, 7.500%

   NR/NR      12,500         313,000   

Series J, 7.625%

   NR/NR      9,001         224,395   

Duke Realty Corp.,

        

Series O, 8.375%

   Baa3/BB      13,500         351,000   

HCP Inc.,

        

Series F, 7.100%

   Baa3/BB+      19,981         505,320   

HSBC USA Inc.,

        

Series G, 4.000%(1)

   Baa1/A-      33,843         575,331   

Kilroy Realty Corp.,

        

Series F, 7.500%

   NR/BB      19,317         482,732   

Kimco Realty Corp.,

        

Series G, 7.750%

   Baa2/BBB-      2,242         57,395   

LaSalle Hotel Properties:

        

Series D, 7.500%

   NR/NR      6,675         160,567   

Series G, 7.250%

   NR/NR      12,809         310,362   

MetLife Inc.,

        

Series A, 4.000%(1)

   Baa2/BBB-      42,800         1,010,080   

ProLogis Inc.:

        

Series L, 6.500%

   Baa3/BB      26,097         622,935   

Series O, 7.000%

   Baa3/BB      19,337         471,823   

Series R, 6.750%

   Baa3/BB      24,665         581,601   

Series S, 6.750%

   Baa3/BB      20,600         466,590   

PS Business Parks Inc.:

        

Series M, 7.200%

   Baa3/BBB-      15,000         378,300   

Series P, 6.700%

   Baa3/BBB-      15,000         372,600   

Public Storage:

        

Series E, 6.750%

   Baa1/BBB+      17,395         439,920   

Series H, 6.950%

   Baa1/BBB+      12,400         313,348   

Series L, 6.750%

   Baa1/BBB+      20,900         529,815   

Series M, 6.625%

   Baa1/BBB+      19,528         496,011   

Series X, 6.450%

   Baa1/BBB+      15,000         379,800   

Regency Centers Corp.:

        

Series C, 7.450%

   Baa3/BB+      23,557         593,636   

Series E, 6.700%

   Baa3/BB+      20,000         500,000   

Santander Finance Preferred SA Unipersonal,

        

Series 6, 4.000%(1)

   Baa2/A-      67,323         964,065   

SL Green Realty Corp.,

        

Series C, 7.625%

   NR/NR      4,367         107,428   

Taubman Centers Inc.,

        

Series G, 8.000%

   NR/NR      9,598         244,749   

The Goldman Sachs Group Inc.:

        

Series A, 3.750%(1)

   Baa2/BBB-      30,500         565,165   

 

4


     Bond Rating
Moody’s/S&P
(Unaudited)
     Shares      Market
Value
 

Series D, 4.000%(1)

     Baa2/BBB-         36,871       $ 670,315   

Vornado Realty Trust:

        

Series F, 6.750%

     Baa3/BBB-         6,836         170,558   

Series H, 6.750%

     Baa3/BBB-         7,300         180,602   

Series I, 6.625%

     Baa3/BBB-         14,816         371,437   
        

 

 

 
           15,006,099   
        

 

 

 

TOTAL PREFERRED STOCK

(Cost $22,900,628)

         $ 15,006,099   
        

 

 

 

 

     Bond Rating
Moody’s/S&P
(Unaudited)
     Principal
Amount
     Market
Value
 

COMMERCIAL REAL ESTATE COLLATERALIZED DEBT OBLIGATIONS 0.04%

        

CW Capital Cobalt II Ltd., 2006-2A,

        

Class P.S., 0.000%, 04/26/2016 (3)(4)(5)(6)(7)

     NR/NR       $ 3,500,000       $ 35,000   

Lenox Street Ltd., Series 2007-1A,

        

Class SN, 0.000%, 06/04/2017 (3)(4)(5)(6)(7)

     NR/NR         1,000,000         0   

Vertical CRE CDO Ltd.,

        

Class P.S., 0.000%, 04/22/2013 (3)(4)(5)(6)(7)

     NR/NR         1,800,000         4,500   
        

 

 

 

TOTAL COMMERCIAL REAL ESTATE COLLATERALIZED DEBT OBLIGATIONS

(Cost $6,266,654)

         $ 39,500   
        

 

 

 

COLLATERALIZED LOAN OBLIGATIONS 6.95%

        

Babson CLO Ltd.,

        2005-3A, 40.642%, 11/11/2019 (3)(4)(5)(6)(7)

     NR/NR         9,000,000       $ 7,200,000   
        

 

 

 

TOTAL COLLATERALIZED LOAN OBLIGATIONS

(Cost $9,000,000)

         $ 7,200,000   
        

 

 

 

 

     Shares      Market
Value
 

MONEY MARKET FUNDS 7.64%

     

AIM STIT Treasury Portfolio,

     

7-Day Yield 0.020%

     7,912,051       $ 7,912,051   
     

 

 

 

TOTAL MONEY MARKET FUNDS

(Cost $7,912,051)

      $ 7,912,051   
     

 

 

 

TOTAL INVESTMENTS 99.03%

(Cost $114,393,790)

      $ 102,547,381   

OTHER ASSETS LESS LIABILITIES 0.97%

        1,003,582   
     

 

 

 

NET ASSETS 100.00%

      $ 103,550,963   
     

 

 

 

AB—Aktiebolag is the Swedish term for a public limited liability company.

ADR—American Depositary Receipts.

AG—Aktiengesellschaft is a German term that refers to a corporation that is limited by shares, i.e., owned by shareholders.

ASA—Allmennaksjeselskap is the Norwegian term for public limited company.

A/S—Aktieselskab is a Danish term for joint stock company.

CDO—Collateralized Debt Obligation.

CLO—Collateralized Loan Obligation.

GDR—Global Depositary Receipts.

 

 

5


KGaA—Kommanditgesellschaft Auf Aktien is a german term that refers to a limited partnership on shares.

NV—Naamloze Vennootschap is the Dutch term for a public limited liability company.

PLC—Public Limited Co.

SA—Generally designates corporations in various countries, mostly those employing the civil law.

SAB de CV—A variable capital company.

Footnotes to DCA Statement of Investments:

 

* 

Non-income producing security.

 

(1) 

The coupon rate shown on floating or adjustable rate securities represents the current effective rate at September 30, 2011.

 

(2)

Security in default or currently deferring interest payments.

 

(3) 

This security was purchased pursuant to the terms of a private placement memorandum and is exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Rule 144A of the Securities Act. This security may only be sold in transactions exempt from registration under the Securities Act, which most commonly involves a sale to “qualified institutional buyers” under Rule 144A. As of September 30, 2011, the value of these securities amount to $7,239,500 or 6.99% of net assets.

 

(4)

This security has been valued at fair value determined in good faith by or under the direction of the Fund’s Board of Trustees.

 

(5) 

The expected maturity date of this security listed herein is earlier than/later than the legal maturity date of the security due to the expected acceleration/deceleration of the schedule of principal payments by the issuer.

 

(6)

This security is considered illiquid by the Advisor. Total illiquid securities amount to 6.99% of net assets.

 

(7)

This security represents a junior tranche whereby the holder is entitled to all residual interest, if any, which can vary. The rate listed represents the most recent interest payment received, annualized and divided by cost.

Sector classifications are solely for illustrative purposes and are not reflective of the industry classifications used for diversification testing for the purposes of the Investment Company Act of 1940, as amended.

See Notes to Quarterly Statement of Investments.

 

6


NOTES TO QUARTERLY STATEMENT OF INVESTMENTS

September 30, 2011 (Unaudited)

DCA Total Return Fund

1. Organization and Summary of Significant Accounting Policies

DCA Total Return Fund (NYSE: “DCA”) (the “Fund”), formerly Dividend Capital Realty Income Allocation Fund, is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s primary investment objective is total return, consisting of capital appreciation and current income. While the Fund is classified as non-diversified, it is currently operating as a diversified fund and has been doing so since 2009. It is anticipated that, if the Fund continues to operate in this manner, it will be automatically reclassified as a diversified fund in the second quarter of 2012.

Initial capitalization for the Fund was provided by Dividend Capital Investments LLC (the “Adviser”) as follows:

 

Organization Date

     December 3, 2004   

Initial Capitalization Date

     February 15, 2005   

Amount of Initial Capitalization

     $ 100,068   

Common Shares Issued at Capitalization

     7,010   

Common Shares Authorized

     Unlimited   

Public Offering Date

     February 24, 2005   

On September 25, 2010, the Fund acquired all of the assets and liabilities of DCW Total Return Fund (“DCW”) in exchange for an equal aggregate value of newly issued common shares of the Fund, pursuant to an Agreement and Plan of Reorganization dated August 18, 2010 and approved by shareholders at an Annual Meeting held on September 16, 2010. The Fund distributed 13,305,099 common shares, which was an amount equal to the aggregate net asset value of DCW common shares, as determined at the close of business on September 24, 2010. The transaction qualified as a tax-free reorganization for federal income tax purposes. For financial reporting purposes, the Fund, which commenced operations on February 24, 2005, has been deemed the accounting survivor.

As of September 30, 2011, the Member of the Adviser’s Investment Committee was Jeffrey Taylor.

Security Valuation

Pricing Procedures: All securities of the Fund are valued as of the close of regular trading on the New York Stock Exchange (“NYSE”), currently 4:00 p.m. (Eastern Time), on each day that the NYSE is open.

Securities traded on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”) are valued at the NASDAQ Official Closing Price (“NOCP”). Domestic exchange-listed securities and non-NASDAQ equity securities not traded on a listed exchange are valued at the last sale price as of the close of the NYSE. In the absence of trading on an NOCP, such securities are valued at the mean of the bid and asked prices. In the event exchange quotations are not available for exchange traded securities, the Fund will obtain at least one price from an independent broker/dealer.

U.S. government and agency securities having a maturity of more than 60 days are valued at the mean between the bid and asked prices. Fixed income securities having a maturity of less than 60 days are valued at amortized cost, which approximates fair value. Other debt securities are valued at the price provided by an independent pricing service or, if such a price is not available, at the value provided by at least one quotation obtained from a broker/dealer. Securities issued by private funds are priced at the value most recently provided by the private fund or at the bid provided by a broker/dealer.

Foreign exchange traded securities are valued at the last sale price at the close of the exchange on which the security is primarily traded (except in certain countries where market maker prices are used). In the absence

 

7


of trading, such securities are valued at the mean between the last reported bid and asked prices or the last sale price. Fixed income securities where market quotations are not readily available are valued at fair value.

Redeemable securities issued by open-end registered investment companies are valued at the investment company’s applicable net asset value, with the exception of exchange traded open-end investment companies, which are priced as equity securities.

Exchange traded options, warrants and rights are valued at the last reported sale price at the close of the exchange on which the security is primarily traded. For non-exchange traded options and exchange traded options, warrants and rights for which no sales are reported, the mean between the bid and asked prices is used. For exchange traded options, warrants and rights and foreign exchange traded equity securities in which the markets are not closed at the time that the Fund prices its securities, snapshot prices provided by individual pricing services are used.

The price for futures contracts are the daily quoted settlement prices. Single security total return swaps in which the referenced security is traded on an exchange are valued at the last sale price at the time of close of the NYSE. In the absence of trading of a referenced security, the mean between the closing bid and asked prices will be used.

Fair Valuation: If the price of a security is unavailable in accordance with the Fund’s pricing procedures, or the price of a security is suspect, e.g., due to the occurrence of a significant event (as defined below), the security may be valued at its fair value determined pursuant to procedures adopted by the Board. For this purpose, fair value is the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. As of September 30, 2011, securities which have been fair valued based on procedures approved by the Board of Trustees represented 6.99% of DCA’s net assets respectively.

The following factors, among other relevant factors, may be considered when determining the fair value of a security: (1) fundamental analytical data; (2) forces which influence the market in which the security is sold, including the liquidity and depth of the market; (3) type of security and the cost at date of purchase; (4) most recent quotation received from a broker; (5) transactions or offers with respect to the security; (6) price, yield and the extent of public or private trading in similar securities of the issuer or comparable companies; (7) price and extent of public trading of the security on foreign exchanges; (8) information on world financial markets and comparable financial products; (9) size of the Fund’s holdings; (10) financial statements of the issuer; (11) analyst reports; (12) merger proposals or tender offers; (13) value of other financial instruments, including derivative securities, traded on other markets or among dealers; (14) trading volumes on markets, exchanges or among dealers; (15) values of baskets of securities traded on other markets, exchanges or among dealers; (16) change in interest rates; (17) observations from financial institutions; (18) government (domestic or foreign) actions or pronouncements; (19) in the case of restricted securities, discount from market value of unrestricted securities of the same class at time of purchase, existence and anticipated time frame of any undertaking to register the security and the size of the holding in relation to any unrestricted outstanding shares; (20) in the case of foreign securities, the country’s or geographic region’s political and economic environment, nature of any significant events, American Depository Receipt trading, exchange-traded fund trading and foreign currency exchange activity; (21) in the case of interests in private funds, the absence of transaction activity in interests in the private fund, extraordinary restrictions on redemptions, whether the private fund’s valuation procedures provide for valuation of underlying securities at market value or fair value, actual knowledge of the value of underlying portfolio holdings, review of audited financial statements and ongoing due diligence and monitoring; and (22) in the case of emergencies or other unusual situations, the nature and duration of the event, forces influencing the operation of the financial markets, likelihood of recurrence of the event, and whether the effects of the event are isolated or affect entire markets, countries or regions.

A three-tier hierarchy has been established to classify fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability,

 

8


including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability that are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability that are developed based on the best information available.

Various inputs are used in determining the value of the Fund’s investments as of the reporting period-end. These inputs are categorized in the following hierarchy under applicable financial accounting standards:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access at the measurement date.

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 assets 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.

The following is a summary of the inputs used to value the Fund’s investments as of September 30, 2011.

 

$00,000,0000 $00,000,0000 $00,000,0000 $00,000,0000

Investments in Securities at Value

   Level 1 -  Quoted
Prices
     Level 2 -  Other
Significant
Observable Inputs
     Level 3 –
Significant
Unobservable
Inputs
     Total  

Common Stock^

   $ 72,389,731       $ —         $ —         $ 72,389,731   
  

 

 

    

 

 

    

 

 

    

 

 

 

Preferred Stock^

     15,006,043         56         —           15,006,099   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Real Estate Collateralized Debt Obligations

     —           35,000         4,500         39,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized Loan Obligations

     —           7,200,000         —           7,200,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Money Market Funds

     7,912,051         —           —           7,912,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 95,307,825       $ 7,235,056       $ 4,500       $ 102,547,381   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:

 

$0,00,0000 $0,00,0000 $0,00,0000 $0,00,0000 $0,00,0000 $0,00,0000 $0,00,0000

Investments in

Securities

   Balance as  of
12/31/2010
     Realized
gain/(loss)
    Change in
unrealized
appreciation/
(depreciation)
     Net
Purchases
/ Sales
     Transfers in
and/
or  out of

Level 3
     Balance as
of
9/30/2011
     Net Change  in
unrealized
appreciation/
(depreciation)
attributable to
Level 3
investments
still held at
9/30/2011
 

Commercial Real Estate Collateralized Debt Obligations*

   $ 75       $ (7,500,000   $ 7,499,925       $ —         $ 4,500       $ 4,500       $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 75       $ (7,500,000   $ 7,499,925       $ —         $ 4,500       $ 4,500       $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

^ For detailed descriptions of sectors see the accompany Statement of Investments.

 

* As of June 30, 2011, Sorin Real Estate CDO II, Ltd., was deemed worthless and was written off by the Fund.

 

9


There were no significant transfers between Levels 1 and 2 during the current period presented.

Recent Accounting Pronouncements: In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2011-03 “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements.” The ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem the financial assets before their maturity. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011. Management is currently evaluating the impact this ASU may have on the Fund’s financial statements.

In May 2011, the FASB issued ASU No. 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU 2011-04 includes common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 will require reporting entities to disclose quantitative information about the unobservable inputs used in the fair value measurements categorized within Level 3 of the fair value hierarchy. In addition, ASU 2011-04 will require reporting entities to make disclosures about amounts and reasons for all transfers in and out of Level 1 and Level 2 fair value measurements. The new and revised disclosures are effective for interim and annual reporting periods beginning after December 15, 2011. Management is currently evaluating the impact this ASU may have on the Fund’s financial statements.

Significant Events: An event is significant if it causes the price for a security determined at the normal time for pricing that security to no longer reflect fair value at the time that the Fund determines its net asset value. A significant event is material (a “Material Significant Event”) if a fair valuation for the security would impact the Fund’s net asset value by more than one-half of one percent (0.5%). If a Material Significant Event has occurred, the Adviser will call a meeting of the Valuation Committee to determine a fair value for the security in accordance with the Fund’s Fair Valuation Procedures.

Security Credit Risk:

The Fund invests in high-yield securities, which may be subject to a greater degree of credit risk, market fluctuations and loss of income and principal, and may be more sensitive to economic conditions than lower-yielding, higher-rated securities. The Fund may acquire securities in default, and is not obligated to dispose of securities whose issuers subsequently default. As of September 30, 2011, securities with an aggregate market value of $56 were in default or currently deferring interest payments.

Foreign Securities:

The Fund may invest without limit in foreign securities. In the event that the Fund executes a foreign security transaction, the Fund will generally enter into forward foreign currency contracts to settle specific purchases or sales of securities denominated in a foreign currency. Foreign securities may carry more risk than U.S. securities, such as political, market and currency risks.

The accounting records of the Fund are maintained in U.S. dollars. Prices of securities denominated in foreign currencies are translated into U.S. dollars at the closing rate of exchange at period end. Amounts related to the purchase and sale of foreign securities and investment income are translated at the rates of exchange prevailing on the respective dates of such transactions.

Repurchase Agreements:

The Fund may invest in repurchase agreements, which are short-term investments in which the Fund acquires ownership of a debt security and the seller agrees to repurchase the security at a future time and specified price. Repurchase agreements are fully collateralized by the underlying debt security. The Fund will make payments for such securities only upon physical delivery or evidence of book entry transfer to the account of the custodian bank. The seller is required to maintain the value of the underlying security at not less than the repurchase proceeds due the Fund. As of September 30, 2011 the Fund had no outstanding repurchase contracts.

Securities Transactions and Investment Income:

 

10


Investment security transactions are accounted for as of trade date. Dividend income is recorded on the ex-dividend date. Interest income, which includes amortization of premium and accretion of discount, is accrued as earned. Dividend income from REIT securities may include return of capital. Upon notification from the issuer, the amount of the return of capital is reclassified to adjust dividend income, reduce the cost basis and/or adjust realized gain. Realized gains and losses from securities transactions and unrealized appreciation and depreciation of securities are determined using the specific identification method for both financial reporting and income tax purposes.

2. Unrealized Appreciation/(Depreciation)

At September 30, 2011 the cost of investments and net unrealized appreciation/ (depreciation) for federal income tax purposes were as follows:

 

Aggregate tax cost

   $ 113,219,859   

Gross unrealized appreciation

     12,102,153   

Gross unrealized depreciation

     (22,774,631 )
  

 

 

 

Net unrealized depreciation

   $ 10,672,478   
  

 

 

 

3. Illiquid and/or Restricted Securities

As of September 30, 2011, investments in securities included issues that are restricted. Restricted securities are often purchased in private placement transactions, are not registered under the Securities Act of 1933, may have contractual restrictions on resale, and may be revalued under methods approved by the Board of Trustees as reflecting fair value. A security may also be considered illiquid if it lacks a readily available market.

The Fund may invest, without limit, in illiquid securities.

Illiquid and/or Restricted Securities as of September 30, 2011

 

$0,000,0000 $0,000,0000 $0,000,0000 $0,000,0000

Description

   Principal
Amount
     Acquisition
Date
     Cost      Market Value  

Babson CLO Ltd.,
2005-3A, 40.642%, 11/11/2019

   $ 9,000,000         10/13/2005       $ 9,000,000       $ 7,200,000   

CW Capital Cobalt II Ltd., 2006-2A,
Class P.S., 0.000%, 04/26/2016

     3,500,000         04/12/2006         3,500,000         35,000   

Lenox Street, Ltd., Series 2007-1A,
Class SN, 0.000%, 03/04/2045

     1,000,000         03/05/2007         966,654         0   

Vertical CRE CDO Ltd.,
Class P.S., 0.000%, 04/22/2013

     1,800,000         05/15/2006         1,800,000         4,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

            $ 7,239,500   
           

 

 

 

Net Assets

            $ 103,550,963   
           

 

 

 

Illiquid and/or Restricted Securities as a % of Net Assets

              6.99
           

 

 

 

4. Certain Provisions of the Declaration of Trust

The Fund’s Amended and Restated Declaration of Trust (“Declaration”) contains restrictions on the acquisitions and dispositions of its shares. The restrictions on acquisitions and dispositions of the Fund’s

 

11


shares are intended to preserve the benefit of the Fund’s capital loss carryforwards and certain other tax attributes for tax purposes.

The restrictions are designed to prevent an “ownership change”, as such term is defined in the Internal Revenue Code of 1986, as amended (the “Code”). Section 382 of the Code imposes significant limitations on the ability of an entity classified as a corporation to use its capital loss carryforwards to offset income in circumstances where such entity has experienced an “ownership change” and may also limit such an entity’s ability to use any built-in losses recognized within five years of any “ownership change.” For a more detailed discussion of the definition of an “ownership change” under the Code, please see Note 5 below.

The restrictions in the Declaration generally prohibit any attempt to purchase or acquire in any manner whatsoever the Fund’s shares or any option, warrant or other right to purchase or acquire shares, or any convertible securities (the “Shares”), if as a result of such purchase or acquisition of such Shares, any person or group becomes a greater than 4.99% shareholder (as defined in the Code), which generally includes a person or group that beneficially owns 4.99% or more of the market value of the total outstanding shares, or the percentage of the Fund’s shares owned by a 4.99% shareholder (as defined in the Code) would be increased. As a result of these restrictions, certain transfers of shares by existing 4.99% shareholders are prohibited. Any attempted transfer in violation of the foregoing restrictions will be void ab initio unless the transferor or transferee obtains the written approval of the Board of Trustees, which it may grant or deny in its sole and absolute discretion. The purported transferee will not be entitled to any rights of shareholders of the Fund with respect to the shares that are the subject of the prohibited transfer, including the right to vote such shares and to receive dividends or distributions, whether liquidating or otherwise, in respect of such shares.

If the Board of Trustees determines that a transfer would be prohibited, then, upon the Fund’s written demand, the purported transferee will transfer the shares that are the subject of the prohibited transfer, or cause such shares to be transferred, to the Fund, which shall be deemed an agent for the limited purpose of consummating a sale of the share to a person who is not a 4.99% shareholder. The proceeds of the sale of any such shares will be applied first to the Fund acting in its role as the agent for the sale of the prohibited shares, second, to the extent of any remaining proceeds, to reimburse the intended transferee for any payments made to the transferor by such intended transferee for such shares, and the remainder, if any, to the original transferor.

5. Existing Tax Attribute Limitation and Potential for Additional Tax Attribute Limitation

In the acquisition by the Fund of the assets and liabilities of DCW on September 25, 2010 (the “Reorganization”), DCA succeeded to DCW’s federal income tax attributes, which included capital loss carryforwards and net unrealized built-in losses in its assets. However, the Reorganization caused DCW to undergo an “ownership change” within the meaning of Section 382 of the Code because the shareholders of the Fund prior to the Reorganization owned more than 50% of the Fund immediately following the Reorganization. As a result of such ownership change, the Fund became subject to a specific annual limitation on the amount of capital loss carryforwards (and net unrealized built-in losses) received from DCW that the Fund can use to offset gains recognized by the Fund in each taxable year.

As of December 31, 2010, the Fund had approximately $123,420,355 of capital loss carryforwards (exclusive of such carryforwards received from DCW). The Fund’s capital loss carryforwards were not limited as a result of the Reorganization. However, the Reorganization has caused the Fund to come close to undergoing its own “ownership change” within the meaning of Section 382 of the Code. Generally, an “ownership change” within the meaning of Section 382 of the Code occurs when one or more shareholders who each own directly or indirectly 5% or more of the Fund’s common shares (including certain “public groups” of shareholders which are treated for this purpose as owning 5% or more of the Fund’s common shares) increase their aggregate ownership of common shares by more than 50 percentage points of the lowest percentage of common shares that such shareholders owned within the preceding three years. As a result of the Reorganization, the Fund believes that it is only approximately 1.5% away from undergoing an

 

12


“ownership change.” Consequently, the Fund could undergo an “ownership change” as a result (for example) of the acquisition by a single person of shares sufficient to cause such person to own 5% or more of the Fund’s common stock. If the Fund were to undergo an ownership change under Section 382 of the Code, any then-existing loss carryforwards (and net unrealized built-in losses) attributable to activities of the Fund would become subject to a specific “annual loss limitation amount,” which would generally equal the product of (i) the fair market value of the stock of the Fund at the time of the ownership change as adjusted pursuant to Section 382, and (ii) a certain interest rate established by the Internal Revenue Service (4.3% for ownership changes occurring in June 2011). If this were to occur, all of the Fund’s loss carryforwards (and net unrealized built-in losses) from periods prior to the ownership change (including those inherited from DCW and those generated by the Fund itself) would be substantially limited by operation of Section 382 of the Code.

As described in Note 4, above, the Fund’s Declaration contains provisions that are designed to prevent the Fund from undergoing an “ownership change” within the meaning of Section 382 of the Code. However, there can be no assurance that such provision of the Declaration will be enforceable under applicable state law or will succeed in avoiding an ownership change for the Fund.

6. Forward Looking Statements

The information contained herein may contain certain forward-looking statements about the factors that may affect the performance of the Fund in the future. These statements are based on Fund management’s predictions and expectations concerning certain future events and their expected impact on the Fund. Management believes these forward looking statements to be reasonable, although they are inherently uncertain and difficult to predict and there is no guarantee of their accuracy. Actual events may cause adjustments in portfolio management strategies from those currently expected to be employed.

 

13


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

DCA Total Return Fund
By:    /s/    Jeffrey W. Taylor
  Jeffrey W. Taylor
  President
  (Principal Executive Officer)

Date: November 28, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

DCA Total Return Fund
By:    /s/    Jami M. VonKaenel
  Jami M. VonKaenel
 

Treasurer and Secretary

  (Principal Financial Officer)

Date: November 28, 2011

 

14