UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-04980
TCW Strategic Income Fund, Inc.
(Exact name of registrant as specified in charter)
865 South Figueroa Street, Suite 1800, Los Angeles, CA 90017
(Address of principal executive offices)
Patrick W. Dennis, Esq.
Vice President and Assistant Secretary
865 South Figueroa Street, Suite 1800
Los Angeles, CA 90017
(Name and address of agent for service)
Registrants telephone number, including area code: (213) 244-0000
Date of fiscal year end: December 31
Date of reporting period: June 30, 2020
Item 1. | Reports to Stockholders. |
TCW Strategic Income Fund, Inc.
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Funds annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports. Instead, the reports will be made available on the Funds website (www.tcw.com), and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund or your financial intermediary electronically by contacting your financial intermediary (such as a broker-dealer or bank) if you invest through a financial intermediary, or by calling 1-800-FUND-TCW (1-800-386-3829) if you invest directly with the Fund.
Beginning on January 1, 2019, you may elect to receive all future reports in paper free of charge. You can call 1-800-FUND-TCW (1-800-386-3829), if you invest directly with the Fund, or contact your financial intermediary, if you invest though a financial intermediary, to inform the Fund or the financial intermediary that you wish to continue receiving paper copies of your shareholder reports. Your election to receive reports in paper will apply to all funds held directly with TCW or through your financial intermediary.
To Our Valued Shareholders |
|
David S. DeVito President, Chief Executive Officer and Director |
To the shareholders of the TCW Strategic Income Fund:
Executive Summary
TCW is pleased to present the 2020 semi-annual report for the TCW Strategic Income Fund (TSI or the Fund). TSI is a multi-asset class closed-end fund managed by TCW Investment Management Company and is listed on the New York Stock Exchange under the ticker TSI. For the first half of 2020, shares of TSI fell by 2.24% while the Funds net asset value (i.e., returns of the underlying assets) increased by 1.20%. For reference, TSIs customized benchmark, a construct that is 25% high yield, 15% equities, 15% convertible bonds, and 45% U.S. Aggregate Bond Index, gained 2.46% through the first six months of 2020. Both the underlying assets and the Funds six-month price-based return trailed the benchmark, with the price-based return trailing the NAV-based return as the share price moved from a premium over NAV of 0.7% at the start of the year to a discount of 2.8%. Annualized price-based performance over longer periods remains ahead of the Funds benchmark.
Over the past four quarters, the TSI Fund paid quarterly dividends of 9.06, 8.13, 10.32, and 8.37 cents per share, as well as a short-and a long-term capital gains distribution of 2.46 cents per share and 1.55 cents per share, respectively. This represents an annualized rate of approximately 40 cents per share, contributing to a realized 12-month trailing yield of 7.31%, as of 6/30/2020. Of course, since yield is a function of a number of parameters, the go-forward yield of TSI will likely differ from the trailing figure.
Fund Performance
Annualized Total Return as of June 30, 2020 | ||||||||||||||||||||||||||||
YTD | 1 Year | 3 Year | 5 Year | 10 Year | Since 3/1/06(2) |
Since 3/5/87(3) |
||||||||||||||||||||||
Price Based Return |
-2.24 | % | +2.00 | % | +5.87 | % | +7.31 | % | +9.63 | % | +9.87 | % | +8.12 | % | ||||||||||||||
NAV Based Return |
+1.20 | % | +3.60 | % | +4.80 | % | +4.64 | % | +8.57 | % | +8.63 | % | +8.33 | % | ||||||||||||||
Custom Benchmark(1) |
+2.46 | % | +7.40 | % | +6.70 | % | +6.18 | % | +7.14 | % | +6.41 | % | n/a |
(1) | Custom Benchmark Index: 15% S&P 500 with Income, 15% Merrill Lynch Convertible Index, 45% Bloomberg Barclays Capital U.S. Aggregate Bond Index, 25% Citi High Yield Cash Pay Index. |
(2) | The date on which the Funds investment objective changed to a multi-asset class fund. Prior to this date, the Fund primarily invested in convertible securities. |
(3) | Inception date of the Fund. |
Past performance is no guarantee of future results. Current performance may be lower or higher than that quoted. The market value and net asset value of the Funds shares will fluctuate with market conditions. Returns shown do not reflect the deduction of taxes that a shareholder would pay on the Funds distributions. You should not draw any conclusions about the Funds performance from the amount of the quarterly distribution or from the terms of the Funds distribution policy.
Management Commentary
TCW manages the Fund according to a full cycle discipline. Effectively, this means that our management style opportunistically increases the level of risk-taking in the early years of an asset price/credit cycle. In the latter stages of the cycle, our proclivity is to reduce risk, which naturally also has the tendency to pull down the overall yield of the portfolio.
The Fund has been defensively oriented for some time in recognition of deteriorating underwriting standards and a build-up of leverage, particularly within the corporate credit space, that indicated markets were in the later stages of the credit cycle. Thus as market volatility picked up dramatically in late March, and increased yield premiums across fixed income sectors resulted in attractive entry points, the Fund was positioned to add exposures in high-quality sectors that are resilient or are likely to benefit from Fed activities or support. This was reflected in an increased allocation to high conviction credits, with relative value additions among financials (namely Fed-supported assets such as money center banks), health care, and municipals, as well as idiosyncratic names with improved outlooks. Additionally, as equity prices swiftly declined in March, the Fund added equities in the banking, energy, and REIT sectors, bringing the allocation to over 10% in a matter of weeks. As markets remediated in May and June on an implied Fed backstop, some of these additions were trimmed, including the equity allocation, which ended the quarter at approximately 4%. Outside of the corporate space, commercial mortgage-backed securities (CMBS) and non-agency mortgage-backed securities (MBS) were reduced to fund purchases of corporate bonds in March, but the allocation to CMBS has since grown with incremental addition of non-agency interest-only CMBS and single-asset, single-borrower (SASB) bonds.
In the forthcoming period, uncertainty remains at the forefront of positioning as lockdowns persist, feeding extraordinary unemployment and small business risk. The pandemic appears to be the catalyst to end the current cycle; however, the recovery stage is yet to begin and there is heightened potential for another leg down in equity and credit markets. As such, Fund positioning remains largely defensive, with minimal exposure to the more vulnerable (i.e., breakable) issuers and industries, and will continue to
1
opportunistically adjust positioning during bouts of volatility if pricing is attractive. Holdings emphasize communications and consumer non-cyclicals such as pharmaceuticals, healthcare, and food and beverage, and have moved towards higher conviction names given idiosyncratic opportunities that arose in recent months. Outside of credit, senior parts of the securitized markets still offer opportunities for attractive risk-adjusted returns, though we remain vigilant about pockets of looser underwriting standards, particularly in current vintage CMBS, with a focus instead on single-asset, single-borrower deals, interest only (IOs), and agency-backed issues. Non-agency MBS continues to be an area offering value, particularly legacy issues that have strong underlying fundamentals, with an overall eye towards adding exposure in heavily discounted, longer spread duration securities. Within asset-backed securities (ABS), the Funds exposure avoids more vulnerable collateral types such as credit card loans, preferring AAA-rated collateralized loan obligations (CLOs) and government-guaranteed student loans. Finally, duration positioning was trimmed from 1.8 years to 1.7 years as Treasury rates remain near historic lows.
Portfolio Positioning
Modest leverage can be utilized by the Fund through a Line of Credit facility ($70 million available). Early year market volatility provided an expanded opportunity set among risk assets and the Fund utilized just over 9% leverage to take advantage of attractive entry points, specifically in the equity space. As equity prices remediated in subsequent months, the Fund began dollar cost averaging out of the equity position, with proceeds from equity sales used to reduce leverage to approximately 2% by the end of June. The management team stands ready to further utilize the leverage facility when market opportunity is again abundant and management deems the use of leverage as accretive to returns.
We greatly appreciate your investment in the Fund and your continuing support of TCW. If you have any additional questions or comments, we invite you to visit our web site at www.tcw.com or contact our shareholder services department at 1-866-227-8179, or contact@tcw.com.
Sincerely,
David S. DeVito
President, Chief Executive Officer and Director
The views expressed in this report reflect those of the Funds Advisor as of the date this is written and may not reflect its views on the date this report is first published or anytime thereafter. This report may contain discussions about investments that may or may not be held by the Fund as of the date of this report. All current and future holdings are subject to risk and to change. To the extent this report contains forward looking statements, unforeseen circumstances may cause actual results to differ materially from the views expressed as of the date this is written.
2
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) |
June 30, 2020 |
See accompanying Notes to Financial Statements.
3
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying Notes to Financial Statements.
4
TCW Strategic Income Fund, Inc.
June 30, 2020 |
See accompanying Notes to Financial Statements.
5
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying Notes to Financial Statements.
6
TCW Strategic Income Fund, Inc.
June 30, 2020 |
See accompanying Notes to Financial Statements.
7
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying Notes to Financial Statements.
8
TCW Strategic Income Fund, Inc.
June 30, 2020 |
See accompanying Notes to Financial Statements.
9
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying Notes to Financial Statements.
10
TCW Strategic Income Fund, Inc.
June 30, 2020 |
See accompanying Notes to Financial Statements.
11
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying Notes to Financial Statements.
12
TCW Strategic Income Fund, Inc.
June 30, 2020 |
See accompanying Notes to Financial Statements.
13
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying Notes to Financial Statements.
14
TCW Strategic Income Fund, Inc.
June 30, 2020 |
See accompanying Notes to Financial Statements.
15
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying Notes to Financial Statements.
16
TCW Strategic Income Fund, Inc.
June 30, 2020 |
See accompanying Notes to Financial Statements.
17
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
Futures Contracts | ||||||||||||||||||
Number of Contracts |
Type | Expiration Date |
Notional Contract Value |
Market Value |
Net Unrealized Appreciation (Depreciation) |
|||||||||||||
Short Futures |
||||||||||||||||||
163 | 5-Year U.S. Treasury Note Futures | 09/30/20 | $ | (20,442,749 | ) | $ | (20,495,977 | ) | $ | (53,228 | ) | |||||||
137 | 10-Year U.S. Ultra Treasury Note Futures | 09/21/20 | (21,442,925 | ) | (21,575,359 | ) | (132,434 | ) | ||||||||||
89 | U.S. Ultra Long Bond Futures | 09/21/20 | (19,455,749 | ) | (19,415,906 | ) | 39,843 | |||||||||||
|
|
|
|
|
|
|||||||||||||
$ | (61,341,423 | ) | $ | (61,487,242 | ) | $ | (145,819 | ) | ||||||||||
|
|
|
|
|
|
Notes to the Schedule of Investments:
ABS | Asset-Backed Securities. |
ACES | Alternative Credit Enhancement Securities. |
CLO | Collateralized Loan Obligation. |
EETC | Enhanced Equipment Trust Certificate. |
I/F | Inverse Floating rate security whose interest rate moves in the opposite direction of prevailing interest rates. |
I/O | Interest Only Security. |
PAC | Planned Amortization Class. |
TAC | Target Amortization Class. |
(1) | Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold, normally only to qualified institutional buyers. At June 30, 2020, the value of these securities amounted to $81,758,629 or 30.5% of net assets. These securities are determined to be liquid by the Funds investment advisor, unless otherwise noted, under procedures established by and under the general supervision of the Funds Board of Directors. |
(2) | Security is not accruing interest. |
(3) | For fair value measurement disclosure purposes, security is categorized as Level 3. Security is valued using significant unobservable inputs. |
(4) | Floating or variable rate security. The interest shown reflects the rate in effect at June 30, 2020. |
(5) | Variable rate security. Interest rate disclosed is as of the most recent information available. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above. |
(6) | Restricted security (Note 9). |
(7) | A portion of the principal balance has been written-off during the period due to defaults in the underlying loans. Cost basis has been adjusted. |
(8) | Investments issued under Regulation S of the Securities Act of 1933, as amended, may not be offered, sold, or delivered within the United States except under special exemptions. At June 30, 2020, the value of these securities amounted to $2,026,639 or 0.8% of net assets. |
(9) | Security is currently in default due to bankruptcy or failure to make payment of principal or interest of the issuer. Income is not being accrued. |
(10) | Rate disclosed is the 7-day net yield as of June 30, 2020. |
(11) | Rate shown represents yield-to-maturity. |
(12) | All or a portion of this security is held as collateral for open futures contracts. |
See accompanying Notes to Financial Statements.
18
TCW Strategic Income Fund, Inc.
Investments by Sector (Unaudited) |
June 30, 2020 |
Sector | Percentage of Net Assets |
|||
Residential Mortgage-Backed Securities Non-Agency |
34.6 | % | ||
Corporate Bonds |
32.2 | |||
Commercial Mortgage-Backed Securities Non-Agency |
9.8 | |||
Asset-Backed Securities |
7.8 | |||
Commercial Mortgage-Backed Securities Agency |
5.8 | |||
Common Stock |
4.2 | |||
Money Market Investments |
2.8 | |||
Municipal Bonds |
2.1 | |||
Foreign Government Bonds |
1.4 | |||
Residential Mortgage-Backed Securities Agency |
1.3 | |||
Short Term Investments |
0.7 | |||
Other* |
(2.7 | ) | ||
|
|
|||
Total |
100.0 | % | ||
|
|
* | Includes cash, futures, pending trades, interest receivable and accrued expenses payable. |
See accompanying Notes to Financial Statements.
19
TCW Strategic Income Fund, Inc.
Fair Valuation Summary (Unaudited) |
June 30, 2020 |
The following is a summary of the fair valuations according to the inputs used as of June 30, 2020 in valuing the Funds investments:
Description |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Other Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Fixed Income Securities |
||||||||||||||||
Asset-Backed Securities |
$ | | $ | 20,757,941 | $ | 96,532 | $ | 20,854,473 | ||||||||
Mortgage-Backed Securities |
||||||||||||||||
Commercial Mortgage-Backed Securities Agency |
| 15,575,198 | | 15,575,198 | ||||||||||||
Commercial Mortgage-Backed Securities Non-Agency |
| 26,146,501 | | 26,146,501 | ||||||||||||
Residential Mortgage-Backed Securities Agency |
| 3,500,677 | | 3,500,677 | ||||||||||||
Residential Mortgage-Backed Securities Non-Agency |
| 85,008,139 | 7,840,476 | 92,848,615 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Mortgage-Backed Securities |
| 130,230,515 | 7,840,476 | 138,070,991 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Corporate Bonds* |
| 86,459,527 | | 86,459,527 | ||||||||||||
Municipal Bonds |
| 5,620,054 | | 5,620,054 | ||||||||||||
Foreign Government Bonds |
| 3,754,787 | | 3,754,787 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Fixed Income Securities |
| 246,822,824 | 7,937,008 | 254,759,832 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Common Stock* |
11,187,536 | | | 11,187,536 | ||||||||||||
Money Market Investments |
7,526,997 | | | 7,526,997 | ||||||||||||
Short-Term Investments |
1,956,518 | | | 1,956,518 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Investments |
$ | 20,671,051 | $ | 246,822,824 | $ | 7,937,008 | $ | 275,430,883 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Asset Derivatives |
||||||||||||||||
Futures Contracts |
||||||||||||||||
Interest Rate Risk |
39,843 | | | 39,843 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 20,710,894 | $ | 246,822,824 | $ | 7,937,008 | $ | 275,470,726 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liability Derivatives |
||||||||||||||||
Futures Contracts |
||||||||||||||||
Interest Rate Risk |
$ | (185,662 | ) | $ | | $ | | $ | (185,662 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (185,662 | ) | $ | | $ | | $ | (185,662 | ) | ||||||
|
|
|
|
|
|
|
|
* | See Schedule of Investments for corresponding industries. |
See accompanying Notes to Financial Statements.
20
TCW Strategic Income Fund, Inc.
Statement of Assets and Liabilities (Unaudited) |
June 30, 2020 |
ASSETS: |
| |||
Investments, at Value (Cost: $268,322,761) |
$ | 275,430,883 | ||
Cash |
45,046 | |||
Interest and Dividends Receivable |
2,195,594 | |||
Receivable for Securities Sold |
453,550 | |||
Cash Collateral Held for Broker for Futures |
225,006 | |||
Receivable for Variation Margin on Open Futures Contracts to Broker |
131,101 | |||
Foreign Tax Reclaims Receivable |
1,636 | |||
|
|
|||
Total Assets |
278,482,816 | |||
|
|
|||
LIABILITIES: |
| |||
Payables for Borrowings |
5,343,000 | |||
Distributions Payable |
4,324,774 | |||
Payables for Securities Purchased |
273,000 | |||
Accrued Other Expenses |
206,583 | |||
Accrued Investment Advisory Fees |
141,299 | |||
Interest Expense Payable |
51,351 | |||
Accrued Directors Fees and Expenses |
20,006 | |||
|
|
|||
Total Liabilities |
10,360,013 | |||
|
|
|||
NET ASSETS |
$ | 268,122,803 | ||
|
|
|||
NET ASSETS CONSIST OF: |
| |||
Common Stock, par value $0.01 per share (75,000,000 shares authorized, 47,734,811 shares issued and outstanding) |
$ | 477,348 | ||
Paid-in Capital |
269,233,354 | |||
Accumulated Earnings (Loss) |
(1,587,899 | ) | ||
|
|
|||
NET ASSETS |
$ | 268,122,803 | ||
|
|
|||
NET ASSET VALUE PER SHARE |
$ | 5.62 | ||
|
|
|||
MARKET PRICE PER SHARE |
$ | 5.46 | ||
|
|
See accompanying Notes to Financial Statements.
21
TCW Strategic Income Fund, Inc.
Statement of Operations (Unaudited) |
Six Months Ended June 30, 2020 |
INVESTMENT INCOME: |
| |||
Income |
| |||
Interest |
$ | 8,201,836 | ||
Dividends (Net of Withholding Taxes of $12,847) |
362,715 | |||
|
|
|||
Total Investment Income |
8,564,551 | |||
|
|
|||
Expenses |
| |||
Investment Advisory Fees |
790,786 | |||
Legal Fees |
196,851 | |||
Interest Expense |
77,056 | |||
Audit and Tax Service Fees |
73,556 | |||
Directors Fees and Expenses |
51,531 | |||
Custodian Fees |
26,252 | |||
Listing Fees |
24,373 | |||
Transfer Agent Fees |
22,918 | |||
Insurance Expense |
22,381 | |||
Administration Fees |
20,482 | |||
Proxy Expense |
19,034 | |||
Printing and Distribution Costs |
15,138 | |||
Accounting Fees |
10,484 | |||
Miscellaneous Expense |
4,847 | |||
|
|
|||
Total Expenses |
1,355,689 | |||
|
|
|||
Net Investment Income |
7,208,862 | |||
|
|
|||
NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS, FUTURES CONTRACTS AND SWAP AGREEMENTS: |
||||
Net Realized Gain (Loss) on: |
| |||
Investments |
4,990,899 | |||
Futures Contracts |
(4,196,701 | ) | ||
Swap Agreements |
13,665 | |||
Change in Unrealized Appreciation (Depreciation) on: |
| |||
Investments |
(4,412,229 | ) | ||
Futures Contracts |
(841,801 | ) | ||
Swap Agreements |
1,292 | |||
|
|
|||
Net Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation) on Investments, Futures Contracts and Swap Agreements |
(4,444,875 | ) | ||
|
|
|||
INCREASE IN NET ASSETS FROM OPERATIONS |
$ | 2,763,987 | ||
|
|
See accompanying Notes to Financial Statements.
22
TCW Strategic Income Fund, Inc.
Statements of Changes in Net Assets
Six Months Ended June 30, 2020 (Unaudited) |
Year Ended December 31, 2019 |
|||||||
OPERATIONS: |
| |||||||
Net Investment Income |
$ | 7,208,862 | $ | 15,564,068 | ||||
Net Realized Gain on Investments, Futures Contracts and Swap Agreements |
807,863 | 820,263 | ||||||
Change in Unrealized Appreciation (Depreciation) on Investments, Futures Contracts and Swap Agreements |
(5,252,738 | ) | 5,735,699 | |||||
|
|
|
|
|||||
Increase in Net Assets Resulting from Operations |
2,763,987 | 22,120,030 | ||||||
|
|
|
|
|||||
DISTRIBUTIONS TO SHAREHOLDERS: |
| |||||||
Distributions to Shareholders |
(8,204,490 | ) | (18,421,472 | ) | ||||
|
|
|
|
|||||
Shares Issued in Reinvestment of Dividends (47,854 for the six months ended June 30, 2020 and 0 for the year ended December 31, 2019) |
270,321 | | ||||||
|
|
|
|
|||||
Total Increase (Decrease) in Net Assets |
(5,170,182 | ) | 3,698,558 | |||||
|
|
|
|
|||||
NET ASSETS: |
| |||||||
Beginning of period |
273,292,985 | 269,594,427 | ||||||
|
|
|
|
|||||
End of period |
$ | 268,122,803 | $ | 273,292,985 | ||||
|
|
|
|
See accompanying Notes to Financial Statements.
23
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited)
Note 1 Organization
TCW Strategic Income Fund, Inc. (the Fund) was incorporated in Maryland on January 13, 1987 as a diversified, closed-end investment management company and is registered under the Investment Company Act of 1940, as amended (the 1940 Act). Its shares are traded on the New York Stock Exchange under the symbol TSI. The Fund commenced operations on March 5, 1987. The Funds investment objective is to seek a total return comprised of current income and capital appreciation, and it seeks to achieve its investment objective by investing in a wide range of securities including convertible securities, marketable equity securities, investment-grade debt securities, high-yield debt securities, securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities (U.S. Government Securities), repurchase agreements, mortgage-related securities, asset-backed securities, money market securities, and other securities and derivative instruments without limit believed by the Funds investment advisor to be consistent with the Funds investment objective. TCW Investment Management Company LLC (the Advisor) is the investment advisor to the Fund and is registered under the Investment Advisers Act of 1940, as amended.
Note 2 Significant Accounting Policies
The following is a summary of significant accounting policies, which are in conformity with accounting principles generally accepted in the United States of America (GAAP) and which are consistently followed by the Fund in the preparation of its financial statements. The Fund is considered an investment company under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 946, Financial Services Investment Companies. Subsequent changes in accounting standards, if any, have been evaluated through the date of issuance in the preparation of the financial statements.
Principles of Accounting: The Fund uses the accrual method of accounting for financial reporting purposes.
Security Valuation: Securities traded on national exchanges are valued at the last reported sales prices. Securities traded on the NASDAQ stock market (NASDAQ) are valued using the official closing prices as reported by NASDAQ, which may not be the last sale price. Other securities, including short-term investments, swap agreements and forward currency contracts, which are traded over-the-counter (OTC), are valued at the mean of the current bid and asked prices as furnished by independent pricing services or by dealer quotations. Futures contracts are valued at the official settlement prices of the exchanges on which they are traded.
Securities for which market quotations are not readily available, including as a result of circumstances under which it is determined by the Advisor that prices received are not reflective of their market values, are valued by the Advisors Pricing Committee in accordance with the guidelines established by the Valuation Committee of the Board of Directors of the Fund (the Board) and under the general oversight of the Board.
Fair value is defined as the price that the Fund would receive upon selling an investment in a timely transaction to an independent buyer in the principal or most advantageous market for the investment. In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the Fund discloses investments in a three-tier hierarchy. This hierarchy is utilized to establish classification of fair value measurement broadly based on inputs that market participants would use in pricing the asset or liability, 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 developed based on market data obtained from sources independent of the reporting entity. Unobservable
24
TCW Strategic Income Fund, Inc.
June 30, 2020 |
Note 2 Significant Accounting Policies (Continued)
inputs are inputs that reflect the reporting entitys own assumptions about the inputs market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.
The three-tier hierarchy of inputs is summarized in the three broad levels listed below.
Level 1 | quoted prices in active markets for identical investments. | |
Level 2 | other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.). | |
Level 3 | significant unobservable inputs (including the Funds own assumptions in determining the fair value of investments). |
Changes in valuation techniques may result in transfers in or out of an investments assigned level within the hierarchy. The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to each security.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition, as well as changes related to liquidity of investments, could cause a security to be reclassified between Level 1, Level 2, or Level 3.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Fair Value Measurements: Descriptions of the valuation techniques applied to the Funds major categories of assets and liabilities on a recurring basis are as follows:
Asset-backed securities (ABS) and mortgage-backed securities (MBS). The fair value of ABS and MBS is estimated based on pricing models that consider the estimated cash flows of each debt tranche of the issuer, establish a benchmark yield, and develop an estimated tranche-specific spread to the benchmark yield based on the unique attributes of the tranche including, but not limited to, the prepayment speed assumptions and attributes of the collateral. To the extent the inputs are observable and timely, the values would be categorized in Level 2 of the fair value hierarchy; otherwise, they would be categorized in Level 3.
Corporate bonds. The fair value of corporate bonds is estimated using recently executed transactions, market price quotations (where observable), bond spreads, or credit default swap spreads adjusted for any basis difference between cash and derivative instruments. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy.
Futures contracts. Futures contracts are generally valued at the settlement price established at the close of business each day by the exchange on which they are traded. They are categorized in Level 1.
25
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 2 Significant Accounting Policies (Continued)
Government and agency securities. Government and agency securities are normally valued using a model that incorporates market observable data such as reported sales of similar securities, broker quotes, yields, bids, offers, quoted market prices, and reference data. Accordingly, government and agency securities are normally categorized in Level 1 or 2 of the fair value hierarchy depending on the liquidity and transparency of the market.
Money market funds. Money market funds are open-end mutual funds that invest in short-term debt securities. To the extent that these funds are valued based upon the reported net asset value (NAV), they are categorized in Level 1 of the fair value hierarchy.
Municipal bonds. Municipal bonds are fair valued based on pricing models that take into account, among other factors, information received from market makers and broker-dealers, current trades, bid-wanted lists, offerings, market movements, the callability of the bond, state of issuance, benchmark yield curves, and bond insurance. To the extent that these inputs are observable and timely, the fair values of municipal bonds are categorized in Level 2; otherwise, the fair values are categorized in Level 3.
Restricted securities. Restricted securities, including illiquid Rule 144A securities, issued by non-public entities are included in Level 3 of the fair value hierarchy because they trade infrequently, and therefore the inputs are unobservable. Any other restricted securities valued similar to publicly traded securities are categorized in Level 2 or 3 of the fair value hierarchy depending on whether a discount is applied and significant to the fair value.
Short-term investments. Short-term investments are valued using market price quotations, and are reflected in Level 1 of the fair value hierarchy.
The summary of the inputs used as of June 30, 2020 is listed after the Investments by Sector table.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Asset-Backed Securities |
Residential Mortgage-Backed Securities Non- Agency |
Total | ||||||||||
Balance as of December 31, 2019 |
$ | 249,257 | $ | 7,049,925 | $ | 7,299,182 | ||||||
Accrued Discounts (Premiums) |
| | | |||||||||
Realized Gain (Loss) |
(210,617 | ) | (386,499 | ) | (597,116 | ) | ||||||
Change in Unrealized Appreciation (Depreciation) |
| 1,177,050 | 1,177,050 | |||||||||
Purchases |
128,524 | | 128,524 | |||||||||
Sales |
| | | |||||||||
Transfers in to Level 3 |
(70,632 | ) | | (70,632 | ) | |||||||
Transfers out of Level 3 |
| | | |||||||||
|
|
|
|
|
|
|||||||
Balance as of June 30, 2020 |
$ | 96,532 | $ | 7,840,476 | $ | 7,937,008 | ||||||
|
|
|
|
|
|
|||||||
Change in Unrealized Appreciation (Depreciation) from Investments Still Held at June 30, 2020 |
$ | (210,617 | ) | $ | 1,177,050 | $ | 966,433 | |||||
|
|
|
|
|
|
26
TCW Strategic Income Fund, Inc.
June 30, 2020 |
Note 2 Significant Accounting Policies (Continued)
Significant unobservable valuation inputs of Level 3 investments as of June 30, 2020 are as follows:
Description |
Fair Value at June 30, 2020 |
Valuation Techniques | Unobservable |
Price or Price |
Weighted | |||||||||
Asset-Backed Securities |
$ | 96,352 | Third-party Broker | Broker Quotes | $10 to $21.2 | $11.154 | ||||||||
Residential Mortgage-Backed Securities Non-Agency (Interest Only Collateral Strip Rate Securities) |
918,488 | Third-party Vendor | Vendor Prices | $0.38 to $2.345 | $1.088 | |||||||||
Residential Mortgage-Backed Securities Non-Agency (Interest Only Securities) |
6,921,988 | Third-party Vendor | Vendor Prices | $2.498 to 36.574 | $11.543 |
Security Transactions and Related Investment Income: Security transactions are recorded as of the trade date. Dividend income is recorded on the ex-dividend date. Interest income is recognized on an accrual basis. Realized gains and losses on investments are recorded on the basis of specific identification.
Use of Estimates: The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from these estimates.
Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency denominated securities and other assets and liabilities stated in foreign currencies are translated using the daily spot rate; and (2) purchases, sales, income and expenses are translated at the rate of exchange prevailing on the respective dates of such transactions. The resultant exchange gains and losses are included in net realized or net unrealized gain (loss) in the Statement of Operations. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains and losses included in realized and unrealized gains and losses are included in, or are a reduction of, ordinary income for U.S. federal income tax purposes.
Distributions: Distributions to shareholders are recorded on each ex-dividend date. The Fund declared and paid or reinvested dividends quarterly under an income-based distribution policy. The income-based distribution policy has a stated goal of providing quarterly distributions out of the Funds accumulated undistributed net investment income and/or other sources subject to the requirements of the 1940 Act and Sub-chapter M of the Internal Revenue Code (the Code). The source for the dividend can come from net investment income and net realized capital gains measured on a fiscal year basis. Any portion of the distribution that exceeds income and capital gains will be treated as a return of capital. Under certain conditions, U.S. federal tax regulations cause some or all of the return of capital to be taxed as ordinary income. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from GAAP. These differences may be primarily due to differing treatments for market discount and premium, losses recognized on structured debt, losses deferred due to wash sales, foreign currency gains and losses, and spillover distributions. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid-in capital and may affect net investment income per share.
27
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 2 Significant Accounting Policies (Continued)
Derivative Instruments: Derivatives are financial instruments whose values are based on the values of one or more indicators, such as a security, asset, currency, interest rate, or index. Derivative transactions can create investment leverage and may be highly volatile. It is possible that a derivative transaction will result in a loss greater than the principal amount invested. The Fund may not be able to close out a derivative transaction at a favorable time or price.
For the period ended June 30, 2020, the Fund had derivatives and transactions in derivatives, grouped in the following risk categories :
Equity Risk | Interest Rate Risk |
Total | ||||||||||
Statement of Assets and Liabilities: |
||||||||||||
Asset Derivatives |
| |||||||||||
Futures Contracts (1) |
$ | | $ | 39,843 | $ | 39,843 | ||||||
|
|
|
|
|
|
|||||||
Total Value |
$ | | $ | 39,843 | $ | 39,843 | ||||||
|
|
|
|
|
|
|||||||
Liability Derivatives |
| |||||||||||
Futures Contracts (1) |
$ | | $ | (185,662 | ) | $ | (185,662 | ) | ||||
|
|
|
|
|
|
|||||||
Total Value |
$ | | $ | (185,662 | ) | $ | (185,662 | ) | ||||
|
|
|
|
|
|
|||||||
Statement of Operations: |
| |||||||||||
Realized Gain (Loss) |
| |||||||||||
Futures Contracts |
$ | (458,813 | ) | $ | (3,737,888 | ) | $ | (4,196,701 | ) | |||
Swap Agreements |
| 13,665 | 13,665 | |||||||||
|
|
|
|
|
|
|||||||
Total Realized Gain (Loss) |
$ | (458,813 | ) | $ | (3,724,223 | ) | $ | (4,183,036 | ) | |||
|
|
|
|
|
|
|||||||
Change in Appreciation (Depreciation) |
| |||||||||||
Futures Contracts |
$ | (183,228 | ) | $ | (658,573 | ) | $ | (841,801 | ) | |||
Swap Agreements |
| 1,292 | 1,292 | |||||||||
|
|
|
|
|
|
|||||||
Total Change in Appreciation (Depreciation) |
$ | (183,228 | ) | $ | (657,281 | ) | $ | (840,509 | ) | |||
|
|
|
|
|
|
|||||||
Number of Contracts or Notional Amounts (2) |
| |||||||||||
Futures Contracts |
32 | 331 | 363 | |||||||||
Swap Agreements |
$ | $30,210,991 | $30,210,991 |
(1) | Represents appreciation (depreciation) of futures contracts as reported in the Schedule of Investments as of June 30, 2020. Only the variation margin is reported within the Statement of Assets and Liabilities. |
(2) | Amount disclosed represents average number of contracts or notional amounts, which are representative of the volume traded for the period ended June 30, 2020. |
Counterparty Credit Risk: Derivative contracts may expose the Fund to counterparty risk. Losses can occur if the counterparty does not perform under the contract.
With exchange-traded futures and centrally cleared swaps, there is less counterparty credit risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, the counterparty credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or insolvency) of the clearing broker or clearinghouse. Additionally, credit risk exists in exchange-traded futures and centrally cleared swaps with respect to initial and variation margin that is held in a clearing brokers customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing
28
TCW Strategic Income Fund, Inc.
June 30, 2020 |
Note 2 Significant Accounting Policies (Continued)
broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata basis across all the clearing brokers customers, potentially resulting in losses to the Fund.
The Funds risk of loss from counterparty credit risk on OTC derivatives is generally limited to the aggregate unrealized gain netted against any collateral held by the Fund. For OTC derivatives, the Fund enters into an International Swaps and Derivatives Association, Inc. Master Agreement (ISDA Master Agreement) with each counterparty. An ISDA Master Agreement is a bilateral agreement between the Fund and a counterparty that governs OTC derivatives and typically contains, among other things, collateral posting terms and netting provisions in the event of a default and/or termination event. Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to OTC derivatives to terminate derivative contracts prior to maturity in the event the Funds net assets decline by a stated percentage or the Fund fails to meet the terms of its ISDA Master Agreements, which would cause the Fund to accelerate payment of any net liability owed to the counterparty.
Collateral Requirements: For derivatives traded under an ISDA Master Agreement, the collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of any collateral pledged or received by the Fund.
Cash collateral that has been pledged to cover obligations of the Fund is reported separately on the Statement of Assets and Liabilities. Non-cash collateral pledged by the Fund, if any, is noted in the Schedule of Investments. Generally, the amount of collateral due from or to a party has to exceed a minimum transfer amount threshold, typically $250,000 or $500,000, before a transfer is required, which is determined at the close of each business day and the collateral is transferred on the next business day. To the extent amounts due to the Fund from its counterparties are not fully collateralized, contractually or otherwise, the Fund bears the risk of loss from counterparty non-performance. The Fund attempts to mitigate counterparty risk by entering into agreements only with counterparties that the Advisor believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. For financial reporting purposes, the Fund does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the Statement of Assets and Liabilities. The Fund has implemented the disclosure requirements pursuant to FASB ASU No. 2013-01, Disclosures about Offsetting Assets and Liabilities that requires disclosures to make financial statements that are prepared under GAAP more comparable to those prepared under International Financial Reporting Standards.
The Fund had no OTC derivatives for offset under an ISDA Master Agreement as of June 30, 2020.
Note 3 Portfolio Investments
Mortgage-Backed and Other Asset-Backed Securities: The Fund may invest in mortgage pass-through securities, which represent interests in pools of mortgages. Payments of both principal and interest on the securities are generally made monthly, in effect passing through monthly payments made by borrowers
29
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 3 Portfolio Investments (Continued)
on the residential or commercial mortgage loans that underlie the securities (net of any fees paid to the issuer or guarantor of the securities). Mortgage pass-through securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. The Fund may also invest in collateralized mortgage obligations (CMOs). CMOs are debt obligations collateralized by residential or commercial mortgage loans or residential or commercial mortgage pass-through securities. Interest and principal are generally paid monthly. CMOs may be collateralized by whole mortgage loans or private mortgage pass-through securities but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by the Government National Mortgage Association (Ginnie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) or Federal National Mortgage Corporation (Fannie Mae). The issuer of a series of CMOs may elect to be treated for tax purposes as a Real Estate Mortgage Investment Conduit. CMOs are structured into multiple classes, each bearing a different stated maturity. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes usually receive principal only after shorter classes have been retired. An investor may be partially protected against a sooner than desired return of principal because of the sequential payments. The Fund may invest in stripped MBS. Stripped MBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. In certain cases, one class will receive all of the interest (the interest only or IO class), while the other class will receive all of the principal (the principal-only or PO class). The yield to maturity on IOs is sensitive to the rate of principal repayments (including prepayments) on the related underlying mortgage assets, and principal payments may have a material effect on yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Fund may not fully recoup its initial investment in IOs. Mortgage-backed and other asset-backed securities held by the fund at June 30, 2020 are listed in the Funds Schedule of Investments.
Repurchase Agreements: The Fund may enter into repurchase agreements under the terms of a Master Repurchase Agreement (MRA). In a repurchase agreement transaction, the Fund will purchase a security from a counterparty who agrees to repurchase the same security at a mutually agreed upon date and price. The MRA permits the Fund, under certain circumstances, including an event of default (such as bankruptcy or insolvency), to offset payables and/or receivables under the MRA with collateral held and/or posted to the counterparty and create one single net payment due to or from the Fund. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of the MRA counterpartys bankruptcy or insolvency. Pursuant to the terms of the MRA, the Fund receives securities as collateral with a market value in excess of the repurchase price. Upon a bankruptcy or insolvency of the MRA counterparty, the Fund recognizes a liability with respect to such excess collateral to reflect the Funds obligation under bankruptcy law to return the excess to the counterparty. The Fund had no repurchase agreements outstanding at June 30, 2020.
When-Issued, Delayed-Delivery, and Forward Commitment Transactions: The Fund may enter into when-issued, delayed-delivery or forward commitment transactions in order to lock in the purchase price of the underlying security or to adjust the interest rate exposure of the Funds existing portfolio. In when-issued, delayed-delivery, or forward commitment transactions, the Fund commits to purchase particular securities, with payment and delivery to take place at a future date. Although the Fund does not pay for the securities or start earning interest on them until they are delivered, it immediately assumes the risks of ownership,
30
TCW Strategic Income Fund, Inc.
June 30, 2020 |
Note 3 Portfolio Investments (Continued)
including the risk of price fluctuation. If the Funds counterparty fails to deliver a security purchased on a when-issued, delayed-delivery or forward commitment basis, there may be a loss, and the Fund may have missed an opportunity to make an alternative investment.
Prior to settlement of these transactions, the value of the subject securities will fluctuate. In addition, because the Fund is not required to pay for when-issued, delayed-delivery or forward commitment securities until the delivery date, they may result in a form of leverage. To guard against this deemed leverage, the Fund monitors the obligations under these transactions and ensures that the Fund has sufficient liquid assets to cover them. The Fund had no When-Issued, Delayed-Delivery, or Forward Commitment Transactions during the period ended June 30, 2020.
Security Lending: The Fund may lend its securities to qualified brokers. The loans must be collateralized at all times primarily with cash although the Fund can accept money market instruments or U.S. government securities with a market value at least equal to the market value of the securities on loan. As with any extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral if the borrowers of the securities fail financially. The Fund earns additional income for lending its securities by investing the cash collateral in short-term investments. The Fund did not lend any securities during the period ended June 30, 2020.
Derivatives:
Forward Foreign Currency Contracts: The Fund enters into forward foreign currency contracts as a hedge against fluctuations in foreign exchange rates. Forward foreign currency contracts are marked-to-market daily and the change in market value is recorded by the Fund as unrealized gains or losses in the Statement of Assets and Liabilities. When a contract is closed or delivery is taken, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Risks arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of the foreign currency relative to the U.S. dollar. The Fund did not have any foreign currency forward contracts as of June 30, 2020.
Futures Contracts: The Fund seeks to manage a variety of different risks or obtain exposure through the use of futures contracts. The Fund may use index futures to hedge against broad market risks to its portfolio or to gain broad market exposure when it holds uninvested cash or as an inexpensive substitute for cash investments directly in securities or other assets. Securities index futures contracts are contracts to buy or sell units of a securities index at a specified future date at a price agreed upon when the contract is made, and are settled in cash. Positions in futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Because futures contracts are exchange-traded, they typically have minimal exposure to counterparty risk. Parties to a futures contract are not required to post the entire notional amount of the contract, but rather a small percentage of that amount (by way of margin), both at the time they enter into futures transactions, and then on a daily basis if their positions decline in value; as a result, futures contracts are highly leveraged. Such payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. Because futures markets are highly leveraged, they can be extremely volatile, and there can be no assurance that the pricing of a futures contract will correlate precisely with the pricing of the asset or index underlying it or the asset or liability of the Fund that is the subject of the hedge. It may not always be possible for the Fund to enter into a closing transaction with respect to a futures contract it has entered into at a favorable time or price. When the Fund enters into a futures transaction, it is subject to the risk that the value of the futures contract will move in a direction unfavorable to it.
31
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 3 Portfolio Investments (Continued)
When the Fund uses futures contracts for hedging purposes, it is likely that the Fund will have an asset or liability that will offset any loss (or gain) on the transactions, at least in part. When a futures contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. During the period ended June 30, 2020, the Fund used S&P 500 Index futures to gain exposure to the equity market. The Fund also utilized treasury futures to help manage interest rate duration and credit market exposure. Futures contracts outstanding at June 30, 2020 are listed in the Funds Schedule of Investments.
Swap Agreements: The Fund may enter into swap agreements. Swap agreements are typically two-party contracts entered into primarily by institutional investors. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or swapped between the parties are generally calculated with respect to a notional amount (i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a basket of securities representing a particular index).
Interest rate swaps are agreements in which one party pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, a party may pay a fixed rate and receive a floating rate. In more complex swaps, the notional principal amount may decline (or amortize) over time. The Funds maximum risk of loss due to counterparty default is the discounted NAV of the cash flows paid to/received from the counterparty over the interest rate swaps remaining life.
During the term of a swap transaction, changes in the value of the swap are recognized as unrealized gains or losses by marking-to-market to reflect the market value of the swap. When the swap is terminated, the Fund will record a realized gain or loss equal to the difference, if any, between the proceeds from (or cost of) the closing transaction and the Funds basis in the agreement. Upfront swap premium payments paid or received by the Fund, if any, are recorded within the value of the open swap agreement on the Funds Statement of Assets and Liabilities and represent payments paid or received upon entering into the swap agreement to compensate for differences between stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, and other relevant factors). These upfront payments are recorded as realized gain or loss on the Funds Statement of Operations upon termination or maturity of the swap agreement.
During the term of a swap transaction, the periodic net payments can be made for a set period of time or may be triggered by a predetermined credit event. The net periodic payments may be based on a fixed or variable interest rate, the change in market value of a specified security, basket of securities or index, or the return generated by a security. These periodic payments received or made by the Fund are recorded as realized gains and losses, respectively. During the period ended June 30, 2020, the Fund entered into interest rate swaps to manage duration, the yield curve or interest rate risk by economically hedging the value of the fixed-rate bonds which may decrease when interest rates rise (interest rate risk). There were no Swap agreements outstanding at June 30, 2020.
Note 4 Risk Considerations
Market Risk: The Funds investments will fluctuate with market conditions, and so will the value of your investment in the Fund. You could lose money on your investment in the Fund or the Fund could underperform other investments.
32
TCW Strategic Income Fund, Inc.
June 30, 2020 |
Note 4 Risk Considerations (Continued)
Liquidity Risk: The Funds investments in illiquid securities may reduce the returns of the Fund because it may not be able to sell the illiquid securities at an advantageous time or price. Investments in high-yield securities, foreign securities, derivatives or other securities with substantial market and/or credit risk tend to have the greatest exposure to liquidity risk. Certain investments in private placements and Rule 144A securities may be considered illiquid investments. The Fund may invest in private placements and Rule 144A securities.
Interest Rate Risk: The values of the Funds investments fluctuate in response to movements in interest rates. If rates rise, the values of debt securities generally fall. The longer the average duration of the Funds investment portfolio, the greater the change in value.
Mortgage-Backed and Other Asset-Backed Securities Risk: The Fund may invest in MBS or other ABS. The values of some mortgage-backed securities or other asset-backed securities may expose the Fund to a lower rate of return upon reinvestment of principal. When interest rates rise, the value of mortgage-related securities generally will decline; however, when interest rates are declining, the value of mortgage-related securities with prepayment features may not increase as much as other fixed-income securities. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may shorten or extend the effective maturity of the security beyond what was anticipated at the time of purchase. The value of these securities may fluctuate in response to the markets perception of the creditworthiness of the issuers. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private guarantee and/or insurance, there is no assurance that private guarantors or insurers will meet their obligations.
Derivatives Risk: Use of derivatives, which at times is an important part of the Funds investment strategy, involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Investments in derivatives could cause the Fund to lose more than the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurance that the Fund will achieve its objective with these transactions to reduce exposure to other risks when that would be beneficial.
Credit Risk: The values of any of the Funds investments may also decline in response to events affecting the issuer or its credit rating. The lower rated debt securities in which the Fund may invest are considered speculative and are subject to greater volatility and risk of loss than investment-grade securities, particularly in deteriorating economic conditions. The value of some mortgage-related securities in which the Fund invests also may fall because of unanticipated levels of principal prepayments that can occur when interest rates decline. The Fund invests a material portion of its assets in securities of issuers that hold mortgage- and asset-backed securities and direct investments in securities backed by commercial and residential mortgage loans and other financial assets. The value and related income of these securities are sensitive to changes in economic conditions, including delinquencies and/or defaults. Continuing shifts in the markets perception of credit quality on securities backed by commercial and residential mortgage loans and other financial assets may result in increased volatility of market prices and periods of illiquidity which can negatively impact the valuation of certain issuers held by the Fund.
MBS and ABS are characterized and classified in a variety of different ways. These classifications include a view of the securities cash flow structure (pass through, sequential pay, prepayment-protected, interest only, principal-only, etc.), the security of the claim on the underlying assets (senior, mezzanine and subordinated), as well as types of underlying collateral (prime conforming loans, prime non-conforming
33
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 4 Risk Considerations (Continued)
loans, Alt-A loans, subprime loans, commercial loans, etc.). In many cases, the classification incorporates a degree of subjectivity a particular loan might be categorized as prime by the underwriting standards of one mortgage issuer while another might classify the loan as subprime. The level of risk associated with an investment in a mortgage loan can be impacted by, among other factors, the nature of the collateral, the form and the level of credit enhancement, the vintage of the loan, the geography of the loan, the purpose of the loan (e.g. refinance versus purchase versus equity take-out), the borrowers credit quality (e.g., FICO score), and whether the loan is a first trust deed or a second lien.
Counterparty Risk: The Fund may be exposed to counterparty risk, or the risk that an entity with which the Fund has unsettled or open transactions may not fulfill its obligations.
LIBOR Risk: The London Interbank Offered Rate (LIBOR) is used extensively in the U.S. and globally as a benchmark or reference rate for various commercial and financial contracts, including corporate and municipal bonds, bank loans, asset-backed and mortgage-related securities, interest rate swaps and other derivatives. For example, debt securities in which the Fund invests may pay interest at floating rates based on LIBOR or may be subject to interest caps or floors based on LIBOR. The Funds derivative investments may also reference LIBOR. In addition, issuers of instruments in which the Fund invests may obtain financing at floating rates based on LIBOR, and the Fund may use leverage or borrowings based on LIBOR. In July 2017, the head of the United Kingdom Financial Conduct Authority announced the intention to phase out the use of LIBOR by the end of 2021. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement reference rate. Abandonment of or modifications to LIBOR could have adverse impacts on newly issued financial instruments and existing financial instruments that reference LIBOR. The expected discontinuation of LIBOR could have a significant impact on the financial markets and may present a material risk for certain market participants, including investment companies such as the Fund. Abandonment of or modifications to LIBOR could lead to significant short- and long-term uncertainty and market instability. The risks associated with this discontinuation and transition may be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner. It remains uncertain how such changes would be implemented and the effects such changes would have on the Fund, issuers of instruments in which the Fund invests, and the financial markets generally.
Public Health Emergencies Risk and Impact of the Coronavirus (COVID-19): Pandemics and other local, national, and international public health emergencies, including outbreaks of infectious diseases such as SARS, H1N1/09 Flu, the Avian Flu, Ebola and the current outbreak of the novel coronavirus (COVID-19), can result, and in the case of COVID-19 is resulting, in market volatility and disruption, and any similar future emergencies may materially and adversely impact economic production and activity in ways that cannot be predicted, all of which could result in substantial investment losses.
The World Health Organization officially declared in March 2020 that the COVID-19 outbreak formally constitutes a pandemic. This outbreak has caused a worldwide public health emergency, straining healthcare resources and resulting in extensive and growing numbers of infections, hospitalizations and deaths. In an effort to contain COVID-19, local, regional, and national governments, as well as private businesses and other organizations, have imposed and continue to impose severely restrictive measures, including instituting local and regional quarantines, restricting travel (including closing certain international borders), prohibiting public activity (including stay-at-home, shelter-in-place, and similar orders), and ordering the closure of a wide range of offices, businesses, schools, and other public venues.
34
TCW Strategic Income Fund, Inc.
June 30, 2020 |
Note 4 Risk Considerations (Continued)
Consequently, COVID-19 has significantly diminished and disrupted global economic production and activity of all kinds and has contributed to both volatility and a severe decline in financial markets. Among other things, these unprecedented developments have resulted in: (i) material reductions in demand across most categories of consumers and businesses; (ii) dislocation (or, in some cases, a complete halt) in the credit and capital markets; (iii) labor force and operational disruptions; (iv) slowing or complete idling of certain supply chains and manufacturing activity; and (v) strain and uncertainty for businesses and households, with a particularly acute impact on industries dependent on travel and public accessibility, such as transportation, hospitality, tourism, retail, sports, and entertainment.
The ultimate impact of COVID-19 (and of the resulting precipitous decline and disruption in economic and commercial activity across many of the worlds economies) on global economic conditions, and on the operations, financial condition, and performance of any particular market, industry or business, is impossible to predict. However, ongoing and potential additional materially adverse effects, including further global, regional and local economic downturns (including recessions) of indeterminate duration and severity, are possible. The extent of COVID-19s impact will depend on many factors, including the ultimate duration and scope of the public health emergency and the restrictive countermeasures being undertaken, as well as the effectiveness of other governmental, legislative, and financial and monetary policy interventions designed to mitigate the crisis and address its negative externalities, all of which are evolving rapidly and may have unpredictable results. Even if COVID-19s spread is substantially contained, it will be difficult to assess what the longer-term impacts of an extended period of unprecedented economic dislocation and disruption will be on future economic developments, the health of certain markets, industries and businesses, and commercial and consumer behavior.
The ongoing COVID-19 crisis and any other public health emergency could have a significant adverse impact on our investments and result in significant investment losses. The extent of the impact on business operations and performance of market participants and the companies in which we invest depends and will continue to depend on many factors, virtually all of which are highly uncertain and unpredictable, and this impact may include or lead to: (i) significant reductions in revenue and growth; (ii) unexpected operational losses and liabilities; (iii) impairments to credit quality; and (iv) reductions in the availability of capital. These same factors may limit the ability to source, research, and execute new investments, as well as to sell investments in the future, and governmental mitigation actions may constrain or alter existing financial, legal, and regulatory frameworks in ways that are adverse to the investment strategies we intend to pursue, all of which could materially diminish our ability to fulfill investment objectives. They may also impair the ability of the companies in which we invest or their counterparties to perform their respective obligations under debt instruments and other commercial agreements (including their ability to pay obligations as they become due), potentially leading to defaults with uncertain consequences, including the potential for defaults by borrowers under debt instruments held in a clients portfolio. In addition, an extended period of remote working by the employees of the companies in which we invest subjects those companies to additional operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to cyberattacks that seek to exploit the COVID-19 pandemic, and the operational damage of any such events could potentially disrupt our business and reduce the value of our investments. The operations of securities markets may also be significantly impacted, or even temporarily or permanently halted, as a result of government quarantine measures, restrictions on travel and movement, remote-working requirements, and other factors related to a public health emergency, including the potential adverse
35
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 4 Risk Considerations (Continued)
impact on the health of any such entitys personnel. These measures may also hinder normal business operations by impairing usual communication channels and methods, hampering the performance of administrative functions such as processing payments and invoices, and diminishing the ability to make accurate and timely projections of financial performance. Because our ability to execute transactions on behalf of the Funds is dependent upon the timely performance of multiple third parties, any interruptions in the business operations of those third parties could impair our ability to effectively implement a Funds investment strategies.
Note 5 Federal Income Taxes
It is the policy of the Fund to comply with the requirements of the Code applicable to regulated investment companies and distribute all of its net taxable income, including any net realized gains on investments, to its shareholders. Therefore, no federal income tax provision is required.
At June 30, 2020, net unrealized appreciation for federal income tax purposes is comprised of the following components:
Unrealized appreciation |
$ | 20,480,869 | ||
Unrealized (depreciation) |
(14,029,729 | ) | ||
|
|
|||
Net unrealized appreciation |
$ | 6,451,140 | ||
|
|
|||
Cost of Investments for Federal Income Tax Purposes |
$ | 268,979,744 | ||
|
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The Fund did not have any unrecognized tax benefits at June 30, 2020, nor were there any increases or decreases in unrecognized tax benefits for the period then ended; and therefore no interest or penalties were accrued. The Fund is subject to examination by U.S. federal and state tax authorities for returns filed for the prior three and four fiscal years, respectively.
The following table shows the character of distributed and undistributed amounts on a tax basis for the year ended December 31, 2019.
Amount Distributed During the Year Ended December 31, 2019 |
Undistributed Amount at Year End December 31, 2019 |
|||||||
Ordinary Income |
$ | 17,273,916 | $ | 36,007 | ||||
Capital Gain |
1,147,556 | | ||||||
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$ | 18,421,472 | $ | 36,007 | |||||
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Note 6 Investment Advisory and Service Fees
As compensation for the investment advisory services rendered, facilities provided, and expenses borne, the Advisor is paid a monthly fee by the Fund computed at the annual rate of 0.75% of the first $100 million of the Funds average managed assets and 0.50% of the Funds average managed assets in excess of $100 million.
Note 7 Purchases and Sales of Securities
For the period ended June 30, 2020, purchases and sales or maturities of investment securities (excluding short-term investments) aggregated to $95,294,008 and $82,455,831, respectively, for non-U.S. Government securities, and aggregated to $18,782,630 and $20,827,392, respectively, for U.S. Government securities.
36
TCW Strategic Income Fund, Inc.
June 30, 2020 |
Note 8 Directors Fees
Directors who are not affiliated with the Advisor received, as a group, fees and expenses of $51,531 from the Fund for the period ended June 30, 2020. Directors may elect to defer receipt of their fees in accordance with the terms of a Non-Qualified Deferred Compensation Plan. Deferred compensation is included within Accrued Directors Fees and Expenses in the Statement of Assets and Liabilities. Certain Officers and/or Directors of the Fund are also Officers and/or Directors of the Advisor but do not receive any compensation from the Fund.
Note 9 Restricted Securities
The Fund is permitted to invest in securities that have legal or contractual restrictions on resale. These securities may be sold privately, but are required to be registered before being sold to the public (exemption rules apply). Private placement securities are generally considered to be restricted except for those securities traded between qualified institutional investors under the provisions of Rule 144A of the Securities Act of 1933, as amended (the Securities Act). However, the Fund considers 144A securities to be restricted if those securities have been deemed illiquid by the Advisor. Disposal of these securities may involve time consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. Restricted securities held by the Fund at June 30, 2020 are listed below:
Issuer Description |
Acquisition Date |
Acquisition Cost |
Aggregate Value |
Percentage of Net Assets |
||||||||||
Citigroup Commercial Mortgage Trust, |
2/13/2015-2/26/2015 | $ | 308,882 | $ | 91,934 | 0.03 | % | |||||||
Four Times Square Trust Commercial Mortgage Pass-Through Certificates
(06-4TS-X), |
3/22/2018-6/19/2018 | 287,094 | 33,280 | 0.01 | % | |||||||||
GS Mortgage Securities Trust GSMS (12-GC6-XB), 0.20% due 01/10/2045 |
2/1/2018 | 141,353 | 55,421 | 0.02 | % | |||||||||
JPMorgan Chase Commercial Mortgage Securities Trust, (12-HSBC-XA), 1.58%, due 07/05/2032 |
10/11/2017 | 263,007 | 109,566 | 0.04 | % | |||||||||
Morgan Stanley Capital I Trust (12-C4-XA), |
5/16/2018 | 339,272 | 131,525 | 0.05 | % | |||||||||
UBS Commercial Mortgage Trust (12-C1-XA), |
6/27/2017 | 383,128 | 133,312 | 0.10 | % | |||||||||
WFRBS Commercial Mortgage Trust (12-C8-XA), 1.96% due 08/15/2045 |
12/22/2017 | 290,854 | 117,935 | 0.05 | % | |||||||||
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$ | 2,013,590 | $ | 672,973 | 0.30 | % | |||||||||
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Note 10 Loan Outstanding
The Fund is permitted to have borrowings for investment purposes. The Fund has entered into a line of credit agreement, renewed annually, with The Bank of New York Mellon (the Bank) which permits the Fund to borrow up to $70 million at a rate, per annum, equal to the Federal Funds Rate plus 1.00%. The average daily loan balance during the period ended June 30, 2020, for which loans were outstanding amounted to $14,714,536, and the weighted average interest rate was 1.13%. Interest expense on the line of credit was $49,744 for the period ended June 30, 2020. The maximum outstanding loan balance during the period ended June 30, 2020 was $22,947,000. The Fund pays the Bank a commitment fee equal to 0.08% per annum on the daily unused portion of the committed line amount. The commitment fee incurred by the Fund is presented in the Interest Expense line in the Statement of Operations.
37
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 11 Indemnifications
Under the Funds organizational documents, its Officers and Directors may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Fund. In addition, the Fund entered into an agreement with each of the Directors which provides that the Fund will indemnify and hold harmless each Director against any expenses actually and reasonably incurred by such Director in any proceeding arising out of or in connection with the Directors services to the Fund, to the fullest extent permitted by the Funds Articles of Incorporation and By-Laws, the Maryland General Corporation Law, the Securities Act, and the 1940 Act, each as now or hereinafter in force. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The Funds maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. The Fund has not accrued any liability in connection with such indemnification.
38
TCW Strategic Income Fund, Inc.
Financial Highlights
Six Months Ended June 30, 2020 (Unaudited) |
Year Ended December 31, | |||||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||||||
Net Asset Value Per Share, Beginning of period |
$ | 5.73 | $ | 5.65 | $ | 5.91 | $ | 5.81 | $ | 5.83 | $ | 5.95 | ||||||||||||
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Income from Operations: |
| |||||||||||||||||||||||
Net Investment Income (1) |
0.15 | 0.33 | 0.30 | 0.27 | 0.26 | 0.22 | ||||||||||||||||||
Net Realized and Unrealized Gain (Loss) on Investments |
(0.09 | ) | 0.14 | (0.19 | ) | 0.14 | 0.00 | (2) | (0.13 | ) | ||||||||||||||
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Total from Investment Operations |
0.06 | 0.47 | 0.11 | 0.41 | 0.26 | 0.09 | ||||||||||||||||||
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Less Distributions: |
| |||||||||||||||||||||||
Distributions from Net Investment Income |
(0.17 | ) | (0.35 | ) | (0.34 | ) | (0.28 | ) | (0.21 | ) | (0.21 | ) | ||||||||||||
Distributions from Net Realized Gains |
| (0.04 | ) | (0.03 | ) | (0.03 | ) | (0.07 | ) | | ||||||||||||||
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Total Distributions |
(0.17 | ) | (0.39 | ) | (0.37 | ) | (0.31 | ) | (0.28 | ) | (0.21 | ) | ||||||||||||
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Net Asset Value Per Share, End of period |
$ | 5.62 | $ | 5.73 | $ | 5.65 | $ | 5.91 | $ | 5.81 | $ | 5.83 | ||||||||||||
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Market Value Per Share, End of period |
$ | 5.46 | $ | 5.77 | $ | 5.27 | $ | 5.87 | $ | 5.33 | $ | 5.27 | ||||||||||||
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Net Asset Value Total Return (3) |
1.20 | % (4) | 8.37 | % | 1.86 | % | 7.22 | % | 4.49 | % | 1.60 | % | ||||||||||||
Market Price Return (5) |
(2.24 | )% (4) | 17.14 | % | (3.88 | )% | 16.36 | % | 6.56 | % | 1.83 | % | ||||||||||||
Ratios/Supplemental Data: |
| |||||||||||||||||||||||
Net Assets, End of period (in thousands) |
$ | 268,123 | $ | 273,293 | $ | 269,594 | $ | 282,034 | $ | 277,132 | $ | 277,932 | ||||||||||||
Ratio of Expenses Before Interest Expense to Average Net Assets |
0.96 | % (6) | 0.85 | % | 0.81 | % | 0.81 | % | 0.84 | % | 0.87 | % | ||||||||||||
Ratio of Interest Expense to Average Net Assets |
0.06 | % (6) | 0.02 | % | 0.02 | % | 0.01 | % | 0.01 | % | 0.01 | % | ||||||||||||
Ratio of Total Expenses to Average Net Assets |
1.02 | % (6) | 0.87 | % | 0.83 | % | 0.82 | % | 0.85 | % | 0.88 | % | ||||||||||||
Ratio of Net Investment Income to Average Net Assets |
5.43 | % (6) | 5.62 | % | 5.13 | % | 4.47 | % | 4.38 | % | 3.70 | % | ||||||||||||
Portfolio Turnover Rate |
38.85 | % (4) | 34.64 | % | 31.16 | % | 32.46 | % | 29.20 | % | 24.81 | % |
(1) | Computed using average shares outstanding throughout the period. |
(2) | Amount rounds to less than $0.01 per share. |
(3) | Based on net asset value per share, adjusted for reinvestment of distributions. |
(4) | For the six months ended June 30, 2020 and not indicative of a full years results. |
(5) | Based on market price per share, adjusted for reinvestment of distributions. |
(6) | Annualized. |
See accompanying Notes to Financial Statements.
39
TCW Strategic Income Fund, Inc.
Supplemental Information
Proxy Voting Guidelines
The policies and procedures that the Fund uses to determine how to vote proxies are available without charge. The Board of the Fund has delegated the Funds proxy voting authority to the Advisor.
Disclosure of Proxy Voting Guidelines
The proxy voting guidelines of the Advisor are available:
1. | By calling 1-877- 829-4768 to obtain a hard copy; or |
2. | By going to the Securities and Exchange Commissions (the SEC) website at www.sec.gov. |
When the Fund receives a request for a description of the Advisors proxy voting guidelines, it will deliver the description that is disclosed in the Funds Statement of Additional Information. This information will be sent out via first class mail (or other means designed to ensure equally prompt delivery) within three business days of receiving the request.
The Advisor, on behalf of the Fund, must prepare and file Form N-PX with the SEC not later than August 31 of each year, which must include the Funds proxy voting record for the most recent twelve-month period ended June 30 of that year. The Funds proxy voting record for the most recent twelve-month period ended June 30, 2020 is available without charge:
1. | By calling 1-877- 829-4768 to obtain a hard copy; or |
2. | By going to the SEC website at http://www.sec.gov. |
When the Fund receives a request for the Funds proxy voting record, it will send the information disclosed in the Funds most recently filed report on Form N-PX via first class mail (or other means designed to ensure equally prompt delivery) within three business days of receiving the request.
The Fund also discloses its proxy voting record on its website as soon as is reasonably practicable after its report on Form N-PX is filed with the SEC.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of its portfolio holdings with the SEC for the first and third quarters of its fiscal year on Form NPORT-P. Such filings occur no later than 60 days after the end of the Funds first and third quarters and are available on the SECs website at www.sec.gov.
Corporate Governance Listing Standards
In accordance with Section 303A.12 (a) of the New York Stock Exchange Listed Company Manual, the Funds Annual CEO Certification certifying compliance with NYSEs Corporate Governance Listing Standards was submitted to the Exchange on October 10, 2019 as part of its Annual Written Affirmation.
40
TCW Strategic Income Fund, Inc.
Dividend Reinvestment Plan
Shareholders who wish to add to their investment may do so by making an election to participate in the Dividend Reinvestment Plan (the Plan). Under the Plan, your dividend is used to purchase Fund shares on the open market whenever shares, including the related sales commission, are selling below the Funds net asset value per share. You will be charged a pro-rata portion of brokerage commissions on open-market purchases under the Plan. If the market price, including commission, of Fund shares is above the Funds net asset value per share, you will receive shares at a price equal to the higher of the Funds net asset value per share on the payment date or 95% of the closing market price of Fund shares on the payment date. Generally, for tax purposes, shareholders participating in the Plan will be treated as having received a distribution from the Fund in cash equal to the value of the shares purchased from them under the Plan.
To enroll in the Plan, if your shares are registered in your name, write to Computershare, P.O. Box #50500, Louisville, KY 40233, or call toll free at (866) 227-8179. If your shares are held by a brokerage firm, please call your broker. If you participate in the Plan through a broker, you may not be able to transfer your shares to another broker and continue to participate in the Plan if your new broker does not permit such participation. If you no longer want to participate in the Plan, please contact Computershare or your broker. You may elect to continue to hold shares previously purchased on your behalf or to sell your shares and receive the proceeds, net of any brokerage commissions. If you need additional information or assistance, please call our investor relations department at (877) 829-4768 or visit our website at www.tcw.com. As always, we would be pleased to accommodate your investment needs.
Distribution Policy
The Fund has a net investment income-based distribution policy. The policy is to pay quarterly distributions out of the Funds accumulated undistributed net investment income and/or other sources subject to the requirements of the 1940 Act and Sub-chapter M of the Code.
Distribution policies are a matter of Board discretion and may be modified or terminated at any time without prior notice. Any such change or termination may have an adverse effect on the market price for the Funds shares.
You should not draw any conclusions about the Funds investment performance from the amount of the quarterly distribution or from the terms of the Funds distribution policy.
41
TCW Strategic Income Fund, Inc.
TSIart9445 6/30/20
Item 2. | Code of Ethics. |
Not required for this filing.
Item 3. | Audit Committee Financial Expert. |
Not required for this filing.
Item 4. | Principal Accountant Fees and Services. |
Not required for this filing.
Item 5. | Audit Committee of Listed Registrants. |
Not required for this filing.
Item 6. | Investments. |
(a) | The Schedule of Investments is included as part of the Report to Shareholders filed under Item 1 of this Form N-CSR. |
(b) | Not applicable. |
Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
Not required for this filing.
Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
Not required for this filing.
Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
None.
Item 10. | Submission of Matters to a Vote of Security Holders. |
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrants Board of Directors.
Item 11. | Controls and Procedures. |
(a) | The Chief Executive Officer and Principal Financial and Accounting Officer have concluded that the Registrants disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the 1940 Act)) provide reasonable assurances that material information relating to the |
Registrant is made known to them by the appropriate persons as of a date within 90 days of the filing date of this report, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934, as amended. |
(b) | There were no changes in the Registrants internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrants internal control over financial reporting. |
Item 12. | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies. |
Not applicable.
Item 13. | Exhibits. |
(a)(1) | Not required for this filing. |
(a)(2) |
(a)(3) | Not applicable. |
(a)(4) | Not applicable. |
(b) |
(c) | Not required for this filing. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) |
TCW Strategic Income Fund, Inc. | |
By (Signature and Title) |
/s/ David S. DeVito | |
David S. DeVito | ||
President and Chief Executive Officer | ||
Date |
August 27, 2020 |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By (Signature and Title) |
/s/ David S. DeVito | |
David S. DeVito | ||
President and Chief Executive Officer | ||
Date |
August 27, 2020 | |
By (Signature and Title) |
/s/ Richard M. Villa | |
Richard M. Villa | ||
Treasurer and Principal Financial and Accounting Officer | ||
Date |
August 27, 2020 |
EX-99.CERT
I, David S. DeVito, certify that:
1. | I have reviewed this report on Form N-CSR of TCW Strategic Income Fund, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) for the Registrant and have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officers and I have disclosed to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize, and report financial information; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: August 27, 2020 |
/s/ David S. DeVito | |
David S. DeVito | ||
President and Chief Executive Officer |
I, Richard M. Villa, certify that:
1. | I have reviewed this report on Form N-CSR of TCW Strategic Income Fund, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) for the Registrant and have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officers and I have disclosed to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize, and report financial information; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: August 27, 2020 |
/s/ Richard M. Villa | |
Richard M. Villa | ||
Treasurer and Principal Financial and Accounting Officer |
EX-99.906CERT
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of TCW Strategic Income Fund, Inc. do hereby certify, to such officers knowledge, that:
The semi-annual report on Form N-CSR of TCW Strategic Income Fund, Inc. for the period ended June 30, 2020 (the Form N-CSR) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of TCW Strategic Income Fund, Inc.
Date: August 27, 2020 |
/s/ David S. DeVito |
|||||||
David S. DeVito |
||||||||
President and Chief Executive Officer |
||||||||
/s/ Richard M. Villa |
||||||||
Richard M. Villa |
||||||||
Treasurer and Principal Financial and Accounting Officer |
A signed original of this written statement required by Section 906 has been provided to TCW Strategic Income Fund, Inc. and will be retained by TCW Strategic Income Fund, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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