CNS AR22 Digital - Flipbook - Page 98
associated with investments in the energy sector, including commodity
price risk, depletion risk, supply and demand risk, interest-rate
transaction risk, affiliated party risk, limited partner risk and risks of
subordinated MLP units. MLPs which invest in the energy industry
are highly volatile due to significant fluctuation in the prices of energy
commodities as well as political and regulatory developments.
Risks of investing in commodities. An investment in commoditylinked derivative instruments may be subject to greater volatility than
investments in traditional securities, particularly if the instruments
involve leverage. The value of commodity-linked derivative instruments
may be affected by changes in overall market movements, commodity
index volatility, changes in interest rates, or factors affecting a particular
industry or commodity, such as drought, floods, weather, livestock
disease, embargoes, tariffs and international economic, political and
regulatory developments. The use of derivatives presents risks different
from, and possibly greater than, the risks associated with investing
directly in traditional securities. Among the risks presented are market
risk, credit risk, counterparty risk, leverage risk and liquidity risk. The
use of derivatives can lead to losses because of adverse movements in
the price or value of the underlying asset, index or rate, which may be
magnified by certain features of the derivatives. No representation or
warranty is made as to the efficacy of any particular strategy or fund or
the actual returns that may be achieved.
Futures trading is volatile, highly leveraged and may be illiquid.
Investments in commodity futures contracts and options on commodity
futures contracts have a high degree of price variability and are subject
to rapid and substantial price changes. Such investments could incur
significant losses. There can be no assurance that the options strategy
will be successful. The use of options on commodity futures contracts
is to enhance risk-adjusted total returns. The use of options, however,
may not provide any, or may provide only partial, protection from
market declines. The return performance of the commodity futures
contracts may not parallel the performance of the commodities or
indexes that serve as the basis for the options it buys or sells; this basis
risk may reduce overall returns.
Risks of investing in natural resource equities. The market value of
securities of natural resource companies may be affected by numerous
factors, including events occurring in nature, inflationary pressures
and international politics. If a strategy invests significantly in natural
resource companies, there is the risk that the strategy will perform
poorly during a downturn in the natural resource sector.
Risks of investing in preferred securities. Investing in any market
exposes investors to risks. In general, the risks of investing in preferred
securities are similar to those of investing in bonds, including credit
risk and interest-rate risk. As nearly all preferred securities have
issuer call options, call risk and reinvestment risk are also important
considerations. In addition, investors face equity-like risks, such as
deferral or omission of distributions, subordination to bonds and other
more senior debt, and higher corporate governance risks with limited
voting rights. Risks associated with preferred securities differ from risks
inherent with other investments. In particular, in the event of bankruptcy,
a company’s preferred securities are senior to common stock but
subordinated to all other types of corporate debt. It is important to note
that corporate bonds sit higher in the capital structure than preferred
securities and therefore, in the event of bankruptcy, will be senior to
the preferred securities. Municipal bonds are issued and backed by
state and local governments and their agencies, and the interest from
municipal securities is often free from both state and local income taxes.
Treasury securities are issued by the U.S. government and are generally
considered the safest of all bonds since they are backed by the full faith
and credit of the U.S. government as to timely payment of principal and
interest. Preferred securities may be rated below-investment-grade
or may be unrated. Below-investment-grade securities or equivalent
unrated securities generally involve greater volatility of price and risk
of loss of income and principal, and may be more susceptible to real or
perceived adverse economic and competitive industry conditions than
higher-grade securities.
