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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to             

Commission File Number 001-34879

 

 

Nuveen Diversified Commodity Fund

(Exact name of registrant as specified in its charter)

 

Delaware   27-2048014
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
333 West Wacker Drive
Chicago Illinois
  60606
(Address of principal executive offices)   (Zip Code)

(877) 827-5920

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨      Accelerated filer   x
Non-accelerated filer   ¨    (Do not check if smaller reporting company)   Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 5, 2014, the registrant had 9,157,040 shares outstanding.

 

 

 


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

TABLE OF CONTENTS

 

         Page No.  
PART I. FINANCIAL INFORMATION   
Item 1.    Financial Statements:  
   Schedule of Investments at September 30, 2014 (Unaudited)     3   
   Statements of Financial Condition at September 30, 2014 (Unaudited) and December 31, 2013     9   
   Statements of Operations (Unaudited) for the three months ended September 30, 2014 and September  30, 2013 and for the nine months ended September 30, 2014 and September 30, 2013     10   
   Statements of Changes in Shareholders’ Capital for the nine months ended September 30, 2014 (Unaudited) and the year ended December 31, 2013     11   
   Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2014 and September 30, 2013     12   
   Notes to Financial Statements (Unaudited)     13   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations     27   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk     41   
Item 4.    Controls and Procedures     44   
PART II. OTHER INFORMATION  
Item 1.    Legal Proceedings     46   
Item 1A.    Risk Factors     46   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds     46   
Item 3.    Defaults Upon Senior Securities     46   
Item 4.    Mine Safety Disclosures     46   
Item 5.    Other Information     46   
Item 6.    Exhibits     47   
Signatures     48   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

NUVEEN DIVERSIFIED COMMODITY FUND

SCHEDULE OF INVESTMENTS (Unaudited)

September 30, 2014

Investments

 

 
 
Principal
Amount (000)
  
  
   Description      Coupon        Maturity         Ratings(1)         Value   
   Short-Term Investments           
   U.S. Government and Agency Obligations           
      $    8,500       U.S. Treasury Bills      0.000     10/16/14         Aaa       $ 8,499,966   
  9,500       U.S. Treasury Bills      0.000     11/13/14         Aaa         9,499,829   
  9,500       U.S. Treasury Bills      0.000     12/11/14         Aaa         9,499,715   
  5,000       U.S. Treasury Bills      0.000     1/08/15         Aaa         4,999,760   
  6,000       U.S. Treasury Bills      0.000     2/05/15         Aaa         5,999,526   
  10,000       U.S. Treasury Bills      0.000     3/05/15         Aaa         9,998,710   
  15,000       U.S. Treasury Bills      0.000     4/02/15         Aaa         14,996,760   
  18,000       U.S. Treasury Bills      0.000     4/30/15         Aaa         17,996,040   
  18,700       U.S. Treasury Bills      0.000     5/28/15         Aaa         18,695,344   
  5,500       U.S. Treasury Bills      0.000     6/25/15         Aaa         5,498,064   
  18,000       U.S. Treasury Bills      0.000     7/23/15         Aaa         17,991,882   
  8,000       U.S. Treasury Bills      0.000     9/17/15         Aaa         7,992,392   

 

 

               

 

 

 
  $  131,700       Total U.S. Government and Agency Obligations
(cost $131,632,979)
           $ 131,667,988   

 

 

               

 

 

 
   Repurchase Agreements           
  $      2,915       Repurchase Agreement with State Street Bank, dated 9/30/14, repurchase price $2,915,465, collateralized by $2,985,000 U.S. Treasury Notes, 2.125%, due 8/15/21, value $2,977,538      0.000     10/01/14         N/A       $ 2,915,465   

 

 

               

 

 

 
   Total Repurchase Agreements (cost $2,915,465)              2,915,465   
             

 

 

 
   Total Short-Term Investments (cost $134,548,444)            $ 134,583,453   
  

 

          

 

 

 

Investments in Derivatives

Futures Contracts outstanding:

 

Commodity
Group
   Contract   Contract
Position(2)
    Contract
Expiration
   

Number

of
Contracts(3)

   

Notional
Amount

at Value(3)

    Unrealized
Appreciation
(Depreciation)
 

Energy

   Crude Oil          
   ICE Brent Crude Oil Futures Contract     Long        November 2014        73      $ 6,910,910      $ (301,211
   ICE Brent Crude Oil Futures Contract     Long        January 2015        73        6,997,780        (287,480
   NYMEX Crude Oil Futures Contract     Long        November 2014        92        8,386,720        (151,500
   NYMEX Crude Oil Futures Contract     Long        January 2015        67        6,013,920        (116,630
  

 

         

 

 

 
   Total Crude Oil             (856,821
  

 

         

 

 

 
   Heating Oil          
   ICE Gas Oil Futures Contract     Long        November 2014        18        1,454,850        (58,850
   ICE Gas Oil Futures Contract     Long        December 2014        5        405,750        (4,000
   NYMEX NY Harbor ULSD Futures Contract     Long        November 2014        48        5,343,408        (201,966
   NYMEX NY Harbor ULSD Futures Contract     Long        January 2015        4        447,485        (33,113
  

 

         

 

 

 
   Total Heating Oil             (297,929
  

 

         

 

 

 

 

3


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

SCHEDULE OF INVESTMENTS (Continued) (Unaudited)

September 30, 2014

Investments in Derivatives (Continued)

Futures Contracts outstanding (Continued):

 

Commodity
Group
   Contract   Contract
Position(2)
    Contract
Expiration
    Number
of
Contracts(3)
    Notional
Amount
at  Value(3)
    Unrealized
Appreciation
(Depreciation)
 

Energy

   Natural Gas          

(continued)

   NYMEX Natural Gas Futures Contract     Long        November 2014        189      $ 7,788,690      $ 359,540   
   NYMEX Natural Gas Futures Contract     Long        January 2015        69        2,933,880        4,450   
  

 

         

 

 

 
   Total Natural Gas             363,990   
  

 

         

 

 

 
   Unleaded Gas          
   NYMEX Gasoline RBOB Futures Contract     Long        November 2014        25        2,559,165        (120,641
   NYMEX Gasoline RBOB Futures Contract     Long        January 2015        24        2,396,520        (109,838
  

 

         

 

 

 
   Total Unleaded Gas             (230,479
  

 

         

 

 

 
   Total Energy             (1,021,239 ) 
  

 

         

 

 

 

Industrial Metals

   Aluminum          
   LME Primary Aluminum Futures Contract     Long        October 2014        81        3,915,337        (304,763
   LME Primary Aluminum Futures Contract     Long        November 2014        80        3,897,000        (277,500
  

 

         

 

 

 
   Total Aluminum             (582,263
  

 

         

 

 

 
   Copper          
   CEC Copper Futures Contract     Long        December 2014        36        2,706,750        (155,738
   CEC Copper Futures Contract     Long        March 2015        8        602,500        (4,400
   LME Copper Futures Contract     Long        October 2014        40        6,710,000        (210,000
   LME Copper Futures Contract     Long        November 2014        21        3,512,250        (162,225
  

 

         

 

 

 
   Total Copper             (532,363
  

 

         

 

 

 
   Nickel          
   LME Nickel Futures Contract     Long        October 2014        31        3,022,686        (473,556
   LME Nickel Futures Contract     Short        October 2014        (8     (780,048     48,672   
  

 

         

 

 

 
   Total Nickel             (424,884
  

 

         

 

 

 
   Zinc          
   LME Zinc Futures Contract     Long        October 2014        19        1,083,831        (44,294
   LME Zinc Futures Contract     Long        November 2014        19        1,085,138        (35,863
  

 

         

 

 

 
   Total Zinc             (80,157
  

 

         

 

 

 
   Lead          
   LME Lead Futures Contract     Long        October 2014        13        680,387        (40,138
   LME Lead Futures Contract     Long        November 2014        13        681,281        (52,812
  

 

         

 

 

 
   Total Lead             (92,950
  

 

         

 

 

 
   Total Industrial Metals             (1,712,617 ) 
  

 

         

 

 

 

Agriculturals

   Corn          
   CBOT Corn Futures Contract     Long        December 2014        321        5,148,038        (745,121
  

 

         

 

 

 
   Soybean          
   CBOT Soybean Futures Contract     Long        November 2014        176        8,036,600        (2,479,371
  

 

         

 

 

 
   Wheat          
   CBOT Wheat Futures Contract     Long        December 2014        73        1,743,788        (235,658
   CBOT Wheat Futures Contract     Long        March 2015        43        1,054,575        (3,975
   KCBT Wheat Futures Contract     Long        December 2014        60        1,674,000        (251,525
   KCBT Wheat Futures Contract     Long        March 2015        36        1,011,150        (65,025
  

 

         

 

 

 
   Total Wheat             (556,183
  

 

         

 

 

 

 

4


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

SCHEDULE OF INVESTMENTS (Continued) (Unaudited)

September 30, 2014

Investments in Derivatives (Continued)

Futures Contracts outstanding (Continued):

 

Commodity
Group
   Contract   Contract
Position(2)
    Contract
Expiration
    Number
of
Contracts(3)
    Notional
Amount
at  Value(3)
    Unrealized
Appreciation
(Depreciation)
 

Agriculturals

   Soybean Meal          

(continued)

   CBOT Soybean Meal Futures Contract     Long        December 2014        97      $ 2,899,330      $ (898,580
   CBOT Soybean Meal Futures Contract     Long        January 2015        16        475,840        (68,840
  

 

         

 

 

 
   Total Soybean Meal             (967,420
  

 

         

 

 

 
   Soybean Oil          
   CBOT Soybean Oil Futures Contract     Long        December 2014        75        1,456,650        (288,774
   CBOT Soybean Oil Futures Contract     Long        January 2015        20        391,800        (1,800
  

 

         

 

 

 
   Total Soybean Oil             (290,574
  

 

         

 

 

 
   Total Agriculturals             (5,038,669 ) 
  

 

         

 

 

 

Precious Metals

   Gold          
   CEC Gold Futures Contract     Long        December 2014        126        15,266,160        (1,197,000
  

 

         

 

 

 
   Silver          
   CEC Silver Futures Contract     Long        December 2014        47        4,008,395        (567,760
  

 

         

 

 

 
   Platinum          
   NYMEX Platinum Futures Contract     Long        January 2015        18        1,170,450        (62,510
  

 

         

 

 

 
   Palladium          
   NYMEX Palladium Futures Contract     Long        December 2014        9        697,635        (96,075
  

 

         

 

 

 
   Total Precious Metals             (1,923,345 ) 
  

 

         

 

 

 

Foods and Fibers

   Cotton          
   ICE Cotton Futures Contract     Long        December 2014        32        981,920        (258,124
   ICE Cotton Futures Contract     Long        March 2015        21        634,725        (60,880
  

 

         

 

 

 
   Total Cotton             (319,004
  

 

         

 

 

 
   Sugar          
   ICE Sugar Futures Contract     Long        March 2015        142        2,616,208        (5,959
  

 

         

 

 

 
   Coffee          
   ICE Coffee C Futures Contract     Long        December 2014        23        1,667,644        42,431   
   LIFFE Coffee Robusta Futures Contract     Long        November 2014        63        1,254,960        13,085   
  

 

         

 

 

 
   Total Coffee             55,516   
  

 

         

 

 

 
   Cocoa          
   ICE Cocoa Futures Contract     Long        December 2014        15        495,000        12,555   
   ICE Cocoa Futures Contract     Long        March 2015        14        456,260        14,370   
  

 

         

 

 

 
   Total Cocoa             26,925   
  

 

         

 

 

 
   Total Foods and Fibers             (242,522 ) 
  

 

         

 

 

 

Livestock

   Live Cattle          
   CME Live Cattle Futures Contract     Long        October 2014        106        6,803,080        179,610   
   CME Live Cattle Futures Contract     Long        December 2014        45        2,942,550        106,086   
   CME Live Cattle Futures Contract     Long        February 2015        2        131,180        2,880   
  

 

         

 

 

 
   Total Live Cattle             288,576   
  

 

         

 

 

 

 

5


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

SCHEDULE OF INVESTMENTS (Continued) (Unaudited)

September 30, 2014

Investments in Derivatives (Continued)

Futures Contracts outstanding (Continued):

 

Commodity
Group
   Contract   Contract
Position(2)
    Contract
Expiration
    Number
of
Contracts(3)
    Notional
Amount
at  Value(3)
    Unrealized
Appreciation
(Depreciation)
 

Livestock

   Lean Hogs          

(continued)

   CME Lean Hog Futures Contract     Long        October 2014        12      $ 518,280      $ 14,280   
   CME Lean Hog Futures Contract     Long         December 2014        74        2,797,940        (11,092
   CME Lean Hog Futures Contract     Long        February 2015        5        180,850        (2,770
  

 

         

 

 

 
   Total Lean Hogs             418   
  

 

         

 

 

 
   Feeder Cattle          
   CME Feeder Cattle Futures Contract     Long        November 2014        15        1,762,875        150,663   
   CME Feeder Cattle Futures Contract     Long        January 2015        7        800,712        25,675   
  

 

         

 

 

 
   Total Feeder Cattle             176,338   
  

 

         

 

 

 
   Total Livestock             465,332   
  

 

         

 

 

 
   Total Futures Contracts outstanding         2,733      $ 147,834,785      $ (9,473,060
  

 

     

 

 

   

 

 

   

 

 

 

Call Options Written outstanding:

 

Commodity
Group
   Contract         Contract
Expiration
    Number
of
Contracts
    Strike
Price
    Value  

Energy

   Crude Oil           
   ICE Brent Crude Oil Futures Options        November 2014        (73   $ 104.0      $ (3,650
   NYMEX Crude Oil Futures Options        October 2014        (80     96.5        (11,200
  

 

          

 

 

 
   Total Crude Oil              (14,850
  

 

          

 

 

 
   Heating Oil           
   NYMEX NY Harbor ULSD Futures Options        October 2014        (35     2.9        (4,851
  

 

          

 

 

 
   Natural Gas           
   NYMEX Natural Gas Futures Options        October 2014        (129     4,150.0        (174,150
  

 

          

 

 

 
   Unleaded Gas           
   NYMEX Gasoline RBOB Futures Options        October 2014        (25     27,000.0        (5,355
  

 

          

 

 

 
   Total Energy              (199,206
  

 

          

 

 

 

Industrial Metals

   Aluminum           
   LME Primary Aluminum Futures Options (4)        October 2014        (81     2,200.0        —     
  

 

          

 

 

 
   Copper           
   LME Copper Futures Options (4)        October 2014        (40     7,250.0        —     
  

 

          

 

 

 
   Nickel           
   LME Nickel Futures Options (4)        October 2014        (11     20,500.0        —     
  

 

          

 

 

 
   Zinc           
   LME Zinc Futures Options (4)        October 2014        (19     2,450.0        —     
  

 

          

 

 

 
   Lead           
   LME Lead Futures Options (4)        October 2014        (13     2,350.0        —     
  

 

          

 

 

 
   Total Industrial Metals              —     
  

 

          

 

 

 

 

6


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

SCHEDULE OF INVESTMENTS (Continued) (Unaudited)

September 30, 2014

Investments in Derivatives (Continued)

Call Options Written outstanding (Continued):

 

Commodity
Group
   Contract         Contract
Expiration
    Number
of
Contracts
    Strike
Price
    Value  

Agriculturals

   Corn           
   CBOT Corn Futures Options        November 2014        (160   $ 390.0      $ (3,000
  

 

          

 

 

 
   Soybean           
   CBOT Soybean Futures Options        October 2014        (11     1,240.0        (69
   CBOT Soybean Futures Options        October 2014        (77     1,060.0        (1,444
  

 

          

 

 

 
   Total Soybean              (1,513
  

 

          

 

 

 
   Wheat           
   CBOT Wheat Futures Options        November 2014        (50     600.0        (1,562
   CBOT Wheat Futures Options        November 2014        (48     680.0        (1,800
   CBOT Wheat Futures Options        November 2014        (8     550.0        (800
  

 

          

 

 

 
   Total Wheat              (4,162
  

 

          

 

 

 
   Soybean Meal           
   CBOT Soybean Meal Futures Options        November 2014        (57     350.0        (4,845
  

 

          

 

 

 
   Soybean Oil           
   CBOT Soybean Oil Futures Options        November 2014        (48     360.0        (4,176
  

 

          

 

 

 
   Total Agriculturals              (17,696 ) 
  

 

          

 

 

 

Precious Metals

   Gold           
   CEC Gold Futures Options        November 2014        (63     1,400.0        (5,040
  

 

          

 

 

 
   Silver           
   CEC Silver Futures Options        November 2014        (24     2,175.0        (3,600
  

 

          

 

 

 
   Total Precious Metals              (8,640 ) 
  

 

          

 

 

 

Foods and Fibers

   Cotton           
   ICE Cotton Futures Options        November 2014        (26     86.0        (390
  

 

          

 

 

 
   Sugar           
   ICE Sugar Futures Options        February 2015        (71     17.8        (35,784
  

 

          

 

 

 
   Coffee           
   ICE Coffee C Futures Options        November 2014        (20     222.5        (39,600
  

 

          

 

 

 
   Cocoa           
   ICE Cocoa Futures Options        November 2014        (15     3,400.0        (10,650
  

 

          

 

 

 
   Total Foods and Fibers              (86,424 ) 
  

 

          

 

 

 

Livestock

   Live Cattle           
   CME Live Cattle Futures Options        October 2014        (97     165.0        (2,910
  

 

          

 

 

 
   Lean Hogs           
   CME Lean Hogs Futures Options        October 2014        (11     117.0        (330
   CME Lean Hogs Futures Options        October 2014        (1     114.0        (50
   CME Lean Hogs Futures Options        December 2014        (33     106.0        (8,910
  

 

          

 

 

 
   Total Lean Hogs              (9,290
  

 

          

 

 

 
   Total Livestock              (12,200 ) 
  

 

          

 

 

 
  

Total Call Options Written outstanding

(premiums received $609,272)

         (1,326 )      $ (324,166 ) 
  

 

      

 

 

     

 

 

 

 

7


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

SCHEDULE OF INVESTMENTS (Continued) (Unaudited)

September 30, 2014

 

 

 

 

(1)    Ratings: Using the highest of Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. rating.
(2)    The Fund expects to invest only in long futures contracts. Some short futures positions arise in futures contracts traded on the London Metal Exchange (“LME”) solely as the result of closing existing long LME futures positions. For every short LME futures contract outstanding, the Fund had previously entered into a long LME futures contract. The London Clearing House is the counterparty for both the long and short position.
(3)    Total number of contracts and notional amount at value include the net effect of LME short futures positions, when applicable.
(4)    For fair value measurement disclosure purposes, these Call Options Written are classified as Level 2. See Notes to Financial Statements, Note 2 – Summary of Significant Accounting Policies, Investment Valuation and Fair Value Measurements for more information.
N/A    Not applicable.
CBOT    Chicago Board of Trade
CEC    Commodities Exchange Center
CME    Chicago Mercantile Exchange
ICE    Intercontinental Exchange
KCBT    Kansas City Board of Trade
LIFFE    London International Financial Futures Exchange
LME    London Metal Exchange
NY Harbor ULSD    New York Harbor Ultra-Low Sulfur Diesel
NYMEX    New York Mercantile Exchange
RBOB    Reformulated Gasoline Blendstock for Oxygen Blending

See accompanying notes to financial statements.

 

8


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

STATEMENTS OF FINANCIAL CONDITION

At September 30, 2014 (Unaudited) and December 31, 2013

 

      September 30, 2014     December 31, 2013  
ASSETS     

Short-term investments, at value
(cost $134,548,444 and $141,217,188, respectively)

   $ 134,583,453      $ 141,238,384   

Deposits with brokers

     24,863,110        25,753,763   

Unrealized appreciation on futures contracts

     974,297        3,905,844   

Other assets

     3,779          
  

 

 

   

 

 

 

Total assets

   $
160,424,639
  
  $ 170,897,991   
  

 

 

   

 

 

 
LIABILITIES     

Call options written, at value
(premiums received $609,272 and $777,236, respectively)

     324,166        1,029,767   

Unrealized depreciation on futures contracts

     10,447,357        2,026,830   

Payable for:

    

Distributions

     1,196,902          

Shares repurchased

            151,538   

Accrued expenses:

    

Management fees

     157,194        178,826   

Independent Committee fees

     13,902        12,935   

Other

     397,646        351,411   
  

 

 

   

 

 

 

Total liabilities

     12,537,167        3,751,307   
  

 

 

   

 

 

 
SHAREHOLDERS’ CAPITAL     

Paid-in capital, unlimited number of shares authorized, 9,206,940 shares issued and outstanding at September 30, 2014 and December 31, 2013

     219,648,412        219,648,412   

Accumulated undistributed earnings (deficit)

     (71,760,940     (52,501,728
  

 

 

   

 

 

 

Total shareholders’ capital (Net assets)

     147,887,472        167,146,684   
  

 

 

   

 

 

 

Total liabilities and shareholders’ capital

   $ 160,424,639      $ 170,897,991   
  

 

 

   

 

 

 

Net assets

   $ 147,887,472      $ 167,146,684   

Shares outstanding

     9,206,940        9,206,940   
  

 

 

   

 

 

 

Net asset value per share outstanding
(net assets divided by shares outstanding)

   $ 16.06      $ 18.15   
  

 

 

   

 

 

 

Market value per share outstanding

   $ 13.79      $ 15.17   
  

 

 

   

 

 

 

 

See accompanying notes to financial statements.

 

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Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

STATEMENTS OF OPERATIONS (Unaudited)

For the Three Months Ended September 30, 2014 and September 30, 2013 and

For the Nine Months Ended September 30, 2014 and September 30, 2013

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Investment Income:

        

Interest

   $      33,081      $      43,001      $    108,684      $    160,054   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Investment Income

     33,081        43,001        108,684        160,054   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Management fees

     501,527        554,419        1,556,703        1,721,258   

Brokerage commissions

     24,809        23,526        89,681        97,537   

Custodian fees and expenses

     26,813        33,893        77,982        89,827   

Independent Committee fees and expenses

     15,905        12,518        43,498        39,642   

Professional fees

     115,721        138,028        368,562        376,365   

Shareholder reporting expenses

     25,786        59,529        101,659        110,499   

Other expenses

     4,461        6,877        14,124        23,773   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     715,022        828,790        2,252,209        2,458,901   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

     (681,941     (785,789     (2,143,525     (2,298,847
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss) from:

        

Short-term investments

            949        17        2,228   

Futures contracts

     (7,002,815     (1,050,382     1,487,968        (16,242,645

Call options written

     898,238        1,136,064        2,969,070        3,586,076   

Change in net unrealized appreciation (depreciation) of:

        

Short-term investments

     10,432        39,863        13,813        21,950   

Futures contracts

     (11,377,594     6,928,496        (11,352,074     2,685,197   

Call options written

     247,519        (54,483     537,637        8,235   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss) and change in net unrealized appreciation (depreciation)

     (17,224,220     7,000,507        (6,343,569     (9,938,959
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (17,906,161   $ 6,214,718      $ (8,487,094   $ (12,237,806
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per weighted-average share

   $ (1.94   $ 0.67      $ (0.92   $ (1.33

Weighted-average shares outstanding

     9,206,940        9,219,240        9,206,940        9,219,240   

 

See accompanying notes to financial statements.

 

10


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

STATEMENTS OF CHANGES IN SHAREHOLDERS’ CAPITAL

For the Nine Months Ended September 30, 2014 (Unaudited) and the Year Ended December 31, 2013

 

                                 
     Nine Months  Ended
September 30, 2014
    Year Ended
December 31, 2013
 

Shareholders’ capital—beginning of period

   $ 167,146,684      $ 197,141,908   

Repurchase of shares

            (186,659
  

 

 

   

 

 

 

Net increase (decrease) in shareholders’ capital resulting from operations:

    

Net investment income (loss)

     (2,143,525     (3,055,568

Net realized gain (loss) from:

    

Short-term investments

     17        3,618   

Futures contracts

     1,487,968        (21,217,789

Call options written

     2,969,070        4,711,122   

Change in net unrealized appreciation (depreciation) of:

    

Short-term investments

     13,813        (9,983

Futures contracts

     (11,352,074     5,662,047   

Call options written

     537,637        (690,565
  

 

 

   

 

 

 

Net income (loss)

     (8,487,094     (14,597,118
  

 

 

   

 

 

 

Distributions to shareholders

     (10,772,118     (15,211,447
  

 

 

   

 

 

 

Shareholders’ capital—end of period

   $ 147,887,472      $ 167,146,684   
  

 

 

   

 

 

 

Shares—beginning of period

     9,206,940        9,219,240   

Repurchase of shares

            (12,300
  

 

 

   

 

 

 

Shares—end of period

     9,206,940        9,206,940   
  

 

 

   

 

 

 

 

 

See accompanying notes to financial statements.

 

11


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

STATEMENTS OF CASH FLOWS (Unaudited)

For the Nine Months Ended September 30, 2014 and September 30, 2013

 

     Nine Months Ended September 30,  
     2014     2013  

Cash flows from operating activities:

    

Net income (loss)

   $ (8,487,094   $ (12,237,806

Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:

    

Purchases of U.S. government and agency obligations

     (127,082,367     (138,568,541

Proceeds from sales and maturities of U.S. government and agency obligations

     135,199,997        158,995,537   

Proceeds from (Purchases of) repurchase agreements, net

     (1,340,185     (1,549,795

Premiums received for call options written

     3,640,803        3,983,067   

Cash paid for call options written

     (839,697     (495,739

Amortization (Accretion)

     (108,684     (159,941

(Increase) Decrease in:

    

Deposits with brokers

     890,653        6,753,956   

Other assets

     (3,779     (1,016

Increase (Decrease) in:

    

Accrued management fees

     (21,632     (29,461

Accrued Independent Committee fees

     967        (7,605

Other accrued expenses

     46,235        38,769   

Net realized (gain) loss from:

    

Short-term investments

     (17     (2,228

Call options written

     (2,969,070     (3,586,076

Change in net unrealized (appreciation) depreciation of:

    

Short-term investments

     (13,813     (21,950

Futures contracts

     11,352,074        (2,685,197

Call options written

     (537,637     (8,235
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     9,726,754        10,417,739   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Cash paid for shares repurchased

     (151,538       

Cash distributions paid to shareholders

     (9,575,216     (10,417,739
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (9,726,754     (10,417,739
  

 

 

   

 

 

 

Net increase (decrease) in cash

              

Cash—beginning of period

              
  

 

 

   

 

 

 

Cash—end of period

   $      $   
  

 

 

   

 

 

 

 

See accompanying notes to financial statements.

 

12


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Unaudited)

September 30, 2014

 

1. Organization

Fund Information

The Nuveen Diversified Commodity Fund (the “Fund”) was organized as a Delaware statutory trust on December 7, 2005, to operate as a commodity pool. Nuveen Commodities Asset Management, LLC, the Fund’s manager (“NCAM” or the “Manager”), a wholly-owned subsidiary of Nuveen Investments, Inc. (“Nuveen Investments”), is a Delaware limited liability company registered as a commodity pool operator with the Commodity Futures Trading Commission (the “CFTC”) and is a member of the National Futures Association (the “NFA”). The Fund commenced operations on September 27, 2010, with its initial public offering. The Fund operates pursuant to a Second Amended and Restated Trust Agreement dated as of March 30, 2012 (the “Trust Agreement”). The Fund’s shares represent units of fractional undivided beneficial interest in, and ownership of, the Fund. The Fund’s shares trade on the NYSE MKT under the ticker symbol “CFD.” The Fund is not a mutual fund, a closed-end fund, or any other type of “investment company” within the meaning of the Investment Company Act of 1940, as amended, and is not subject to regulation thereunder.

Investment Adviser

The Manager has selected its affiliate, Gresham Investment Management LLC (“Gresham LLC”), acting through its Near Term Active division (in that capacity, “Gresham” or the “Commodity Sub-adviser”), to manage the Fund’s commodity investment strategy and its options strategy. Gresham LLC is a Delaware limited liability company, the successor to Gresham Investment Management, Inc., formed in July 1992. Gresham LLC is registered with the CFTC as a commodity trading adviser and commodity pool operator, is a member of the NFA and is registered with the Securities and Exchange Commission (the “SEC”) as an investment adviser.

The Manager has selected its affiliate, Nuveen Asset Management, LLC (“Nuveen Asset Management” or the “Collateral Sub-adviser”), to manage the Fund’s collateral invested in cash equivalents, U.S. government securities and other short-term, high grade debt securities. Nuveen Asset Management is a Delaware limited liability company and is registered with the SEC as an investment adviser.

Investment Objectives and Principal Investment Strategies

The Fund’s investment objective is to generate higher risk-adjusted total return than leading commodity market benchmarks. Risk-adjusted total return refers to the income and capital appreciation generated by a portfolio (the combination of which equals its total return) per unit of risk taken, with such risk measured by the volatility of the portfolio’s total returns over a specific period of time. In pursuing its investment objective, the Fund invests directly in a diversified portfolio of commodity futures, forward and options contracts to obtain broad exposure to all principal groups in the global commodity markets. The Fund’s investment strategy has three principal elements:

 

   

An actively managed portfolio of commodity futures and forward contracts utilizing Gresham’s proprietary Tangible Asset Program®, or TAP®, a long-only rules-based commodity investment strategy designed to maintain consistent, fully collateralized exposure to commodities as an asset class;

 

   

An integrated program of writing commodity call options designed to enhance the risk-adjusted total return of the Fund’s commodity investments (TAP® and this options strategy are collectively referred to as TAP PLUSSM); and

 

   

A collateral portfolio of cash equivalents, U.S. government securities and other short-term, high grade debt securities.

 

13


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

2. Summary of Significant Accounting Policies

The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

The accompanying unaudited financial statements were prepared in accordance with U.S. GAAP for interim financial information and with the instructions for Form 10-Q and the rules and regulations of the SEC. In the opinion of management, all material adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the interim period financial statements have been made. Interim period results are not necessarily indicative of results for a full-year period. These financial statements and the notes thereto should be read in conjunction with the Fund’s financial statements included in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2013.

Basis of Accounting

The accompanying financial statements have been prepared in conformity with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.

Futures Contracts

The Fund invests in commodity futures contracts. Upon execution of a futures contract, the Fund is obligated to deposit cash or eligible securities, also known as “initial margin,” into an account at its clearing broker. Generally investments in futures contracts also obligate the investor and the clearing broker to settle monies on a daily basis representing changes in the prior days “mark-to-market” of the open contracts. If the Fund has unrealized appreciation the clearing broker would credit the Fund’s account with an amount equal to appreciation and conversely if the Fund has unrealized depreciation the clearing broker would debit the Fund’s account with an amount equal to depreciation. These daily cash settlements are also known as “variation margin.” In lieu of posting variation margin daily, the Fund has deposited cash with the clearing broker, generally representing approximately twice the required initial margin to cover the initial margin and the daily changes in the market value of its futures investments. Cash held by the clearing broker to cover both margin requirements on open futures contracts is recognized as “Deposits with brokers” on the Statements of Financial Condition.

During the period the futures contract is open, changes in the value of the contract are recognized as an unrealized gain or loss by “marking-to-market” on a daily basis to reflect the changes in market value of the contract, which are recognized as a component of “Unrealized appreciation or depreciation on futures contracts” on the Statements of Financial Condition and “Change in net unrealized appreciation (depreciation) of futures contracts” on the Statements of Operations. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract on the closing date and the value of the contract when originally entered into, which is recognized as a component of “Net realized gain (loss) from futures contracts” on the Statements of Operations.

The Fund expects to invest only in long futures contracts. Some short futures positions may arise in futures contracts traded on the London Metal Exchange (“LME”) solely as the result of closing existing long LME futures positions. For every short LME futures contract outstanding, the Fund had previously entered into a long futures contract. The LME Clearing House is the counterparty for both the long and short positions.

 

14


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

2. Summary of Significant Accounting Policies (Continued)

 

Risks of investments in commodity futures contracts include possible adverse movement in the price of the commodities underlying the contracts, the possibility that there may not be a liquid secondary market for the contracts and the possibility that a change in the value of the contract may not correlate with a change in the value of the underlying commodities.

The average number of futures contracts outstanding during the nine months ended September 30, 2014 and the fiscal year ended December 31, 2013 was as follows:

 

     Nine Months Ended
September 30, 2014
     Year Ended
December 31, 2013
 

Average number of futures contracts outstanding*

     2,809         3,076   
  

 

 

    

 

 

 

 

* The average number of contracts is calculated based on the number of contracts outstanding at the beginning of the fiscal year and at the end of each quarter within the current fiscal year.

Refer to Note 3 – Derivative Instruments and Hedging Activities within these Notes to Financial Statements for further details on futures contracts activity.

Options Contracts

The Fund may write (sell) and purchase options on commodity futures and forward contracts to enhance the Fund’s risk-adjusted total return. When the Fund writes an option, an amount equal to the premium received is recognized as a component of “Call options written, at value” on the Statements of Financial Condition and is subsequently adjusted to reflect the current value of the written option until the option expires or the Fund enters into a closing purchase transaction. The changes in value of the options written during the reporting period are recognized as a component of “Change in net unrealized appreciation (depreciation) of call options written” on the Statements of Operations. When an option is exercised or expires, or the Fund enters into a closing purchase transaction, the difference between the net premium received and any amount paid at expiration or on executing a closing purchase transaction is recognized as a component of “Net realized gain (loss) from call options written” on the Statements of Operations. The Fund, as writer of an option, has no control over whether the underlying instrument may be sold (called) and as a result bears the risk of an unfavorable change in the market value of the instrument underlying the written option. There is also the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the nine months ended September 30, 2014 and the fiscal year ended December 31, 2013, the Fund wrote call options on futures contracts.

The Fund did not purchase options on futures or forward contracts during the nine months ended September 30, 2014 and the fiscal year ended December 31, 2013. The purchase of options involves the risk of loss of all or part of the cash paid for the options (the premium). The market risk associated with purchasing options is limited to the premium paid. The counterparty credit risk of purchasing options, however, needs to take into account the current value of the option, as this is the performance expected from the counterparty.

 

15


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

2. Summary of Significant Accounting Policies (Continued)

 

Transactions in call options written during the nine months ended September 30, 2014 and the fiscal year ended December 31, 2013 were as follows:

 

      Nine Months Ended
September 30, 2014
    Year Ended
December 31, 2013
 
     Number of
Contracts
    Premiums
Received
    Number of
Contracts
    Premiums
Received
 

Outstanding, beginning of period

     1,377      $ 777,236        1,537      $ 974,047   

Options written

     6,903        3,640,803        10,128        5,116,574   

Options terminated in closing purchase transactions

     (3,039     (1,523,530     (5,455     (2,788,807

Options expired

     (2,716     (1,688,023     (3,897     (2,058,351

Options exercised

     (1,199     (597,214     (936     (466,227
  

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding, end of the period

     1,326      $ 609,272        1,377      $ 777,236   
  

 

 

   

 

 

   

 

 

   

 

 

 

The average number of call options written outstanding during the nine months ended September 30, 2014 and the fiscal year ended December 31, 2013 was as follows:

 

     Nine Months Ended
September 30, 2014
     Year Ended
December 31, 2013
 

Average number of call options written outstanding*

     1,359         1,452   
  

 

 

    

 

 

 

 

* The average number of contracts is calculated based on the outstanding number of contracts at the beginning of the fiscal year and at the end of each quarter within the current fiscal year.

Refer to Note 3 – Derivative Instruments and Hedging Activities within these Notes to Financial Statements for further details on options activity.

Forward Contracts

The Fund may enter into forward contracts but did not make any such investments during the nine months ended September 30, 2014 and the fiscal year ended December 31, 2013. A forward contract is an agreement between two parties to purchase or sell a specified quantity of a commodity at or before a specified date in the future at a specified price. Forward contracts are typically traded in the over-the-counter (“OTC”) markets and all details of the contract are negotiated between the counterparties to the agreement. Accordingly, the forward contracts are valued by reference to the contracts traded in the OTC markets.

The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the underlying commodity, establishing an opposite position in the contract and recognizing the profit or loss on both positions simultaneously on the delivery date or, in some instances, paying a cash settlement before the designated date of delivery. The forward contracts are adjusted by the daily fluctuation of the underlying commodity or currency and any gains or losses are recognized on the Statements of Operations as unrealized appreciation or depreciation until the contract settlement date.

Forward contracts are, in general, not cleared or guaranteed by a third party. The Fund may collateralize forward commodity contracts with cash and/or certain securities as indicated on its Statements of Financial Condition or Schedule of Investments, when applicable, and such collateral is held for the benefit of the

 

16


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

2. Summary of Significant Accounting Policies (Continued)

 

counterparty in a segregated account at the custodian to protect the counterparty against non-payment by the Fund. In the event of a default by the counterparty, the Fund will seek return of this collateral and may incur certain costs exercising its right with respect to the collateral.

The Fund remains subject to credit risk with respect to the amount it expects to receive from counterparties, as those amounts are not similarly collateralized by the counterparty. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain only limited recovery or may obtain no recovery in such circumstances.

Participants in trading foreign exchange forward contracts often do not require margin deposits, but rely upon internal credit limitations and their judgments regarding the creditworthiness of their counterparties.

The Fund will enter into forward contracts only with large, well-capitalized and well-established financial institutions. The creditworthiness of each of the firms which is a party to a forward contract is monitored by the Manager.

Netting Agreements

In the ordinary course of business, the Fund has entered into transactions subject to enforceable master repurchase agreements or other similar arrangements (“netting agreements”). Generally, the right to offset in netting agreements allows the Fund to offset any exposure to a specific counterparty with any collateral received or delivered to that counterparty based on the terms of the agreements. The Fund manages its cash collateral and securities collateral on a counterparty basis. As of September 30, 2014 and December 31, 2013, the Fund was not invested in any portfolio securities or derivatives, other than the repurchase agreements further described below, that are subject to netting agreements.

Repurchase Agreements

In connection with transactions in repurchase agreements, it is the Fund’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. If the counterparty defaults, and the fair value of the collateral declines, realization of the collateral may be delayed or limited.

 

17


Table of Contents

NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

2. Summary of Significant Accounting Policies (Continued)

 

The following tables present the repurchase agreements for the Fund, presented on the Statements of Financial Condition as of September 30, 2014 and December 31, 2013, and recognized as a component of “Short-term investments, at value,” that are subject to netting agreements as of the end of each reporting period, and the collateral delivered related to those repurchase agreements.

 

     September 30, 2014  
     Counterparty      Short-Term
Investments,
at Value
     Collateral Pledged
(From)
Counterparty*
    Net
Exposure
 

Repurchase Agreements

     State Street Bank       $ 2,915,465       $ (2,915,465   $   —   
     

 

 

    

 

 

   

 

 

 

 

     December 31, 2013  
     Counterparty      Short-Term
Investments,
at Value
     Collateral Pledged
(From)
Counterparty*
    Net
Exposure
 

Repurchase Agreements

     State Street Bank       $ 1,575,280       $ (1,575,280   $   —   
     

 

 

    

 

 

   

 

 

 

 

* As of September 30, 2014 and December 31, 2013, the value of the collateral pledged from the counterparty exceeded the value of the repurchase agreements. Refer to the Schedule of Investments for details on the repurchase agreements.

Collateral Investments

Currently, approximately 15% of the Fund’s net assets are committed to secure the Fund’s futures contract positions. These assets are placed in a commodity futures account maintained by the Fund’s clearing broker, and are held in high-quality instruments permitted under CFTC regulations.

The Fund’s remaining assets are held in a separate collateral investment account managed by the Collateral Sub-adviser. The Fund’s assets held in the separate collateral account are invested in cash equivalents, U.S. government securities and other high-quality short-term debt securities with final terms not exceeding one year at the time of investment. The collateral portfolio’s debt securities (other than U.S. government securities) are rated at the highest applicable rating as determined by at least one nationally recognized statistical rating organization, or if unrated, judged by the Collateral Sub-adviser to be of comparable quality.

Investment Valuation

Commodity futures contracts and options on commodity futures contracts traded on an exchange will be valued at the final settlement price or official closing price as determined by the principal exchange on which the instruments are traded as supplied by independent pricing services. These investments are generally classified as Level 1 for fair value measurement purposes. OTC commodity futures and forward contracts and options on commodity futures and forward contracts not traded on an exchange will be valued, in order of hierarchy, by independent pricing services, price quotations obtained from counterparty broker-dealers, or through fair valuation methodologies as determined by the Manager. These investments are generally classified as Level 2. Additionally, events may occur after the close of the market, but prior to the determination of the Fund’s net asset value, that may affect the values of the Fund’s investments. In such circumstances, the Manager will determine a fair valuation for such investments that in its opinion is reflective of fair market value. These investments are generally classified as Level 2 or Level 3 depending on the priority of the significant inputs.

 

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NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

2. Summary of Significant Accounting Policies (Continued)

 

Prices of fixed-income securities, including, but not limited to, highly-rated agency discount notes and U.S. Treasury bills, are provided by a pricing service approved by the Fund’s Manager. These securities are generally classified as Level 2. The pricing service establishes a security’s fair value using methods that may include consideration of the following: yields or prices of investments of comparable quality, type of issue, coupon, maturity and rating, market quotes or indications of value from security dealers, general market conditions and other information and analysis, including the obligor’s credit characteristics considered relevant. These securities are generally classified as Level 2 or Level 3 depending on the priority of the significant inputs.

Repurchase agreements are valued at contract amount plus accrued interest, which approximates market value. These securities are generally classified as Level 2.

Fair Value Measurements

Fair value is defined as the price that the Fund would receive upon selling an investment or transferring a liability in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment. A three-tier hierarchy is used to maximize the use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability. Observable inputs are based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Unobservable inputs are based on the best information available in the circumstances. The following is a summary of the three-tier hierarchy of valuation inputs.

Level 1—Inputs are unadjusted and prices are determined by quoted prices in active markets for identical securities.

Level 2—Prices are determined using other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Prices are determined using significant unobservable inputs (including management’s assumptions in determining the fair value of investments).

The inputs or methodologies used for valuing securities are not an indication of the risks associated with investing in those securities. The following is a summary of the Fund’s fair value measurements as of September 30, 2014 and December 31, 2013:

 

    September 30, 2014  
    Level 1     Level 2     Level 3     Total  

Short-Term Investments:

       

U.S. Government and Agency Obligations

  $             —      $ 131,667,988      $         —      $ 131,667,988   

Repurchase Agreements

           2,915,465               2,915,465   

Investments in Derivatives:

       

Futures Contracts*

    (9,473,060                   (9,473,060

Call Options Written**

    (324,166     ***             (324,166
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (9,797,226   $ 134,583,453      $      $ 124,786,227   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

2. Summary of Significant Accounting Policies (Continued)

 

    December 31, 2013  
    Level 1     Level 2     Level 3     Total  

Short-Term Investments:

       

U.S. Government and Agency Obligations

  $      $ 139,663,104      $             —      $ 139,663,104   

Repurchase Agreements

           1,575,280               1,575,280   

Investments in Derivatives:

       

Futures Contracts

    1,879,014                      1,879,014   

Call Options Written

    (779,835     (249,932            (1,029,767
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,099,179      $ 140,988,452      $      $ 142,087,631   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

* Represents net unrealized appreciation (depreciation) as reported in the Schedule of Investments.
** Refer to the Schedule of Investments for a breakdown of call options written classified as Level 2, which is comprised of the Fund’s call options written on the LME.
*** Value equals zero as of the end of the reporting period.

The Manager is responsible for the Fund’s valuation process and has delegated daily oversight of the process to the Manager’s Valuation Committee. The Valuation Committee, pursuant to its valuation policies and procedures, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Manager’s senior management. The Valuation Committee is aided in its efforts by the Manager’s Securities Valuation Team, which is responsible for administering the daily valuation process and applying fair value methodologies as approved by the Valuation Committee. When determining the reliability of independent pricing services for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of the pricing services and monitors the quality of security prices received through various testing reports conducted by the Securities Valuation Team.

For each portfolio instrument that has been fair valued pursuant to the Valuation Committee’s policies, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such testing and fair valuation occurrences are reported to the Manager’s senior management.

Investment Transactions

Investment transactions are recorded on a trade date basis. Realized gains and losses from investment transactions are determined on the specific identification method, which is the same for federal income tax purposes.

Investment Income

Interest income, which reflects the amortization of premiums and includes accretion of discounts for financial reporting purposes, is recorded on an accrual basis.

Brokerage Commissions and Fees

The Fund pays brokerage commissions, including applicable clearing costs, exchange fees, NFA fees, give-up fees, pit brokerage fees and other transaction-related fees and expenses, incurred in connection with its commodity trading activities.

 

20


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NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

2. Summary of Significant Accounting Policies (Continued)

 

Income Taxes

No provision for federal, state, and local income taxes has been made in the accompanying financial statements because the Fund has elected to be classified as a partnership for U.S. federal income tax purposes. Each owner of the Fund’s shares will be required to take into account its allocable share of the Fund’s income, gains, losses, deductions and other items for the Fund’s taxable year.

For all open tax years and all major taxing jurisdictions, the Manager of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Open tax years are those that are open for examination by taxing authorities (i.e., generally the last four tax year ends and the interim tax period since then). Furthermore, the Manager of the Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.

Expense Recognition

All expenses of the Fund are recognized on an accrual basis. The Fund pays all routine and extraordinary costs and expenses of its operations, brokerage expenses, custody fees, transfer agent expenses, professional fees, expenses of preparing, printing and distributing reports, notices, information statements, proxy statements, reports to governmental agencies, and taxes, if any.

Calculation of Net Asset Value

The net asset value per share of the Fund on any given day is computed by dividing the value of all assets of the Fund (including any accrued interest), less all liabilities (including accrued expenses and distributions declared but unpaid), by the total number of shares outstanding.

Distributions

The Fund intends to make regular monthly distributions to its shareholders stated in terms of a fixed cents per share distribution rate. Among other factors, the Manager seeks to establish a distribution rate that roughly corresponds to its projections of the total return that could reasonably be expected to be generated by the Fund over an extended period of time. In the event that the amount of income earned or capital gains realized by the Fund is not sufficient to cover the Fund’s distributions, the Fund may be required to liquidate investments to fund distributions at times or on terms that are disadvantageous to the Fund and its shareholders. As market conditions and portfolio performance may change, the rate of distribution on the shares and the Fund’s distribution policy could change. The Manager reserves the right to change the Fund’s distribution policy and the basis for establishing the rate of the Fund’s monthly distributions, or may temporarily suspend or reduce distributions without a change in policy, at any time and may do so without prior notice to shareholders.

Distributions to shareholders are recorded on the ex-dividend date.

Commitments and Contingencies

Under the Fund’s organizational documents, the Manager, Wilmington Trust Company (the Fund’s Delaware trustee) and the Manager’s Independent Committee members are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts

 

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NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

2. Summary of Significant Accounting Policies (Continued)

 

that provide general indemnifications to other parties. The Fund’s 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, the Fund has not had prior claims or losses pursuant to these contracts and believes the risk of loss to be remote.

Financial Instrument Risk

The Fund utilizes commodity futures and options, whose values are based upon an underlying asset and generally represent future commitments that have a reasonable possibility of being settled in cash or through physical delivery. As of September 30, 2014 and December 31, 2013, the financial instruments held by the Fund were traded on an exchange and are standardized contracts.

Market risk is the potential for changes in the value of the financial instruments traded by the Fund due to market changes, including fluctuations in commodity prices. Investing in commodity futures and forward contracts involves the Fund entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The market risk associated with the Fund’s commitments to purchase commodities will be limited to the gross or face amount of the contracts held. The Fund’s exposure to market risk may be influenced by a number of factors, including changes in international balances of payments and trade, currency devaluations and revaluations, changes in interest and foreign currency exchange rates, price volatility of commodity futures and forwards contracts and market liquidity, weather, geopolitical events and other factors. These factors also affect the Fund’s investments in options on commodity futures and forward contracts. The inherent uncertainty of the Fund’s investments as well as the development of drastic market occurrences could ultimately lead to a loss of all, or substantially all, of investors’ capital.

Credit risk is the possibility that a loss may occur due to failure of a counterparty performing according to the terms of the forwards, futures and option contracts. The Fund may be exposed to credit risk from its investments in commodity futures and forward contracts and options on commodity futures and forward contracts resulting from the clearing house associated with a particular exchange failing to meet its obligations to the Fund. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance of one of their members, which should significantly reduce this credit risk. In cases where the clearing house is not backed by the clearing members (i.e., as in some foreign exchanges), it may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearing member or clearing house will meet its obligations to the Fund.

The commodity markets have volatility risk. The commodity markets have experienced periods of extreme volatility. General market uncertainty and consequent repricing risk have led to market imbalances of sellers and buyers, which in turn have resulted in significant reductions in values of a variety of commodities. Similar future market conditions may result in rapid and substantial valuation increases or decreases in the Fund’s holdings. In addition, volatility in the commodity and securities markets may directly and adversely affect the setting of distribution rates on the Fund’s shares.

3. Derivative Instruments and Hedging Activities

The Fund records derivative instruments at fair value, with changes in fair value recognized on the Statements of Operations.

 

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NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

3. Derivative Instruments and Hedging Activities (Continued)

 

The following tables present the fair value of all derivative instruments held by the Fund as of September 30, 2014 and December 31, 2013, the location of these instruments on the Statements of Financial Condition and the primary underlying risk exposure.

 

       

September 30, 2014

Location on the Statements of Financial Condition

 
Underlying
Risk Exposure
  Derivative
Instrument
 

Asset Derivatives

   

Liability Derivatives

 
    Location   Value     Location   Value  

 

 

Commodity

  Futures Contracts  

Unrealized appreciation on futures contracts

  $
974,297
  
 

Unrealized depreciation on futures contracts

  $ 10,447,357   

Commodity

  Options            Call options written, at value     324,166   

Total

          $ 974,297          $ 10,771,523   

 

       

December 31, 2013

Location on the Statements of Financial Condition

 
Underlying
Risk Exposure
  Derivative
Instrument
 

Asset Derivatives

   

Liability Derivatives

 
    Location   Value     Location   Value  

 

 

Commodity

  Futures Contracts   Unrealized appreciation on futures contracts   $ 3,905,844      Unrealized depreciation on futures contracts   $ 2,026,830   

Commodity

  Options            Call options written, at value     1,029,767   

Total

          $ 3,905,844          $ 3,056,597   

The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized on derivative instruments during the nine months ended September 30, 2014 and September 30, 2013, the location of these instruments on the Statements of Operations and the primary underlying risk exposure.

 

Commodity Risk Exposure   Nine Months Ended
September 30, 2014
   

Nine Months Ended

September 30, 2013

 

Net realized gain (loss) from:

   

Futures contracts

  $ 1,487,968      $ (16,242,645

Call options written

    2,969,070        3,586,076   

Change in net unrealized appreciation (depreciation) of:

   

Futures contracts

  $ (11,352,074   $ 2,685,197   

Call options written

    537,637        8,235   

4. Related Parties

The Manager, the Commodity Sub-adviser and the Collateral Sub-adviser are considered to be related parties to the Fund.

 

23


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NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

4. Related Parties (Continued)

 

For the services and facilities provided by the Manager, the Fund pays the Manager an annual management fee, payable monthly, based on the Fund’s average daily net assets, according to the following schedule:

 

Average Daily Net Assets

   Management Fee  

For the first $500 million

     1.250

For the next $500 million

     1.225   

For the next $500 million

     1.200   

For the next $500 million

     1.175   

For net assets over $2 billion

     1.150   

“Average daily net assets” represents the total assets of the Fund, minus the sum of its total liabilities.

The Manager and the Fund have entered into sub-advisory agreements with the Commodity Sub-adviser and the Collateral Sub-adviser. Both the Commodity Sub-adviser and the Collateral Sub-adviser are compensated for their services to the Fund from the management fees paid to the Manager, and the Fund does not reimburse the Manager for those fees.

5. Share Repurchase Program

On December 21, 2011, the Fund adopted an open-market share repurchase program, pursuant to which it was authorized to repurchase up to 10% of its outstanding common shares (approximately 920,000 shares) in open-market transactions at the Manager’s discretion.

On March 6, 2014, the Fund reauthorized its share repurchase program, pursuant to which it may repurchase up to 10% of its outstanding common shares as of the reauthorization date (approximately 920,000 shares) in open-market transactions at the Manager’s discretion.

Transactions in share repurchases during the nine months ended September 30, 2014 and the fiscal year ended December 31, 2013, were as follows:

 

     Nine Months  Ended
September 30, 2014
    Year Ended
December 31,  2013
 

Shares repurchased

            12,300   
  

 

 

   

 

 

 

Weighted average price per share repurchased

       —      $ 15.16   
  

 

 

   

 

 

 

Weighted average discount per share repurchased

            17.10
  

 

 

   

 

 

 

 

6. Financial Highlights

The following financial highlights relate to investment performance and operations for a Fund share outstanding during the three months and nine months ended September 30, 2014 and September 30, 2013. The Net Asset Value presentation is calculated using average daily shares outstanding. The Ratios to Average Net Assets are calculated using average daily net assets and are annualized for periods less than a full fiscal year. The Total Returns at Net Asset Value and Market Value are based on the change in net asset value and market value,

 

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NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

6. Financial Highlights (Continued)

 

respectively, for a share during the period. An investor’s return and ratios will vary based on the timing of purchasing and selling Fund shares.

 

     Three Months Ended     Nine Months Ended  
     September 30, 2014     September 30, 2013     September 30, 2014     September 30, 2013  

Net Asset Value:

        

Net asset value per share—beginning of period

   $         18.40      $         18.51     

$

        18.15

  

  $         21.38   

Net investment income (loss)

     (.07     (.09     (.23     (.25

Net realized and unrealized gain (loss)

     (1.88     0.77        (.69     (1.07

Distributions

     (0.39     (0.39     (1.17     (1.26
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per share—end of period

   $ 16.06      $ 18.80      $ 16.06      $ 18.80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Market Value:

        

Market value per share—beginning of period

   $ 16.26      $ 17.07      $ 15.17      $ 19.97   
  

 

 

   

 

 

   

 

 

   

 

 

 

Market value per share—end of period

   $ 13.79      $ 16.55      $ 13.79      $ 16.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratios to Average Net Assets:(a)

        

Net investment income (loss)

     (1.70 )%      (1.77 )%      (1.72 )%      (1.67 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

     1.78     1.87     1.81     1.79
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Returns:(b)

        

Based on Net Asset Value

     (10.67 )%      3.66     (5.54 )%      (6.29 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Based on Market Value

     (12.93 )%      (0.78 )%      (2.05 )%      (11.33 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Annualized.
(b) Total Return Based on Net Asset Value is the combination of changes in net asset value per share and the assumed reinvestment of distributions, if any, at net asset value per share on the distribution payment date. The last distribution declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the net asset value per share at the end of the period. Total returns are not annualized.

Total Return Based on Market Value is the combination of changes in the market price per share and the assumed reinvestment of distributions, if any, at the ending market price per share on the distribution payment date. The last distribution declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the ending market price per share at the end of the period. Total returns are not annualized.

7. New Accounting Pronouncement

Financial Accounting Standards Board (“FASB”) Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements

In June 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-08, “Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,”

 

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NUVEEN DIVERSIFIED COMMODITY FUND

NOTES TO FINANCIAL STATEMENTS (Continued) (Unaudited)

September 30, 2014

 

7. New Accounting Pronouncement (Continued)

 

which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. ASU 2013-08 is effective for fiscal years beginning on or after December 15, 2013. The Fund has adopted ASU 2013-08 for its fiscal year end December 31, 2014 as it follows the investment company reporting requirements under U.S. GAAP and therefore follows the accounting and reporting guidance under Topic 946. The adoption of ASU 2013-08 did not have an impact on the Fund’s financial statements or footnote disclosures.

8. Subsequent Events

Purchase and Sale Agreement

On October 1, 2014, TIAA-CREF, a national financial services organization, completed its previously announced acquisition of Nuveen, the parent company of the Manager, the Commodity Sub-adviser and the Collateral Sub-adviser. The transaction has not resulted in any change in the portfolio management of the Fund or in the Fund’s investment objectives or policies.

 

26


Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This information should be read in conjunction with the financial statements and notes to financial statements included in Item 1 of Part I of this Quarterly Report (the “Report”). The discussion and analysis includes forward-looking statements that generally relate to future events or future performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or the negative of these terms or other comparable terminology. These forward-looking statements are based on information currently available to Nuveen Commodities Asset Management, LLC (“NCAM” or the “Manager”), Gresham Investment Management LLC and its Near Term Active division (such division referred to herein as “Gresham” or the “Commodity Sub-adviser”) and Nuveen Asset Management, LLC (“Nuveen Asset Management” or the “Collateral Sub-adviser”) and are subject to a number of risks, uncertainties and other factors, both known and unknown, that could cause the actual results, performance, prospects or opportunities of the Nuveen Diversified Commodity Fund (the “Fund”) to differ materially from those expressed in, or implied by, these forward-looking statements.

You should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws or otherwise, the Fund and the Manager undertake no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.

Introduction

The Fund is a commodity pool which was organized as a Delaware statutory trust on December 7, 2005 and commenced operations on September 27, 2010, with its public offering. The shares of the Fund trade on the NYSE MKT under the ticker symbol “CFD”. Prior to the initial public offering, the Fund was inactive except for matters relating to its organization and registration. The Fund’s investment objective is to generate higher risk-adjusted total return than leading commodity market benchmarks. In pursuing its investment objective, the Fund invests directly in a diversified portfolio of commodity futures and forward contracts to obtain broad exposure to all principal groups in the global commodity markets. The Fund is unleveraged, and the Fund’s commodity contract positions are fully collateralized with cash equivalents and short-term, high grade debt securities. The Fund writes commodity call options seeking to enhance the Fund’s risk-adjusted total return. The Manager focuses on the Bloomberg Commodity Index (“BCOM”, formerly the Dow Jones-UBS Commodity Index) when evaluating the performance of the commodity futures, forwards, and options positions (the “commodity portfolio”) in the Fund’s portfolio.

Results of Operations

The Quarter Ended September 30, 2014—Fund Share Price

The Fund’s shares traded on the NYSE MKT at a price of $13.79 on the close of business on September 30, 2014. This represents a decrease of 15.19% in share price (not including an assumed reinvestment of distributions) from the $16.26 price at which the shares of the Fund traded on the close of business on June 30, 2014. The high and low intra-day share prices for the quarter were $16.30 (July 30, 2014) and $13.46 (September 26, 2014), respectively. During the quarter, the Fund declared distributions totaling $0.390 per share to shareholders, of which $0.130 was paid on October 1, 2014. The remainder was paid during the quarter. The Fund’s cumulative total return on market value for the quarter, which assumes reinvestment of such distributions, was -12.93%. At September 30, 2014, shares of the Fund traded at a 14.13% discount to the Fund’s net asset value of $16.06.

The Quarter Ended September 30, 2013—Fund Share Price

The Fund’s shares traded on the NYSE MKT at a price of $16.55 on the close of business on September 30, 2013. This represents a decrease of 3.05% in share price (not including an assumed reinvestment of distributions)

 

27


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from the $17.07 price at which the shares of the Fund traded on the close of business on June 28, 2013 (the last trading day of the previous quarter). The high and low intra-day share prices for the quarter were $17.60 (September 10, 2013) and $16.04 (August 8, 2013), respectively. During the quarter, the Fund declared distributions totaling $0.390 per share to shareholders, of which $0.130 was paid on October 1, 2013. The remainder was paid during the quarter. The Fund’s cumulative total return on market value for the quarter, which assumes reinvestment of such distributions, was -0.78%. At September 30, 2013, the shares of the Fund traded at a 11.97% discount to the Fund’s net asset value of $18.80.

The Quarter Ended September 30, 2014—Net Assets of the Fund

The Fund’s net assets decreased from $169.4 million at June 30, 2014, to $147.9 million at September 30, 2014, a decrease of $21.5 million. The decrease in the Fund’s net assets was due to a net loss of $17.9 million, in addition to approximately $3.6 million of distributions to shareholders.

The Fund generated a net loss of $17.9 million for the quarter ended September 30, 2014, resulting from net realized losses of $6.1 million, expenses of $0.7 million, and net unrealized depreciation of $11.1 million.

During the quarter ended September 30, 2014, the Fund’s collateral investments generated interest income of $33,081 which represents 0.02% of average net assets for the quarter ended September 30, 2014.

The net asset value per share on September 30, 2014, was $16.06. This represents a decrease of 12.72% in net asset value (not including an assumed reinvestment of distributions) from the $18.40 net asset value as of June 30, 2014. The Fund declared distributions totaling $0.390 per share during the quarter. When an assumed reinvestment of these distributions is taken into account, the cumulative total return for the Fund on net asset value was -10.67% for the quarter ended September 30, 2014.

The Quarter Ended September 30, 2013—Net Assets of the Fund

The Fund’s net assets increased from $170.7 million as of June 30, 2013, to $173.3 million as of September 30, 2013, an increase of $2.6 million. The increase in the Fund’s net assets was due to $0.1 million in net realized gains and $6.9 million in net unrealized appreciation on the Fund’s portfolio during the quarter, a net investment loss of $0.8 million, and $3.6 million of distributions to shareholders.

During the quarter ended September 30, 2013, the Fund’s collateral investments generated interest income of $43,001, which represents 0.02% of average net assets for the quarter ended September 30, 2013.

The net asset value per share on September 30, 2013, was $18.80. This represents an increase of 1.57% in net asset value (not including an assumed reinvestment of distributions) from the $18.51 net asset value as of June 30, 2013. The Fund declared distributions totaling $0.390 per share during the quarter. When an assumed reinvestment of these distributions is taken into account, the cumulative total return for the Fund on net asset value was 3.66% for the quarter ended September 30, 2013.

The Fund generated a net gain of $6.2 million for the quarter ended September 30, 2013, resulting from expenses of $0.8 million, net realized gains of $0.1 million, and net unrealized appreciation of $6.9 million.

The Quarter Ended September 30, 2014—Overall Commodity Market Commentary

The BCOM declined 11.8% during the quarter, as a strengthening U.S. dollar and unfavorable supply-demand dynamics led to widespread losses in commodity contracts during the third quarter of 2014. Anticipation of the U.S. Federal Reserve’s first rate hike prompted a rally in the dollar. Because most commodities are priced in dollars, a stronger dollar makes commodities more expensive, which softens demand and puts downward pressure on commodity prices. At the same time, China announced some disappointing economic data and another stimulus measure, prompting concerns about weakening global demand for raw materials. Additionally, energy and grain commodities began to report oversupply, which weighed on prices.

 

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In this environment, all six commodity groups in the BCOM, as grouped by Gresham, ended the quarter lower. Livestock and industrial metals posted the smallest declines, while agriculture was the weakest performer. Only four individual commodities in the BCOM had positive returns during the quarter: Arabica coffee, live cattle, zinc, and aluminum.

The largest group by weight, energy commodities represented 31.7% of the BCOM at the end of the quarter. With all energy commodities falling during the quarter, the group declined 12.1%. Crude oil suffered a double-digit loss as the dollar gained, demand from Europe and China slowed, and the Organization of the Petroleum Exporting Countries (OPEC) increased production amid booming North American shale oil production. Natural gas prices were dampened by ample storage injections, less cooling demand for the summer, and moderate fall weather forecasts.

Agricultural commodities, as grouped by Gresham, made up 18.6% of the BCOM at the end of the quarter. The group had the biggest losses in the BCOM, down 21.7%. Corn prices dropped to a five-year low on expectations of a record U.S. crop yield with a high percentage of crops rated good or excellent. Abundant supply and favorable crop ratings dragged soybean prices to a four-year low.

The commodities in the industrial metals group comprised 18.0% of the BCOM at the end of the quarter. Performance was mixed among the individual commodities. Reduced stockpiles of aluminum and zinc helped their prices rally early in the quarter. However, those gains were tempered by losses in nickel and copper, which saw tumbling prices on concerns about languishing demand from China. Overall, the industrial metals group declined 4.1% for the quarter.

Gold and silver collectively represented 15.8% of the BCOM at the end of the quarter. Not included in the BCOM are platinum and palladium, which are held in the Fund’s commodity portfolio. All four precious metals commodities declined during the quarter, as a strengthening dollar sapped demand for these commodities as a hedge against dollar weakness. The BCOM’s precious metals group lost 11.3% during the quarter.

Foods and fibers commodities, as grouped by Gresham, made up a combined 9.6% of the BCOM at the end of the quarter. The foods and fibers group tumbled 9.6% during the quarter, with cotton and sugar prices falling but Arabica coffee rallying. Arabica supply continued to shrink as crops were damaged by heat and drought in Brazil, the world’s leading Arabica producer, and by a coffee-plant fungus in Central America.

Livestock is the smallest group, comprising 6.4% of the BCOM at the end of the quarter. Live cattle prices appreciated on concerns about smaller herd sizes and underweight cows. In contrast, lean hogs prices were choppy, ending the quarter lower. Producers were able to offset shortages by bulking up hogs, as lower grain prices this year have reduced the cost of feed. As a result, lean hog supply was larger than expected, causing prices to fall. The BCOM’s livestock group fell 2.2% during the quarter.

The Quarter Ended September 30, 2013—Overall Commodity Market Commentary

Commodity markets were influenced by two major themes during the third quarter of 2013, the anticipation of an earlier-than-expected reduction in the pace of the U.S. Federal Reserve’s asset purchases (known as quantitative easing or QE) and the escalation of geopolitical tension in the Middle East. The broad commodity market rose 2.1% for the quarter, as measured by the BCOM. The strongest performing group was precious metals, followed by industrial metals, energy, and livestock. The foods and fibers group was relatively flat, and agriculture fell during the quarter.

Energy commodities represented 36.7% of the BCOM at the end of the quarter, and were its most significant commodity group by weight. The prices of both Brent and West Texas Intermediate (WTI) crude oil rallied during the quarter as geopolitical turmoil in the Middle East threatened supplies. Heating oil and gasoline also rose. Natural gas, however, declined amid robust inventories and mild weather forecasts.

 

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Agricultural commodities, as grouped by Gresham, made up 20.4% of the BCOM at the end of the quarter. As in the second quarter, corn prices continued to be pressured by expectations for a supply glut as the harvest peaked in the third quarter. Soybean oil also saw declining prices because of high surplus and low demand. In contrast, soybean prices were lifted by concerns about poor crop conditions and low 2012 supply.

Industrial metals represented 16.5% of the BCOM at the end of the quarter. All of the industrial metals advanced during the quarter, led by copper. Robust demand was expected from China, which pledged to increase infrastructure spending and had recently posted better economic data. The continuation of QE and improving unemployment data in the U.S. also supported copper’s gain.

Precious metals represented 12.6% of the BCOM at the end of the quarter. Near-term spot prices indicated high demand for physical gold, at levels not seen since 1999. Individuals in Asian and Middle Eastern countries have been buying physical gold for jewelry and coins/bars, and the perception of gold as a “safe haven” for investors during times of economic uncertainty further contributed to gold’s advance. Silver prices also strengthened, and in fact outperformed gold in August, benefiting from increasing Asian demand and large inflows into silver-oriented exchange traded funds.

Foods and fibers, as grouped by Gresham, made up a combined 8.3% of the BCOM at the end of the quarter. Although cotton and sugar had positive performance for the quarter, it was almost entirely offset by weakness in coffee. Coffee remained in a bear market since mid-May due to ample supply amid favorable crop conditions.

Livestock was the smallest group, comprising 5.6% of the BCOM at the end of the quarter. Demand during the summer grilling season and concerns about supply shortages buoyed lean hog prices. Live cattle prices rallied in August after major food producers discontinued the use of a cattle feed supplement designed to speed weight gain, fueling concerns that declining cattle weights could potentially hurt beef supplies.

The Quarter Ended September 30, 2014—Fund Commodity Portfolio Commentary

The Fund’s commodity portfolio declined 10.3% for the quarter ended September 30, 2014, before considering the expenses of the Fund. The overall commodities market, as measured by the BCOM, lost 11.8% The Fund’s total return on net asset value for the same period, which includes the effect of the Fund’s expenses and the performance of the collateral portfolio and assumes reinvestment of the Fund’s distributions, was -10.67%.

The Fund writes – that is, sells – covered call options on its portfolio’s commodity futures, seeking to limit return volatility, and to provide cash flow to support the Fund’s distributions. Gresham sells exchange-traded commodity call options on approximately 50% of the value of each of the Fund’s commodity futures contracts, when those options are deemed to have sufficient trading volume and liquidity. The Fund receives cash premiums in return.

During the quarter, the Fund sold options on approximately 50% of the value of each commodity position. The Fund’s option-writing activity contributed positively to performance for the quarter and helped reduce the Fund’s volatility, as measured by the standard deviation of return, versus the BCOM. Call options written on the Fund’s lean hogs position and on all energy, agriculture, precious metals, and foods and fibers positions expired out of the money, enabling the Fund to retain all of those premiums.

At the commodity group level, the Fund’s commodity portfolio bested the BCOM on an absolute basis in all six groups.

In the energy group, the Fund and the BCOM performed nearly in line with each other. The Fund’s strategic weighting decisions in regards to crude oil resulted in negative performance relative to the BCOM due to the Fund’s higher weight. However, the Fund benefited from collecting the full option premiums on its energy options contracts, all of which expired without being exercised.

 

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The Fund’s outperformance in the agriculture group was driven by a lower weighting in the group overall, and particularly in corn, as well as favorable contract selection in corn. Additionally, all of the Fund’s option positions expired out of the money, enabling the Fund to retain the full premiums from selling those options.

The Fund’s industrial metals position declined slightly less than the BCOM’s position. The Fund captured less of the rally in aluminum and zinc due to options on these commodities being exercised. However, relative losses were offset by the Fund’s outperformance in copper.

The Fund’s lower weight in precious metals helped the Fund post a smaller decline for the quarter. The Fund’s option strategy had a positive impact on performance as well, as all of the precious metals options expired without being exercised.

On an absolute basis, the Fund’s foods and fibers position slightly outperformed the BCOM’s. However, when the Fund’s strategic weighting decisions are taken into account, these resulted in negative performance relative to the BCOM, due in part to the Fund’s smaller Arabica coffee position was disadvantageous during the quarter’s price rally. Contributing positively to performance was the Fund’s options strategy, as all foods and fibers options expired out of the money and were not exercised.

In the livestock group, the Fund’s higher weight in live cattle contracts, superior contract selection in lean hogs, and lean hogs options that expired out of the money helped the Fund outperform the BCOM. A position in feeder cattle, which rallied during the quarter but isn’t represented in the BCOM, was also advantageous to the Fund’s relative performance.

The Quarter Ended September 30, 2013—Fund Commodity Portfolio Commentary

The Fund’s commodity portfolio returned approximately 4.0% (before considering the expenses of the Fund or the performance of the collateral portfolio), outperforming the BCOM, which returned 2.1% for the quarter. The Fund’s total return on net asset value for the quarter, which includes the effect of the Fund’s expenses, the performance of the collateral portfolio and assumes the reinvestment of the Fund’s distributions, was a gain of 3.66%. At the commodity group level, the Fund outperformed the BCOM on an absolute basis in energy, agriculturals, foods and fibers, industrial metals, and livestock, but underperformed the BCOM in precious metals.

The Fund writes—that is, sells—covered options on its commodity futures, seeking to limit return volatility, and to provide cash flow for the Fund’s distributions. Gresham sells exchange-traded commodity call options on approximately 50% of the value of each of the Fund’s commodity futures contracts, when those contracts are deemed to have sufficient trading volume and liquidity. The Fund receives cash for the related premiums. The Fund’s option-writing activity benefitted Fund performance for the quarter as most of the contracts written went unexercised. For the quarter ended September 30, 2013, the Fund’s option program helped to contribute to the commodity portfolio’s lower volatility when compared to the BCOM, as measured by the standard deviation of return.

The Fund’s energy positions gained approximately 5.1% versus the BCOM’s 2.8%. On a weighted basis, a larger weight in crude oil, which rose during the period, and a smaller weight in natural gas, which fell, drove the Fund’s outperformance over the BCOM. Detracting slightly from relative performance were options positions in WTI that were exercised.

The Fund’s agricultural positions fell approximately 1.9%, while the BCOM’s were down nearly 4.0%. The Fund’s smaller weightings in both corn and soybean oil aided outperformance on a weighted basis. Additionally, the Fund’s corn position benefited from better contract selection and more advantageous timing in rolling some of its futures contracts, as well as the collection of option premiums on contracts that expired without being exercised.

 

 

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In industrial metals, the Fund was up approximately 5.3%, compared to the BCOM position’s 4.3% return. The Fund’s performance in this group was aided by its options strategy, as none of the options written were exercised.

The Fund’s precious metals positions returned approximately 8.5% versus the BCOM’s 9.0%, in part because the Fund’s silver options were exercised, which detracted from absolute Fund performance in silver. However, the Fund slightly outperformed the BCOM on a weighted basis, as the Fund held a 13.7% weight in the group and the BCOM held 12.6%. This relative overweight provided the Fund with greater exposure to the group’s overall gain.

The Fund outperformed the BCOM in foods and fibers, gaining approximately 3.1% versus the BCOM’s 0.9%. The Fund’s underweight to coffee was the main driver of outperformance for the group.

The Fund’s livestock positions, up approximately 4.2%, also outpaced the BCOM’s, up 2.6%. On a weighted basis, the Fund slightly outperformed the BCOM, as the Fund’s larger weighting amplified the positive effect of a rising market.

The Nine Months Ended September 30, 2014—Fund Share Price

The Fund’s shares traded on the NYSE MKT at a price of $13.79 on the close of business on September 30, 2014. This represents a decrease of 9.10% in share price (not including an assumed reinvestment of distributions) from the $15.17 price at which the shares of the Fund traded on the close of business on December 31, 2013. The high and low intra-day share prices for the nine month period were $16.51 (May 23, 2014) and $13.46 (September 26, 2014), respectively. During the nine month period, the Fund declared distributions totaling $1.170 per share to shareholders, of which $0.130 was paid on October 1, 2014. The remainder was paid during the period. The Fund’s cumulative total return on market value for the nine month period, which assumes reinvestment of such distributions, was -2.05%. At September 30, 2014, shares of the Fund traded at a 14.13% discount to the Fund’s net asset value of $16.06.

The Nine Months Ended September 30, 2013—Fund Share Price

The Fund’s shares traded on the NYSE MKT at a price of $16.55 on the close of business on September 30, 2013. This represents a decrease of 17.13% in share price (not including an assumed reinvestment of distributions) from the $19.97 price at which the shares of the Fund traded on the close of business on December 31, 2012. The high and low intra-day share prices for the nine month period were $22.09 (January 23, 2013) and $16.04 (August 8, 2013), respectively. During the nine month period, the Fund declared distributions totaling $1.260 per share to shareholders, of which $0.130 was paid on October 1, 2013. The remainder was paid during the nine month period. The Fund’s cumulative total return on market value for the nine month period, which assumes reinvestment of such distributions, was -11.33%. At September 30, 2013, the shares of the Fund traded at a 11.97% discount to the Fund’s net asset value of $18.80.

The Nine Months Ended September 30, 2014—Net Assets of the Fund

The Fund’s net assets decreased from $167.1 million at December 31, 2013, to $147.9 million at September 30, 2014, a decrease of $19.2 million. The decrease in the Fund’s net assets was due to a net loss of $8.5 million, in addition to approximately $10.7 million of distributions to shareholders.

The Fund generated a net loss of $8.5 million for the nine month period ended September 30, 2014, resulting from interest income of $0.1 million and net realized gains of $4.5 million, offset by expenses of approximately $2.3 million and net unrealized depreciation of $10.8 million.

During the nine month period ended September 30, 2014, the Fund’s collateral investments generated interest income of $108,684, which represents 0.07% of average net assets for the nine month period ended September 30, 2014.

 

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The net asset value per share on September 30, 2014, was $16.06. This represents a decrease of 11.52% in net asset value (not including an assumed reinvestment of distributions) from the $18.15 net asset value as of December 31, 2013. The Fund declared distributions totaling $1.170 per share during the nine month period. When an assumed reinvestment of these distributions is taken into account, the cumulative total return for the Fund on net asset value was -5.54% for the nine month period ended September 30, 2014.

The Nine Months Ended September 30, 2013—Net Assets of the Fund

The Fund’s net assets decreased from $197.1 million as of December 31, 2012, to $173.3 million as of September 30, 2013, a decrease of $23.8 million. The decrease in the Fund’s net assets was due to $12.6 million in net realized losses and $2.7 million in unrealized appreciation on the Fund’s portfolio during the period, a net investment loss of $2.3 million, and $11.6 million of distributions declared to shareholders.

During the nine month period ended September 30, 2013, the Fund’s collateral investments generated interest income of $160,054, which represents 0.09% of average net assets for the nine month period ended September 30, 2013.

The net asset value per share on September 30, 2013, was $18.80. This represents a decrease of 12.07% in net asset value (not including an assumed reinvestment of distributions) from the $21.38 net asset value as of December 31, 2012. The Fund declared distributions totaling $1.260 per share during the nine month period. When an assumed reinvestment of these distributions is taken into account, the cumulative total return for the Fund on net asset value was -6.29% for the nine month period ended September 30, 2013.

The Fund generated a net loss of $12.2 million for the nine month period ended September 30, 2013, resulting from interest income of $0.2 million, expenses of $2.5 million, net realized losses of $12.6 million, and net unrealized appreciation of $2.7 million.

The Nine Months Ended September 30, 2014—Overall Commodity Market Commentary

After rising in the first half of 2014, the broad commodity market gave back all of its gains during a turbulent third quarter. For the nine months ended September 30, 2014, the broad commodity market was down 5.6%, as measured by the BCOM. Performance across the six commodity groups, as grouped by Gresham, was mixed, with a double-digit gain in livestock and a double-digit decline in agriculture.

The energy group lost 4.4%. Crude oil, heating oil, and unleaded gas (RBOB) slumped during the period, while natural gas was up modestly. Crude oil prices were hit hard in the third quarter by the strengthening U.S. dollar, weakening demand, and rising supply.

The worst-performing group in the BCOM, agriculture, dropped 20.2% during the period. After rallying in the first quarter, agriculture commodities as a group declined in the second and third quarters on expectations of oversupply amid ideal growing conditions in the U.S.

The industrial metals group traded nearly flat, down 0.7%, during the period. Concerns about slowing demand from China weighed on prices, especially for copper. However, nickel advanced during the period, as supply was threatened by a mineral ore export ban in Indonesia and economic sanctions in Russia.

The precious metals group fell 3.0% during the period. Gold and silver saw rallies throughout the first half of the year on speculation of higher inflation in the U.S. But, in the third quarter, a rising U.S. dollar and disinflation fears weighed on prices.

A 2.1% gain in the foods and fibers group, as grouped by Gresham, was led by soaring prices in Arabica coffee. Forecasts called for the largest coffee shortage in nine years because of heat and drought in Brazil, the world’s main Arabica supplier.

 

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Livestock, up 17.8%, was the best-performing group in the BCOM during the period. Prices for both live cattle and lean hogs increased during the period. Lean hog prices reached all-time highs early in 2014 as a highly infectious pig virus was expected to decrease supply. Live cattle prices rallied on supply concerns as well, with the harsh winter weather early in 2014 hindering breeding, weight gain, and slaughter.

The Nine Months Ended September 30, 2013—Overall Commodity Market Commentary

The calendar year began on a positive note for the broad commodity market, but prices turned volatile amid global economic uncertainty, geopolitical tensions in the Middle East and North Africa, and speculation about the timing of the U.S. Federal Reserve’s QE tapering. In the BCOM, declines in the first and second quarters (-1.2% and -9.5%, respectively) overwhelmed a slight gain (2.1%) in the third quarter, for an overall loss of 8.6% for the nine-month period ended September 30, 2013. The precious metals, industrials metals, foods and fibers, agriculture and livestock groups fell during the nine month period, while energy appreciated slightly.

Energy commodities represented 36.7% of the BCOM at the end of the nine month period, and were its most significant commodity group by weight. Losses in natural gas, heating oil, and gasoline (RBOB) offset gains in crude oil, resulting in an overall 0.77% return for the energy group.

Agricultural commodities, as grouped by Gresham, made up 20.4% of the BCOM at the end of the nine month period. Soybean and soybean meal rose during the period, but corn, wheat, and soybean oil had much larger declines. Agriculturals lost 9.9% for the period.

Industrial metals represented 16.5% of the BCOM at the end of the nine month period and declined 13.9%, as slowing demand, particularly from China, put downward pressure on the prices of aluminum, copper, nickel, and zinc.

Precious metals represented 12.6% of the BCOM at the end of the nine month period. The group posted the weakest performance in the BCOM, falling 23.3%. Gold and silver prices fell for most of the period, with demand for perceived “safe haven” investments diminishing, but rallied in the third quarter as demand appeared to re-accelerate.

Foods and fibers, as grouped by Gresham, made up a combined 8.3% of the BCOM at the end of the nine month period. Coffee and sugar contracts led the group lower, despite a gain in cotton. The group as a whole fell 10.5%.

Livestock is the smallest group, comprising 5.6% of the BCOM at the end of the nine month period. Rising supply early in the year depressed prices for lean hogs and live and feeder cattle, but stronger summer demand and concerns about tightening supply buoyed prices in the second and third quarters. Against this backdrop, livestock declined 1.9% for the period.

The Nine Months Ended September 30, 2014—Fund Commodity Portfolio Commentary

The Fund’s commodity portfolio fell 4.4% for the nine months ended September 30, 2014, before considering the expenses of the Fund. The overall commodities market, as measured by the BCOM, was down 5.6%. The Fund’s total return on net asset value for the same period, which includes the effect of the Fund’s expenses and the performance of the collateral portfolio and assumes reinvestment of the Fund’s distributions, was -5.54%.

The Fund writes – that is, sells – covered call options on its portfolio’s commodity futures, seeking to limit return volatility, and to provide cash flow to support the Fund’s distributions. Gresham sells exchange-traded commodity call options on approximately 50% of the value of each of the Fund’s commodity futures contracts, when those options are deemed to have sufficient trading volume and liquidity. The Fund receives cash premiums in return.

 

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During the period, the Fund sold options on approximately 50% of the value of each commodity position. The Fund’s option-writing activity detracted slightly from performance for the period, but premiums collected on other call options helped reduce the Fund’s volatility, as measured by the standard deviation of return, versus the BCOM.

At the commodity group level, the Fund’s commodity portfolio outperformed the BCOM on an absolute basis in precious metals, livestock, and agriculture. The foods and fibers group was the Fund’s largest underperformer on an absolute basis, while industrial metals and energy marginally lagged. When the Fund’s strategic weighting decisions are taken into account they resulted in positive performance relative to the BCOM in all commodity groups except for food and fibers.

The Fund’s energy position performed nearly in line with the BCOM’s position on an absolute basis. When the Fund’s strategic weighting decisions are taken into account, they resulted in positive performance relative to the BCOM, due mostly to the Fund’s crude oil and unleaded gas positions.

In the agriculture group, the Fund outperformed the BCOM. The Fund’s lower weights in corn and soybean oil, both of which saw declining prices during the period, added to relative gains.

Although it underperformed the BCOM on an absolute basis, the Fund’s strategic weighting decisions in regards to its industrial metals position had a positive impact on relative performance. The Fund’s lower weight in New York copper contracts was beneficial amid falling copper prices.

The Fund’s precious metals position outperformed the BCOM. Silver prices traded lower over the period, and the Fund’s smaller weight in silver contracts contributed positively to relative returns.

Relative underperformance in the Fund’s foods and fibers position was driven by an underweight in coffee contracts, as the Fund had less exposure than the BCOM to coffee’s substantial rally over the period.

In the livestock group, the Fund’s relative results benefited primarily from the Fund’s exposure to feeder cattle contracts, which performed well during the period and are not represented in the BCOM.

The Nine Months Ended September 30, 2013—Fund Commodity Portfolio Commentary

The Fund lost approximately 5.3% for the nine month period (before considering the expenses of the Fund or the performance of the collateral portfolio), outperforming the BCOM, which fell 8.6%. The Fund’s total return on net asset value for the quarter, which includes the effect of the Fund’s expenses, the performance of the collateral portfolio, and assumes the reinvestment of the Fund’s distributions, was a loss of 6.29%. At the commodity group level, the Fund outperformed the BCOM on an absolute basis in all six groups.

The Fund writes—that is, sells—covered options on its commodity futures, seeking to limit return volatility, and to provide cash flow for the Fund’s distributions. Gresham sells exchange-traded commodity call options on approximately 50% of the value of each of the Fund’s commodity futures contracts, when those contracts are deemed to have sufficient trading volume and liquidity. The fund receives cash for the related premiums. The Fund’s option-writing activity benefitted fund performance for the period as most of the contracts written went unexercised. For the nine month period ended September 30, 2013, the Fund’s option program helped to contribute to the commodity portfolio’s lower volatility when compared to the BCOM, as measured by the standard deviation of return.

The Fund’s energy group positions rose approximately 4.3% during the nine month period versus the BCOM’s increase of 0.8%. A smaller weight in the natural gas position, which declined during the period, contributed the most to weighted performance. An overweight in crude oil, which rallied, also added to relative outperformance on a weighted basis.

Agricultural holdings were down approximately 4.5% in the Fund during the nine month period, losing less than the 9.4% decline in the BCOM. Although the Fund’s corn and wheat positions had negative absolute

 

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performance, a smaller weight in these contracts aided relative performance. This group had the largest contribution to outperformance.

In industrial metals, the Fund’s positions fell approximately 12.0% during the nine month period compared to the BCOM’s 13.9% loss. Smaller relative weights in nickel and zinc, which suffered price pressure during the first half of the year, were beneficial to relative performance.

Precious metals were down approximately 21.3% in the Fund and 23.3% in the BCOM and contributed to absolute losses for the nine month period. However, the group had a minimal impact on relative performance.

The Fund’s foods and fibers positions declined approximately 6.9% during the nine month period, while the BCOM dropped 10.5%. The Fund had less exposure to weak performance in coffee and sugar than the BCOM, which bolstered relative performance.

In the livestock group, the Fund’s positions lost approximately 1.5% and the BCOM fell 1.9% during the nine month period. While an overweight position in lean hogs added to performance, live and feeder cattle positions detracted, making the overall effect of the group on relative weighted performance almost neutral.

Fund Total Returns

The following table presents selected total returns for the Fund as of September 30, 2014. Total returns based on market value and net asset value are based on the change in market value and net asset value, respectively, for a share during the period presented. The total returns presented assume the reinvestment of distributions at market value on the distribution payment date for returns based on market value, and at net asset value on the distribution payment date for returns based on net asset value. The last distribution declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the market price per share at the end of the period for total returns based on market value, and at the ending net asset value per share at the end of the period for total returns based on net asset value.

 

     Total Returns as of September 30, 2014  
     Cumulative     Average Annual  
        3 Months        Year to Date         1 Year         Since Inception  

Market Value

     -12.93     -2.05     -7.91     -6.25

Net Asset Value

     -10.67     -5.54     -6.83     -2.09

“Since inception” returns present performance for the period since the Fund’s commencement of operations on September 27, 2010.

Returns represent past performance, which is no guarantee of future performance.

Distributions

The Fund makes regular monthly distributions to its shareholders stated in terms of a fixed cents per share distribution rate. The Manager seeks to establish a distribution rate that, among other factors, roughly corresponds to its projections of the total return that could reasonably be expected to be generated by the Fund over an extended period of time. The Fund’s projected or actual distribution rate is not a prediction of what the Fund’s actual total returns will be over any specific future period.

The Fund’s ability to make distributions will depend on a number of factors, including, most importantly, the long-term total returns generated by the Fund’s commodity investments and the gains generated through the Fund’s options strategy. The Fund’s actual financial performance will likely vary significantly from month-to-month and from year-to-year, and there may be periods, perhaps of extended durations of up to several years,

 

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when the distribution rate exceeds the Fund’s actual total returns. In the event that the amount of income earned or capital gains realized by the Fund is not sufficient to cover the Fund’s distributions, the Fund may be required to liquidate investments to fund distributions at times or on terms that could be disadvantageous to the Fund and its shareholders.

Because the Fund’s investment performance since its inception has not been sufficient to cover the distributions made, the Fund has effectively been drawing upon its assets to meet payments prescribed by its distribution policy. The Fund also has paid fees and expenses that have also been drawn from the Fund’s assets.

As market conditions and portfolio performance may change, the rate of distributions on the shares and the Fund’s distribution policy could change. The Manager reserves the right to change the Fund’s distribution policy and the basis for establishing the rate of its monthly distributions, or may temporarily suspend or reduce distributions without a change in policy, at any time and may do so without prior notice to shareholders. The reduction or elimination of the Fund’s distributions could have the effect of increasing the Manager’s management fees.

Commodity Weightings

The table below presents the composition of the Fund’s TAP PLUSSM strategy (Gresham’s long-only rules-based investment strategy, which uses futures and forward contracts to gain exposure to commodities and options to enhance the Fund’s risk-adjusted total return) and the BCOM as of September 30, 2014. The September 30, 2014 composition serves as a guide to how the composition of the Fund’s TAP PLUSSM investment strategy compared to that of the BCOM, a leading commodity market benchmark.

 

          Composition  

Commodity Group

  

Commodity

   TAP PLUSSM         BCOM      

Energy

   Crude Oil      19.16     14.94
   Heating Oil      5.18     3.55
   Natural Gas      7.25     9.68
   Unleaded Gas      3.35     3.48
     

 

 

   

 

 

 
        34.94     31.65
     

 

 

   

 

 

 

Industrial Metals

   Aluminum      5.28     5.50
   Copper      9.15     7.13
   Nickel      1.52     2.63
   Zinc      1.47     2.74
   Lead      0.92     0.00
     

 

 

   

 

 

 
        18.34     18.00
     

 

 

   

 

 

 

Agriculturals

   Corn      3.48     5.74
   Soybean      5.44     4.32
   Wheat      3.71     3.92
   Soybean Meal      2.28     2.05
   Soybean Oil      1.25     2.56
     

 

 

   

 

 

 
        16.16     18.59
     

 

 

   

 

 

 

Precious Metals

   Gold      10.33     12.05
   Silver      2.71     3.79
   Platinum      0.79     0.00
   Palladium      0.47     0.00
     

 

 

   

 

 

 
        14.30     15.84
     

 

 

   

 

 

 

 

37


Table of Contents
          Composition  

Commodity Group

  

Commodity

   TAP PLUSSM         BCOM      

Foods and Fibers

   Cotton      1.09     1.21
   Sugar      1.77     4.30
   Coffee      1.98     4.06
   Cocoa      0.64     0.00
     

 

 

   

 

 

 
        5.48     9.57
     

 

 

   

 

 

 

Livestock

   Live Cattle      6.68     4.15
   Lean Hogs      2.37     2.20
   Feeder Cattle      1.73     0.00
     

 

 

   

 

 

 
        10.78     6.35
     

 

 

   

 

 

 

Total

        100.00     100.00
     

 

 

   

 

 

 

Liquidity and Capital Resources

The Fund pursues its investment objective by taking long positions in commodity futures contracts and writing commodity call options as part of an integrated program designed to enhance the risk-adjusted total return of the Fund’s commodity investments. The Fund’s investment activity in futures contracts and writing commodity call options does not require a significant outlay of capital. The Fund currently expects to post approximately 10% to 25% of its net assets in a margin account with Barclay’s Capital Inc., the Fund’s clearing broker, to cover its futures contracts; the remaining assets are held by the Fund in a separate collateral pool managed by the Collateral Sub-adviser. The Fund believes the higher allocation to initial margin will provide a significant buffer to accommodate variations in the required margin posting that may result from market volatility, potential gains and losses on the contracts, and changes in margin rules, and will minimize the frequency of cash transfers from the Fund’s other collateral pool to meet variation margin requirements. The Fund does not intend to utilize leverage and its commodity contract positions are fully collateralized. Ordinary expenses and distributions are met by cash on hand, although distributions may at times consist of return of capital and may require that the Fund liquidate investments. The Fund earns interest on its continuing investments in cash equivalents, U.S. government securities and other short-term, high grade debt securities. The Fund also generates cash from the premiums it receives when writing call options on the Fund’s futures contracts.

The Fund’s investments in commodity futures contracts and options on commodity futures contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the futures contract can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved to the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Fund from promptly liquidating its commodity futures positions.

The Fund’s shares trade on the NYSE MKT and shares are not redeemed by the Fund in the normal course of business (although the Manager may decide to do so at its discretion), thereby alleviating the need for the Fund to have liquidity available for possible shareholder redemptions. On December 21, 2011, the Fund announced the adoption of an open-market share repurchase program, pursuant to which it is authorized to repurchase an aggregate of up to 10% of its outstanding common shares in open-market transactions. On March 6, 2014, the Fund reauthorized its share repurchase program, pursuant to which it may repurchase up to 10% of its outstanding common shares as of the reauthorization date (approximately 920,000 shares) in open-market transactions, at the Manager’s discretion. Refer to “Part II—Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” in this Report for details of repurchase activity, if any, during the nine months ended September 30, 2014.

 

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Table of Contents

The Fund is unaware of any other trends, demands, conditions or events that are reasonably likely to result in material changes to the Fund’s liquidity needs.

Because the Fund invests in commodity futures contracts, its capital is at risk from changes in the value of these contracts (market risk) or the inability of clearing brokers or counterparties to perform under the terms of the contracts (credit risk).

Market Risk

Investing in commodity futures and forward contracts involves the Fund entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The market risk associated with the Fund’s commitments to purchase commodities will be limited to the gross or face amount of the contracts held.

The Fund’s exposure to market risk may be influenced by a number of factors, including changes in international balances of payments and trade, currency devaluations and revaluations, changes in interest and foreign currency exchange rates, price volatility of commodity futures and forwards contracts and market liquidity, weather, geopolitical events and other factors. These factors also affect the Fund’s investments in options on commodity futures and forward contracts. The inherent uncertainty of the Fund’s investments as well as the development of drastic market occurrences could ultimately lead to a loss of all, or substantially all, of investors’ capital.

Credit Risk

The Fund may be exposed to credit risk from its investments in commodity futures and forward contracts and options on commodity futures and forward contracts resulting from the clearing house associated with a particular exchange failing to meet its obligations to the Fund. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance of one of their members, which should significantly reduce this credit risk. In cases where the clearing house is not backed by the clearing members (i.e., as in some foreign exchanges), it may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearing member or clearing house will meet its obligations to the Fund.

The Fund attempts to minimize market risks, and the Commodity Sub-adviser attempts to minimize credit risks, by abiding by various investment limitations and policies, which include limiting margin accounts, investing only in liquid markets and permitting the use of stop-loss orders. The Commodity Sub-adviser implements procedures which include, but are not limited to:

 

   

Employing the options strategy to limit directional risk (although there is no guarantee that the Fund’s options strategy will be successful);

 

   

Executing and clearing trades only with counterparties the Commodity Sub-adviser believes are creditworthy;

 

   

Limiting the amount of margin or premium required for any one commodity contract or all commodity contracts combined; and

 

   

Generally limiting transactions to contracts which are traded in sufficient volume to permit the efficient taking and liquidating of positions.

A commodity broker, when acting as the Fund’s futures commission merchant, is required by Commodity Futures Trading Commission (“CFTC”) regulations to separately account for and segregate all assets of the Fund relating to domestic futures investments. A commodity broker is not allowed to commingle such assets with other assets of the commodity broker. In addition, CFTC regulations also require a commodity broker, when acting as the Fund’s futures commission merchant, to hold in a “secured” account the assets of the Fund related to foreign commodity futures investments and not commingle such assets with assets of the commodity broker.

 

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Table of Contents

If the Fund purchases over-the-counter (“OTC”) commodity put options, the Fund will be exposed to credit risk that the counterparty to the contract will not meet its obligations. In cases where the Fund purchases OTC commodity put options with a counterparty, the sole recourse of the Fund will be the financial resources of the counterparty to the transaction since there is no clearing house to assume the obligations of the counterparty.

As it relates to the Fund’s assets held as collateral for its investments in commodity futures and forwards contracts, there is credit risk present in the securities used to invest the Fund’s cash. While these consist of eligible cash equivalents and high-quality short-term debt securities, like any investment, these too would be affected by any credit difficulties that might be experienced by their issuers.

Off-Balance Sheet Arrangements

As of September 30, 2014, the Fund has not utilized, nor does it expect to utilize in the future, special purpose entities to facilitate off-balance sheet financing arrangements and has no loan guarantee arrangements or off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Fund. While the Fund’s exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on the Fund’s financial position.

Contractual Obligations

The Fund’s contractual obligations are with the Manager, the Collateral Sub-adviser, the Commodity Sub-adviser, the custodian, the transfer agent, the commodity broker and, to the extent that the Fund enters into OTC transactions, dealers. Management fee payments made to the Manager are calculated as a fixed percentage of the Fund’s net assets. The custodian fee is primarily based on the Fund’s assets and trading activity. The transfer agent fee is calculated based on the Fund’s total number of registered accounts. Commission payments to the commodity broker are on a contract-by-contract or round-turn basis, and payments to forward contract dealers are usually based on a fee or percentage of the notional value of the contract. The Manager cannot anticipate the amount of payments that will be required under these arrangements for future periods, as these payments are based on figures which are not known until a future date. Additionally, these agreements may be terminated by either party for various reasons.

Critical Accounting Policies

The Fund’s critical accounting policies are as follows:

 

   

Preparation of the financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires the application of appropriate accounting rules and guidance, as well as the use of estimates and assumptions. The Fund’s application of these policies involves judgments and actual results may differ from the estimates used.

 

   

The Fund holds a significant portion of its assets in futures contracts, options contracts, and short-term, high grade debt instruments, all of which are recorded on a trade date basis and recognized at fair value in the financial statements, with changes in fair value reported on the Statements of Operations as changes in net unrealized appreciation (depreciation).

 

   

The use of fair value to measure financial instruments, with related unrealized appreciation (depreciation) recognized in earnings in each period, is fundamental to the Fund’s financial statements.

 

   

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

   

Generally, commodity futures and forward contracts and options on commodity futures and forward contracts traded on an exchange will be valued at the final settlement price or official closing price as determined by the principal exchange on which the instruments are traded as supplied by independent

 

40


Table of Contents
 

pricing services. OTC commodity futures and forward contracts and options on commodity futures and forward contracts not traded on an exchange will be valued, in order of hierarchy, by independent pricing services, price quotations obtained from counterparty broker-dealers, or through fair valuation methodologies as determined by the Manager.

 

   

Market quotations for exchange-traded commodity futures and forward contracts and options on commodity futures and forward contracts may not be readily available as a result of significant events, which can include, but are not limited to: trading halts or suspensions, market disruptions, or the absence of market makers willing to make a market in such instruments. In addition, events may occur after the close of the market, but prior to the determination of the Fund’s net asset value, which may affect the values of the Fund’s investments. In such circumstances, the Manager will determine a fair valuation for such investments that in its opinion is reflective of fair market value.

 

   

Realized gains (losses) on closed positions and changes in unrealized appreciation (depreciation) on open positions are determined on a specific identification basis and recognized in the Statements of Operations during the period in which the contract is closed or the changes occur, respectively.

 

   

Interest income, which reflects the amortization of premiums and includes accretion of discounts for financial reporting purposes, is recorded on an accrual basis.

Refer to note 2 of the Fund’s Notes to Financial Statements in “Part 1—Item 1. Financial Statements” of this Report for the summary of significant accounting policies of the Fund.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative Disclosure

The Fund is exposed to commodity price risk through the futures and forward contracts and the options on futures and forward contracts that the Fund invests in as part of its investment strategy. These instruments have been entered into for trading purposes. The following table provides information about the Fund’s futures contracts and options on futures contracts, which are sensitive to changes in commodity prices, as of September 30, 2014. The Fund expects to invest only in long futures contracts. Some short futures positions arise in futures contracts traded on the London Metal Exchange (“LME”) solely as the result of closing existing long LME futures positions. For every short LME futures contract held by the Fund, the Fund had previously entered into a long futures contract. As of September 30, 2014, the Fund has not invested in forward contracts.

Futures Contracts

 

Commodity
Group

 

Contract

  Contract
Position
  Contract
Expiration
    Number
of
Contracts
    Valuation
Price
    Contract
Multiplier
    Notional
Amount
at Value
 

Energy

  Crude Oil            
  ICE Brent Crude Oil Futures Contract   Long     November 2014        73      $ 94.6700        1,000      $ 6,910,910   
  ICE Brent Crude Oil Futures Contract   Long     January 2015        73        95.8600        1,000        6,997,780   
  NYMEX Crude Oil Futures Contract   Long     November 2014        92        91.1600        1,000        8,386,720   
  NYMEX Crude Oil Futures Contract   Long     January 2015        67        89.7600        1,000        6,013,920   
  Heating Oil            
  ICE Gas Oil Futures Contract   Long     November 2014        18        808.2500        100        1,454,850   
  ICE Gas Oil Futures Contract   Long     December 2014        5        811.5000        100        405,750   
  NYMEX NY Harbor ULSD Futures Contract   Long     November 2014        48        2.6505        42,000        5,343,408   
  NYMEX NY Harbor ULSD Futures Contract   Long     January 2015        4        2.6636        42,000        447,485   
  Natural Gas            
  NYMEX Natural Gas Futures Contract   Long     November 2014        189        4.1210        10,000        7,788,690   
  NYMEX Natural Gas Futures Contract   Long     January 2015        69        4.2520        10,000        2,933,880   
  Unleaded Gas            
  NYMEX Gasoline RBOB Futures Contract   Long     November 2014        25        2.4373        42,000        2,559,165   
  NYMEX Gasoline RBOB Futures Contract   Long     January 2015        24        2.3775        42,000        2,396,520   

 

41


Table of Contents

Commodity
Group

 

Contract

  Contract
Position
  Contract
Expiration
    Number
of
Contracts
    Valuation
Price
    Contract
Multiplier
    Notional
Amount
at Value
 

Industrial Metals 

  Aluminum            
  LME Primary Aluminum Futures Contract   Long     October 2014        81      $ 1,933.5000        25      $ 3,915,337   
  LME Primary Aluminum Futures Contract   Long     November 2014        80        1,948.5000        25        3,897,000   
  Copper            
  CEC Copper Futures Contract   Long     December 2014        36        3.0075        25,000        2,706,750   
  CEC Copper Futures Contract   Long     March 2015        8        3.0125        25,000        602,500   
  LME Copper Futures Contract   Long     October 2014        40        6,710.0000        25        6,710,000   
  LME Copper Futures Contract   Long     November 2014        21        6,690.0000        25        3,512,250   
  Nickel            
  LME Nickel Futures Contract   Long     October 2014        31        16,251.0000        6        3,022,686   
  LME Nickel Futures Contract   Short     October 2014        (8     16,251.0000        6        (780,048
  Zinc            
  LME Zinc Futures Contract   Long     October 2014        19        2,281.7500        25        1,083,831   
  LME Zinc Futures Contract   Long     November 2014        19        2,284.5000        25        1,085,138   
  Lead            
  LME Lead Futures Contract   Long     October 2014        13        2,093.5000        25        680,387   
  LME Lead Futures Contract   Long     November 2014        13        2,096.2500        25        681,281   

Agriculturals

  Corn            
  CBOT Corn Futures Contract   Long     December 2014        321        3.2075        5,000        5,148,038   
  Soybean            
  CBOT Soybean Futures Contract   Long     November 2014        176        9.1325        5,000        8,036,600   
  Wheat            
  CBOT Wheat Futures Contract   Long     December 2014        73        4.7775        5,000        1,743,788   
  CBOT Wheat Futures Contract   Long     March 2015        43        4.9050        5,000        1,054,575   
  KCBT Wheat Futures Contract   Long     December 2014        60        5.5800        5,000        1,674,000   
  KCBT Wheat Futures Contract   Long     March 2015        36        5.6175        5,000        1,011,150   
  Soybean Meal            
  CBOT Soybean Meal Futures Contract   Long     December 2014        97        298.9000        100        2,899,330   
  CBOT Soybean Meal Futures Contract   Long     January 2015        16        297.4000        100        475,840   
  Soybean Oil            
  CBOT Soybean Oil Futures Contract   Long     December 2014        75        0.3237        60,000        1,456,650   
  CBOT Soybean Oil Futures Contract   Long     January 2015        20        0.3265        60,000        391,800   

Precious Metals

  Gold            
  CEC Gold Futures Contract   Long     December 2014        126        1,211.6000        100        15,266,160   
  Silver            
  CEC Silver Futures Contract   Long     December 2014        47        17.0570        5,000        4,008,395   
  Platinum            
  NYMEX Platinum Futures Contract   Long     January 2015        18        1,300.5000        50        1,170,450   
  Palladium            
  NYMEX Palladium Futures Contract   Long     December 2014        9        775.1500        100        697,635   

Foods and Fibers 

  Cotton            
  ICE Cotton Futures Contract   Long     December 2014        32        0.6137        50,000        981,920   
  ICE Cotton Futures Contract   Long     March 2015        21        0.6045        50,000        634,725   
  Sugar            
  ICE Sugar Futures Contract   Long     March 2015        142        0.1645        112,000        2,616,208   
  Coffee            
  ICE Coffee C Futures Contract   Long     December 2014        23        1.9335        37,500        1,667,644   
  LIFFE Coffee Robusta Futures Contract   Long     November 2014        63        1,992.0000        10        1,254,960   
  Cocoa            
  ICE Cocoa Futures Contract   Long     December 2014        15        3,300.0000        10        495,000   
  ICE Cocoa Futures Contract   Long     March 2015        14        3,259.0000        10        456,260   

Livestock

  Live Cattle            
  CME Live Cattle Futures Contract   Long     October 2014        106        1.6045        40,000        6,803,080   
  CME Live Cattle Futures Contract   Long     December 2014        45        1.6348        40,000        2,942,550   
  CME Live Cattle Futures Contract   Long     February 2015        2        1.6398        40,000        131,180   
  Lean Hogs            
  CME Lean Hog Futures Contract   Long     October 2014        12        1.0798        40,000        518,280   
  CME Lean Hog Futures Contract   Long     December 2014        74        0.9453        40,000        2,797,940   
  CME Lean Hog Futures Contract   Long     February 2015        5        0.9043        40,000        180,850   
  Feeder Cattle            
  CME Feeder Cattle Futures Contract   Long     November 2014        15        2.3505        50,000        1,762,875   
  CME Feeder Cattle Futures Contract   Long     January 2015        7        2.2878        50,000        800,712   

 

42

Futures Contracts (Continued)


Table of Contents

Commodity Call Options Written

 

Commodity Group

  

Contract

  Contract
Expiration
    Number
of
Contracts
    Strike
Price
    Value  

Energy

   Crude Oil        
   ICE Brent Crude Oil Futures Options     November 2014        (73   $ 104.0      $ (3,650
   NYMEX Crude Oil Futures Options     October 2014        (80     96.5        (11,200
   Heating Oil        
   NYMEX NY Harbor ULSD Futures Options     October 2014        (35     2.9        (4,851
   Natural Gas        
   NYMEX Natural Gas Futures Options     October 2014        (129     4,150.0        (174,150
   Unleaded Gas        
   NYMEX Gasoline RBOB Futures Options     October 2014        (25     27,000.0        (5,355

Industrial Metals

   Aluminum        
   LME Primary Aluminum Futures Options     October 2014        (81     2,200.0        —     
   Copper        
   LME Copper Futures Options     October 2014        (40     7,250.0        —     
   Nickel        
   LME Nickel Futures Options     October 2014        (11     20,500.0        —     
   Zinc        
   LME Zinc Futures Options     October 2014        (19     2,450.0        —     
   Lead        
   LME Lead Futures Options     October 2014        (13     2,350.0        —     

Agriculturals

   Corn