UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-23289
Angel Oak Strategic Credit Fund
(Exact name of registrant as specified in charter)
One Buckhead Plaza
3060 Peachtree Rd. NW, Suite 500
Atlanta, Georgia 30305
(Address of principal executive offices) (Zip code)
Dory S. Black, Esq., President
One Buckhead Plaza
3060 Peachtree Rd. NW, Suite 500
Atlanta, Georgia 30305
(Name and address of agent for service)
Copy to:
Douglas P. Dick
Stephen T. Cohen
Dechert LLP
1900 K Street NW
Washington, DC 20006
404-953-4900
Registrants telephone number, including area code
Date of fiscal year end: January 31
Date of reporting period: January 31, 2019
Item 1. Reports to Stockholders.
ANNUAL REPORT
January 31, 2019
Angel Oak Strategic Credit Fund
Angel Oak Capital Advisors, LLC
One Buckhead Plaza
3060 Peachtree Road NW
Suite 500
Atlanta, GA 30305
(404) 953-4900
Beginning on January 1, 2021, as permitted by regulations adopted by the U.S. Securities and Exchange Commission, paper copies of the Funds shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from the Fund or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund electronically by contacting your financial intermediary (such as broker-dealer or bank) or, if you are a direct investor, by calling (855) 751-4324.
You may elect to receive all future reports in paper free of charge. If you invest through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. If you invest directly with the Fund, you can call (855) 751-4324 to let the Fund know you wish to continue receiving paper copies of your shareholder reports. Your election to receive reports in paper will apply to all funds held in your account if you invest through a financial intermediary or all funds held with the fund complex if you invest directly with the Fund.
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2018 will go down as one of the most challenging years in the post-crisis period with fewer asset classes beating inflation than in 2008. Fears of a global and domestic growth slowdown, U.S. recession worries, and trade wars all weighed on risk assets. Most importantly, the U.S. Federal Reserve Systems (the Fed) tightening campaign, coupled with the reduction in its bond portfolio (Quantitative Tightening) increased volatility and sent most global asset classes lower on the year, including risk-free alternatives that historically offset any weakness in risk portfolios. Interestingly, the current economic expansion is still robust, driven by historically accommodative monetary policy, generationally low unemployment rates, and tax cuts.
Despite recent headlines regarding an impending recession, we are cautiously optimistic about the economic outlook for 2019 and expect this expansion will continue, becoming the longest since the American Civil War. While it is impossible to predict the exact timing of the end of the expansion, we expect that it will last well beyond 2019 and into 2020. Growth will likely slow into 2019 and 2020 as the impact of tax cuts and fiscal stimulus begins to fade, but we do not foresee a recession in the near term. We do not expect last years pace of robust economic growth to continue, but a solid 2%-3% growth rate is reasonable given the current data.
Market participants are closely watching the shape of the yield curve because it has historically been an excellent indication of potential volatility in the marketplace and a recession. In the past, the Fed has tended to tighten too far too fast sending the U.S. economy into recession. We do ultimately believe the Feds Federal Open Market Committee (FOMC) will eventually tighten the U.S. into recession, but this expansion will last far longer than market participants expect. Recent rhetoric points to the FOMC dramatically slowing their pace of tightening.
As Fed Reserve Chairman Jerome Powell said at the Atlanta Feds economic conference on January 4, 2019, the FOMC will continue to reduce the size of their balance sheet in the form of Quantitative Tightening but will be more data-dependent with respect to increases in the target rate. Most enlightening from the Atlanta Feds economic conference on January 4, 2019, he reiterated, [The Fed] will be prepared to adjust policy quickly and flexibly, and to use all of our tools to support the economy, should that be appropriate to keep the expansion on track, to keep the labor market strong and to keep inflation near 2%. The bottom line is the FOMC is not looking to overtighten in 2019, but to support robust growth over the medium term. We think a pause in 2019 is warranted, and a re-steepening of the U.S. yield curve is quite possible as the growth picture stabilizes.
In early 2018, we improved the credit quality across our fund complex. This higher-quality positioning dampened net asset value (NAV) volatility during the recent market turmoil enabling us to rotate into more attractive assets. Significant opportunities have begun to emerge in various areas of the U.S. structured credit landscape in 2019, and we see the best risk-adjusted returns in legacy and new issue non-agency residential mortgage-backed securities (RMBS), U.S. financials, shorter duration commercial mortgage-backed securities (CMBS), collateralized loan obligations (CLOs), and asset-backed securities (ABS).
Thank you for your continued support.
Respectfully yours,
Sreeniwas V. Prabhu
Chief Executive Officer and Chief Investment Officer
The opinions expressed are subject to change at any time, are not guaranteed and should not be considered investment advice.
Must be accompanied or preceded by a prospectus.
Mutual fund investing involves risk. Principal loss is possible.
The Angel Oak Funds are distributed by Quasar Distributors, LLC.
1
Angel Oak Strategic Credit Fund
1. | How did the Fund perform during the period? |
For the year ended January 31, 2019, the Funds Institutional Shares (ASCIX) returned 4.72%. During the same period, the Funds benchmark, the Bloomberg Barclays Aggregate Bond Index, returned 2.25%.
2. | What were the main contributors to and detractors from the Funds performance during the period? |
Duration and credit strategies benefited the Fund relative to the benchmark. Duration positioning short of the index was a positive contributor to relative performance as interest rates rose for most of the term structure for the year ended January 31, 2019. The 2-year Treasury yield finished up 32 basis points to 2.46% while the 10-year Treasury yield fell 8 basis points to 2.63%, flattening the 2-year/10-year Treasury spread curve (2s/10s Curve) 45 basis points from 62 to 17 basis points.
Credit strategies benefited the Fund relative to the benchmark for the period as risk assets outperformed traditional fixed income sectors within the benchmark. The total returns of each of the Funds credit allocations non-agency residential mortgage-backed securities (NA RMBS), collateralized loan obligations (CLOs), commercial mortgage-backed securities (CMBS), asset backed securities (ABS), and corporate bonds were all positive contributors to the Fund. High income from these positions offset price softness throughout the year resulting in a total return of 4.72% for the Fund.
The Funds largest allocation throughout the year was NA RMBS, which produced a total return of 7.51% on the fiscal year, contributing 217 basis points to Fund performance. The NA RMBS sector had another strong year in 2018 following several years of post-crisis outperformance. The fundamental tailwinds of the broad-based housing recovery have resulted in solid improvement in home equity in the U.S. This has resulted in rising Sharpe Ratios for NA RMBS as it continues to exhibit high current carry and lower spread volatility, even in periods of widening like we saw in late 2018. Across all of fixed income, 2018 was a year defined by supply and NA RMBS was no different. It was the busiest supply year in the post-crisis period, with over $115 billion of new issuance coming to market. In fact, it was the first year since the crisis where the NA RMBS market actually grew in the total amount of bonds outstanding. Heavy supply weighed on spreads across fixed income and prices moved slightly lower on the year within the space. However, that was more than offset by a positive income return from high-quality, floating rate securities. Additionally, the mortgage credit expansion has been prudent with little drift in the credit box. We continue to selectively target new issue RMBS securities in the non-qualified mortgage (non-QM) and credit risk transfer subsectors of the market.
The CMBS allocation produced a total return of 9.11% during the period, contributing 0.59% to Fund performance. CMBS had a very strong start to the year and the Fund chose to reduce its allocation and take profits throughout the first half of the year. This proved to be the right positioning as the sector gave back a good portion of its gains in the second half. We continue to be wary of moving down in credit positioning within the conduit subsector as underwriting standards have continued to drift and the retail workout is still in the early innings. As a result, we have shifted focus towards the single asset/single borrower subsector.
The CLO allocation was a positive contributor to the Fund for the period owing to carry above 10%. The CLO allocation produced a total return of 4.92% during the period, contributing 1.18% to Fund performance. CLO spreads began widening from post-crisis tights set earlier in 2018 amidst heavy supply and general corporate credit spread widening. Taking advantage of wider spreads and a steeper credit curve, the Fund invested in below investment-grade positions from top tier managers. The high, floating rate carry more than offset the price volatility exhibited by the allocation in the fourth quarter of 2018. With the potential of more volatility on the horizon as the U.S. Federal Reserve (the Fed) continues to pull back from their historically accommodative position, we will look for trading opportunities to take gains and re-enter the sector at wider levels.
The Funds allocation to corporate bonds also was a positive contributor to Fund performance. The allocation had a total return of 4.95% contributing 0.94% to Fund performance. The Funds focus within the corporate sector was towards bank and non-bank financials throughout the period. The Funds investments benefitted from the macro tailwinds in the consumer and housing sectors that have served as the bedrock for our investment thesis, which resulted in a significant outperformance over indexed high yield.
3. | What is your outlook heading into 2019, and how is the Fund positioned? |
Despite recent headlines implying an impending recession, we are cautiously optimistic on the economic outlook for 2019 and expect this will be the longest expansion since the American Civil War. While it is impossible to predict the exact timing of the end of the expansion, expectations are it will last well beyond 2019 and into 2020. Growth will likely slow into 2019 and 2020 as the impact of tax cuts and fiscal stimulus begin to fade, but we dont foresee a recession in the near term. We do not expect last years pace of robust economic growth to continue, but a solid 2-3% is reasonable given the current data.
2
The labor market is very healthy at the moment. The unemployment rate is at 3.9% and wages are rising at approximately 3.1% per annum. Payrolls have added an average of 220,000 jobs over the last four months, well ahead of the 100,000 per month required to continue the downtrend in the unemployment rate, which could remain below 4% throughout 2019.
Market participants are closely watching the shape of the yield curve, because it has historically been an excellent indication of potential volatility in the marketplace and a recession. In the past, the Fed has tended to tighten too far too fast sending the U.S. economy into recession. We do ultimately believe the Feds FOMC will eventually tighten the U.S. into recession, but this expansion will last far longer than market participants expect. Recent rhetoric points to the FOMC dramatically slowing their pace of tightening.
As Fed Reserve Chairman Jerome Powell said at the Atlanta Feds economic conference on January 4, 2019, the FOMC will continue to reduce the size of their balance sheet in the form of quantitative tightening but will be more data-dependent with respect to increases in the target rate. Most enlightening, he reiterated, [The Fed] will be prepared to adjust policy quickly and flexibly, and to use all of our tools to support the economy, should that be appropriate to keep the expansion on track, to keep the labor market strong and to keep inflation near 2%. The bottom line is the FOMC is not looking to overtighten in 2019, but to support robust growth over the medium term. We think a pause in 2019 is warranted, and a re-steepening of the U.S. yield curve is quite possible as the growth picture stabilizes.
We see 2019 as a year that will exhibit higher volatility than what we have seen in recent years. However, with rates having rallied substantially from their 2018 highs, high current income should continue to be an important part of any investment portfolio. We will continue to position the Fund in sectors with strong fundamental tailwinds that we believe should outperform if we do see increased volatility.
Past performance is not a guarantee of future results.
Investing involves risk. Principal loss is possible. The Funds Shares will not be listed on an exchange in the foreseeable future, if at all. The Funds derivative investments have risks, including the imperfect correlation between the value of such instruments and the underlying asset, rate or index, which creates the possibility that the loss on such instruments may be greater than the gain in the value of the underlying asset, rate or index; the loss of principal; the possible default of the other party to the transaction; and illiquidity of the derivative investments. The Fund may invest in illiquid securities and restricted securities. Investments in restricted securities could have the effect of increasing the amount of the Funds assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase these securities. The Fund will be subject to risks associated with adverse political and economic developments in foreign countries, including seizure or nationalization of foreign deposits, the imposition of economic sanctions, different legal systems and laws relating to bankruptcy and creditors rights and the potential inability to enforce legal judgments, all of which could cause the Fund to lose money on its investments in non-U.S. securities. Changes in interest rates generally will cause the value of fixed-income instruments held by the Fund to vary inversely to such changes. Below investment grade instruments are commonly referred to as junk or high-yield instruments and are regarded as predominantly speculative with respect to the issuers capacity to pay interest and repay principal. Lower grade instruments may be particularly susceptible to economic downturns. The price paid by the Fund for asset-backed securities, including CLOs, the yield the Fund expects to receive from such securities and the average life of such securities are based on a number of factors, including the anticipated rate of prepayment of the underlying assets. Mortgage-backed securities are subject to the general risks associated with investing in real estate securities; that is, they may lose value if the value of the underlying real estate to which a pool of mortgages relates declines. See the prospectus for a more detailed description of Fund risks.
Definitions:
Basis Point (bps): One hundredth of one percent. Used to denote the percentage change in a financial instrument.
Bloomberg Barclays Aggregate Bond Index: An unmanaged index that measures the performance of the investment-grade universe of bonds issued in the United States. The index includes institutionally traded U.S. Treasury, government-sponsored, mortgage and corporate securities. It is not possible to invest directly in an index.
Duration: Measures a portfolios sensitivity to changes in interest rates. Generally, the longer the duration, the greater the price change relative to interest rate movements.
Sharpe Ratio: A statistical measure that uses standard deviation and excess return to determine reward per unit of risk. A higher Sharpe ratio implies a better historical risk-adjusted performance. The Sharpe ratio has been calculated since inception using the 3-month Treasury bill for the risk-free rate of return.
3
Spread: The difference in yield between a U.S. Treasury bond and a debt security with the same maturity but of lesser quality.
2s/10s Curve: Refers to the divergence between the 10-year US Treasury bond and the 2-year Treasury note. In normal economic circumstances, the yield on the 10-year should be greater than the 2-year, creating a positive spread. This signals some combination of positive future growth expectations, positive future inflation expectations, and basic recognition that more adverse economic events are likelier to transpire over a longer timeframe than a shorter timeframe. Thus investors are compensated for taking on the higher risk of longer-duration bonds in the form of higher yields.
4
Investment Results (Unaudited)
Angel Oak Strategic Credit Fund
Total Return Based on a $50,000 Investment
The chart above assumes an initial investment of $50,000 made on December 26, 2017 (commencement of operations). Returns shown include the reinvestment of all dividends. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions. In the absence of fee waivers and reimbursements, when they are necessary to keep expenses at the expense cap, total return would be reduced. Past performance is not predictive of future performance. Investment return and principal value will fluctuate so that your shares, when repurchased, may be worth more or less than the original cost. Index returns do not reflect the effects of fees or expenses. It is not possible to invest directly in an index.
Average Annual Returns(1)
(For the year ended January 31, 2019)
One Year | Since Inception(2) | |||||||
Angel Oak Strategic Credit Fund Institutional Class |
4.72 | % | 5.33 | % | ||||
Bloomberg Barclays Aggregate Bond Index(3) |
2.25 | % | 1.32 | % |
(1) Return figures reflect any change in price per share and assume the reinvestment of all distributions.
(2) Inception date is December 26, 2017.
(3) The Bloomberg Barclays Aggregate Bond Index measures the performance of the investment-grade, fixed-rate bond market, including government and credit securities, agency pass-through securities, asset-backed securities and commercial mortgage-backed securities. Performance figures include the change in value of the bonds in the index and the reinvestment of interest. The index return does not reflect expenses, which have been deducted from the Funds return. You cannot invest directly in an index; however, an individual can invest in exchange-traded funds or other investments vehicles that attempt to track the performance of a benchmark index.
5
Summary of Fund Expenses (Unaudited)
As a shareholder of the Fund, you incur ongoing costs, including management fees and other expenses of the Fund. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period, and held for the entire period from August 1, 2018 to January 31, 2019.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = $8.60), then multiply the result by the number in the first line under the heading entitled Expenses Paid During the Period to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account value and hypothetical expenses based on the Funds actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Funds actual return. The hypothetical account value and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table below is useful in comparing ongoing costs only and will not help you determine the relative costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Angel Oak Strategic Credit Fund | Beginning Account Value, August 1, 2018 |
Ending Account Value, January 31, 2019 |
Expenses Paid During Period(1) |
Annualized Expense Ratio | ||||||
Institutional Class |
Actual | $1,000.00 | $1,017.60 | $3.81 | 0.75% | |||||
Hypothetical(2) | $1,000.00 | $1,021.42 | $3.82 | 0.75% |
(1) Expenses are equal to the Funds annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days (184) in the most recent six month period and divided by the number of days in the most recent twelve month period (365). The annualized expense ratios reflects fee waiver and expense limitation arrangements, including interest expense, in effect during the period. The Financial Highlights tables in the Funds financial statements, included in the report, also show the gross expense ratios, without such reimbursements.
(2) Hypothetical assumes 5% annual return before expenses.
6
Portfolio Holdings (Unaudited)
The investment objective of Angel Oak Strategic Credit Fund is to seek total return.
* As a percentage of total investments.
7
Angel Oak Strategic Credit Fund
Schedule of Investments
January 31, 2019
Principal Amount |
Value | |||||||
Asset-Backed Securities 13.08% |
||||||||
GSAA Home Equity Trust, Series 2006-15, Class AF6, 5.876%, 9/25/2036 (a) |
$ | 51,983 | $ | 26,781 | ||||
GSAA Home Equity Trust, Series 2006-18, Class AF3A, 5.772%, 11/25/2036 (b) |
170,236 | 94,612 | ||||||
Home Partners of America Trust, Series 2018-1, Class F, 4.858% |
100,000 | 98,991 | ||||||
Morgan Stanley Mortgage Loan Trust, Series 2007-7AX, Class 2A1, 2.630% |
200,592 | 99,806 | ||||||
Mosaic Solar Loan Trust, Series 2019-1A, Class B, 0.000%, 12/21/2043 (c)(e)(f) |
100,000 | 74,000 | ||||||
Mosaic Solar Loan Trust, Series 2018-1A, Class C, 0.000%, 6/22/2043 (c)(e) |
350,000 | 297,904 | ||||||
Mosaic Solar Loans LLC, Series 2017-2A, Class D, 0.000%, 6/22/2043 (c)(e) |
237,714 | 221,132 | ||||||
|
|
|||||||
TOTAL ASSET-BACKED SECURITIES |
913,226 | |||||||
|
|
|||||||
Collateralized Loan Obligations 16.73% |
||||||||
Ares XLIV CLO Ltd., Series 2017-44A, Class E, 10.837% |
500,000 | 467,400 | ||||||
MMCF CLO LLC, Series 2017-1A, Class D, 9.167% |
100,000 | 97,757 | ||||||
Monroe Capital MML CLO VI Ltd., Series 2018-1A, Class E, 9.687% |
250,000 | 233,516 | ||||||
OZLM VI Ltd., Series 2014-6A, Class ES, 11.413% |
300,000 | 280,800 | ||||||
York CLO Ltd., Series 2015-1A, Class F, 10.011% |
100,000 | 89,000 | ||||||
|
|
|||||||
TOTAL COLLATERALIZED LOAN OBLIGATIONS |
1,168,473 | |||||||
|
|
|||||||
Collateralized Mortgage Obligations 33.88% |
||||||||
Alternative Loan Trust, Series 2007-20, Class A1, 3.010% |
338,190 | 223,797 | ||||||
American Home Mortgage Assets Trust, Series 2006-6, Class XP, 1.182%, 12/25/2046 (b)(g) |
1,743,657 | 117,646 | ||||||
American Home Mortgage Investment Trust, Series 2006-3, Class 3A2, 6.750%, 12/25/2036 (a) |
327,013 | 152,006 | ||||||
American Home Mortgage Investment Trust, Series 2006-2, Class 1A2, 2.830% |
453,352 | 203,188 | ||||||
CHL Mortgage Pass-Through Trust, Series 2004-29, Class 1X, 0.524%, 2/25/2035 (b)(g) |
4,205,788 | 74,998 | ||||||
Deephaven Residential Mortgage Trust, Series 2018-1A, Class B1, 4.340%, 12/25/2057 (b)(c) |
200,000 | 197,122 | ||||||
GS Mortgage Securities Trust, Series 2018-HART, Class F, 6.409% |
250,000 | 250,572 | ||||||
HarborView Mortgage Loan Trust, Series 2005-2, Class X, 0.545%, 5/19/2035 (b)(g) |
881,799 | 29,636 | ||||||
JP Morgan Chase Commercial Mortgage Securities Trust, Series 2018-ASH8, Class F, 6.509% |
100,000 | 99,749 | ||||||
RBSSP Resecuritization Trust, Series 2009-10, Class 2A2, 2.000%, 1/26/2037 (b)(c) |
512,585 | 350,096 | ||||||
Residential Accredit Loans, Inc., Trust, Series 2005-QS12, Class A4, 5.500%, 8/25/2035 |
94,067 | 91,348 | ||||||
Residential Asset Securitization Trust, Series 2006-A8, Class 2A7, 6.500%, 8/25/2036 |
312,840 | 191,291 | ||||||
Velocity Commercial Capital Loan Trust, Series 2018-1, Class M6, 7.260%, 4/25/2048 (c) |
226,341 | 226,721 | ||||||
Washington Mutual Pass-Through Certificates Trust, Series 2005-AR1, |
2,850,430 | 61,259 | ||||||
WFRBS Commercial Mortgage Trust, Series 2014-C24, Class C, 4.290%, 11/18/2047 (b) |
100,000 | 96,467 | ||||||
|
|
|||||||
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS |
2,365,896 | |||||||
|
|
See accompanying notes which are an integral part of these financial statements.
8
Angel Oak Strategic Credit Fund
Schedule of Investments (continued)
January 31, 2019
Principal Amount |
Value | |||||||
Corporate Obligations 14.04% |
||||||||
Financial 14.04% |
||||||||
Fidelity & Guaranty Life Holdings, Inc., 5.500%, 5/1/2025 (c) |
$ | 100,000 | $ | 96,750 | ||||
Hunt Cos, Inc., 6.250%, 2/15/2026 (c) |
200,000 | 180,500 | ||||||
Nationstar Mortgage Holdings, Inc., 8.125%, 7/15/2023 (c) |
100,000 | 101,470 | ||||||
Trinitas Capital Management LLC 7.750%, 6/15/2023 (c) |
300,000 | 300,000 | ||||||
WT Holdings, Inc., 7.000%, 4/30/2023 (c) |
300,000 | 301,750 | ||||||
|
|
|||||||
TOTAL CORPORATE OBLIGATIONS |
980,470 | |||||||
|
|
|||||||
Mortgage Backed Securities U.S. Government Agency Issues 11.18% |
||||||||
Federal Home Loan Mortgage Corp., Series 2018-HQA1, Class M2, 4.810% |
200,000 | 198,831 | ||||||
Federal Home Loan Mortgage Corp., Series 2018-HQA1, Class B1, 6.860% |
170,000 | 172,577 | ||||||
Federal National Mortgage Association, Series 2017-C03, Class 1M2, 5.510% |
100,000 | 106,113 | ||||||
Federal National Mortgage Association, Series 2017-C06, Class 1M2, 5.160% |
100,000 | 103,467 | ||||||
Federal National Mortgage Association, Series 2018-C04, Class 2M2, 5.060% |
100,000 | 100,755 | ||||||
Federal National Mortgage Association, Series 2018-C06, Class 2M2, 4.610% |
100,000 | 98,687 | ||||||
|
|
|||||||
TOTAL MORTGAGE BACKED SECURITIES U.S. GOVERNMENT AGENCY ISSUES |
780,430 | |||||||
|
|
|||||||
Shares | ||||||||
Preferred Stocks 4.36% |
||||||||
Real Estate Investment Trust 4.36% |
||||||||
Ready Capital Corp., 6.500%, 4/30/2021 |
12,000 | 304,200 | ||||||
|
|
|||||||
TOTAL PREFERRED STOCKS |
304,200 | |||||||
|
|
|||||||
Short-Term Investments 5.94% |
||||||||
Money Market Funds 5.94% |
||||||||
Fidelity Institutional Money Market Government Portfolio, Institutional Class, 2.270% (h)(i) |
414,769 | 414,769 | ||||||
|
|
|||||||
TOTAL SHORT-TERM INVESTMENTS |
414,769 | |||||||
|
|
|||||||
TOTAL INVESTMENTS 99.21% |
6,927,464 | |||||||
|
|
|||||||
Other Assets in Excess of Liabilities 0.79% |
54,945 | |||||||
|
|
|||||||
NET ASSETS 100.00% |
$ | 6,982,409 | ||||||
|
|
(a) | Step-up bond that pays an initial coupon rate for the first period and then a higher coupon rate for the following periods. Rate disclosed is the rate in effect as of January 31, 2019. |
(b) | Variable Rate Security. The coupon is based on an underlying pool of assets. Rate disclosed is the rate in effect as of January 31, 2019. |
See accompanying notes which are an integral part of these financial statements.
9
Angel Oak Strategic Credit Fund
Schedule of Investments (continued)
January 31, 2019
(c) | Security exempt from registration under Rule 144A or Section 4(a)(2) of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities are determined to be liquid by the Adviser, under the procedures established by the Funds Board of Trustees, unless otherwise denoted. At January 31, 2019, the value of these securities amounted to $3,965,230 or 56.79% of net assets. |
(d) | Variable or Floating Rate Security based on a reference index and spread. Rate disclosed is the rate in effect as of January 31, 2019. |
(e) | Principal Only Security. |
(f) | Security issued on a when-issued basis. On January 31, 2019, the total value of investments purchased on a when-issued basis was $74,000 or 1.06% of net assets. |
(g) | Interest Only Security. |
(h) | Rate disclosed is the seven day yield as of January 31, 2019. |
(i) | All or portion of this security has been pledged as collateral in connection with open futures contracts. |
Schedule of Open Futures Contracts
Short Futures Contracts |
Expiration |
Number of |
Notional |
Unrealized |
||||||||||||
3 Year ERIS Aged Standard Swap Future |
December 2021 | (18 | ) | $ | (1,809,374 | ) | $ | (21,976 | ) | |||||||
4 Year ERIS Aged Standard Swap Future |
March 2022 | (9 | ) | (882,540 | ) | (12,059 | ) | |||||||||
|
|
|||||||||||||||
Total |
$ | (34,035 | ) | |||||||||||||
|
|
See accompanying notes which are an integral part of these financial statements.
10
Statement of Assets and Liabilities
January 31, 2019
Strategic Credit Fund |
||||
Assets |
||||
Investments in securities at fair value (cost $7,031,109) |
$ | 6,927,464 | ||
Due from Adviser |
53,793 | |||
Deposit at broker for futures |
21,119 | |||
Receivable for fund shares sold |
75,000 | |||
Interest receivable |
38,819 | |||
Prepaid expenses |
23,924 | |||
|
|
|||
Total Assets |
7,140,119 | |||
|
|
|||
Liabilities |
||||
Payable for distributions to shareholders |
3,355 | |||
Payable for investments purchased |
68,314 | |||
Variation margin on futures contracts |
4,903 | |||
Payable to administrator, fund accountant, and transfer agent |
29,567 | |||
Payable to custodian |
1,003 | |||
Other accrued expenses |
50,568 | |||
|
|
|||
Total Liabilities |
157,710 | |||
|
|
|||
Net Assets |
$ | 6,982,409 | ||
|
|
|||
Net Assets consist of: |
||||
Paid-in capital |
$ | 7,142,088 | ||
Total Distributable Earnings (Accumulated Deficit) |
(159,679 | ) | ||
|
|
|||
Net Assets |
$ | 6,982,409 | ||
|
|
|||
Shares outstanding (unlimited number of shares authorized, no par value) |
285,151 | |||
|
|
|||
Net asset value (NAV) and offering price per share |
$ | 24.49 | ||
|
|
See accompanying notes which are an integral part of these financial statements.
11
For the Year Ended January 31, 2019
Strategic Credit Fund |
||||
Investment Income |
||||
Interest |
$ | 483,453 | ||
Dividends |
14,787 | |||
|
|
|||
Total Investment Income |
498,240 | |||
|
|
|||
Expenses |
||||
Legal |
119,225 | |||
Investment Advisory |
74,320 | |||
Transfer agent |
64,016 | |||
Administration |
53,873 | |||
Audit and Tax |
34,000 | |||
Fund accounting |
31,872 | |||
Trustee |
30,088 | |||
Distribution |
20,049 | |||
Compliance |
16,488 | |||
Printing |
11,537 | |||
Registration |
9,866 | |||
Custodian |
5,656 | |||
Insurance |
2,136 | |||
|
|
|||
Total Expenses |
473,126 | |||
|
|
|||
Fees voluntarily waived by Adviser (See Note 4) |
(428,534 | ) | ||
|
|
|||
Net operating expenses |
44,592 | |||
|
|
|||
Net Investment Income (Loss) |
453,648 | |||
|
|
|||
Realized and Unrealized Gain (Loss) on Investments |
||||
Net realized gain (loss) on investments |
(11,942 | ) | ||
Net realized gain (loss) on futures contracts |
(4,691 | ) | ||
Net change in unrealized appreciation (depreciation) on investments |
(109,417 | ) | ||
Net change in unrealized depreciation on futures contracts |
(34,035 | ) | ||
|
|
|||
Net realized and unrealized gain (loss) on investments |
(160,085 | ) | ||
|
|
|||
Net increase (decrease) in net assets resulting from operations |
$ | 293,563 | ||
|
|
See accompanying notes which are an integral part of these financial statements.
12
Angel Oak Strategic Credit Fund
Statements of Changes in Net Assets
For the Year Ended January 31, 2019 |
For the Period Ended January 31, 2018 (a) |
|||||||
Increase (Decrease) in Net Assets due to: |
||||||||
Operations |
||||||||
Net investment income (loss) |
$ | 453,648 | $ | 15,031 | ||||
Net realized gain (loss) on investment transactions and futures contracts |
(16,633 | ) | 8,276 | |||||
Net change in unrealized appreciation (depreciation) on investments and futures contracts |
(143,452 | ) | 5,772 | |||||
|
|
|
|
|||||
Net increase (decrease) in net assets resulting from operations |
293,563 | 29,079 | ||||||
|
|
|
|
|||||
Distributions to Shareholders |
||||||||
Total Distributions |
(477,667 | ) | (4,654 | ) (b) | ||||
|
|
|
|
|||||
Capital Transactions |
||||||||
Proceeds from shares sold |
4,746,401 | 2,661,949 | ||||||
Reinvestment of distributions |
444,192 | 4,654 | ||||||
Amount paid for shares redeemed |
(815,108 | ) | | |||||
|
|
|
|
|||||
Net increase (decrease) in net assets resulting from capital transactions |
4,375,485 | 2,666,603 | ||||||
|
|
|
|
|||||
Total Increase (Decrease) in Net Assets |
4,191,381 | 2,691,028 | ||||||
|
|
|
|
|||||
Net Assets |
||||||||
Beginning of period |
2,791,028 | 100,000 | ||||||
|
|
|
|
|||||
End of period |
$ | 6,982,409 | $ | 2,791,028 | (c) | |||
|
|
|
|
|||||
Share Transactions |
||||||||
Shares sold |
189,077 | 106,439 | ||||||
Shares issued in reinvestment of distributions |
17,790 | 185 | ||||||
Shares redeemed |
(32,340 | ) | | |||||
|
|
|
|
|||||
Net increase (decrease) in share transactions |
174,527 | 106,624 | ||||||
|
|
|
|
(a) | Fund commenced operations on December 26, 2017. |
(b) | This amount is comprised entirely of net investment income. |
(c) | Includes accumulated undistributed net investment income of $10,377. |
See accompanying notes which are an integral part of these financial statements.
13
Angel Oak Strategic Credit Fund Institutional Class
Financial Highlights
(For a share outstanding during each period)
For the Year Ended January 31, 2019 |
For the Period Ended January 31, 2018 (a) |
|||||||
Selected Per Share Data: |
||||||||
Net asset value, beginning of period |
$ | 25.23 | $ | 25.00 | ||||
|
|
|
|
|||||
Income from investment operations: |
||||||||
Net investment income (loss) |
1.76 | 0.14 | ||||||
Net realized and unrealized gain (loss) on investments |
(0.60 | ) | 0.14 | |||||
|
|
|
|
|||||
Total from investment operations |
1.16 | 0.28 | ||||||
|
|
|
|
|||||
Less distributions to shareholders: |
||||||||
From net investment income |
(1.85 | ) | (0.05 | ) | ||||
From net realized gains |
(0.05 | ) | | |||||
|
|
|
|
|||||
Total Distributions |
(1.90 | ) | (0.05 | ) | ||||
|
|
|
|
|||||
Net asset value, end of period |
$ | 24.49 | $ | 25.23 | ||||
|
|
|
|
|||||
Total Return |
4.72 | % | 1.10 | % (b) | ||||
Ratios and Supplemental Data: |
||||||||
Net assets, end of period (000s omitted) |
$ | 6,982 | $ | 2,791 | ||||
Ratio of expenses to average net assets after waiver and reimbursement (c) |
0.75 | % | 0.75 | % (d) | ||||
Ratio of net investment income (loss) to average net assets before waiver and reimbursement |
0.42 | % | -16.03 | % (d) | ||||
Ratio of net investment income (loss) to average net assets after waiver and reimbursement |
7.63 | % | 5.85 | % (d) | ||||
Portfolio turnover rate |
63.83 | % | 69.68 | % (b) |
(a) Fund commenced operations on December 26, 2017. |
||||||||
(b) Not Annualized. |
||||||||
(c) Ratio of expenses to average net assets before waiver and reimbursement. |
7.96 | % | 22.63 | % (d) | ||||
(d) Annualized. |
See accompanying notes which are an integral part of these financial statements.
14
Angel Oak Strategic Credit Fund
Notes to the Financial Statements
January 31, 2019
NOTE 1. ORGANIZATION
Angel Oak Strategic Credit Fund (the Trust or the Fund), a Delaware statutory trust organized on August 18, 2017, is a continuously-offered diversified, closed-end management investment company issuing shares, as defined in the Investment Company Act of 1940, as amended (the 1940 Act). The Trusts sole series is the Fund. The Fund offers Class A and Institutional Class shares to investors. The Funds Institutional Class shares commenced operations on December 26, 2017. As of January 31, 2019, Class A shares have not commenced operations. Class A shares charge a 2.25% front-end sales charge and are subject to a 0.25% 12b-1 fee. Institutional Class shares do not charge front-end or back-end sales charges and are not subject to a 12b-1 fee. The Trusts Agreement and Declaration of Trust authorizes the issuance of an unlimited number of shares. The investment objective of the Fund is to seek total return.
The Fund operates as an interval fund pursuant to Rule 23c-3 under the 1940 Act. The Board of Trustees (Board) of the Fund has adopted a fundamental policy that the Fund will make quarterly repurchase offers pursuant to Rule 23c-3 under the 1940 Act, as such rule may be amended from time to time, for between 5% and 25% of the shares of beneficial interest (Shares) outstanding at net asset value (NAV), unless suspended or postponed in accordance with regulatory requirements, and each repurchase pricing shall occur no later than the 14th day after the Repurchase Request Deadline (as defined in the Funds Prospectus), or the next business day if the 14th day is not a business day. The Fund will not be required to repurchase Shares at a shareholders option nor will Shares be exchangeable for units, interests or shares of any investment of the Fund. In connection with each repurchase offer, it is possible that the Fund may offer to repurchase only the minimum amount of 5% of its outstanding Shares. It is also possible that a repurchase offer may be oversubscribed, with the result that shareholders may only be able to have a portion of their Shares repurchased. The Fund does not currently intend to list its Shares for trading on any national securities exchange. The Fund does not expect any secondary market to develop for the Shares in the foreseeable future. The Shares are, therefore, not readily marketable. Even though the Fund will make quarterly repurchase offers to repurchase a portion of the Shares to try to provide liquidity to shareholders, investors should consider the Shares to be illiquid. The schedule requires the Fund to make repurchase offers every three months. Quarterly repurchases occur in the month of March, June, September, and December.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements in accordance with the generally accepted accounting principles in the United States of America (GAAP). The Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Codification Topic 946 Financial Services-Investment Companies.
Securities Valuation and Fair Value Measurements The Fund has adopted authoritative fair valuation accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion in changes in valuation techniques and related inputs, if any, during the period. In addition, these standards require expanded disclosure for each major category of assets. These inputs are summarized in the three broad levels listed below:
| Level 1 Quoted prices in active markets for identical securities |
| Level 2 other significant observable inputs (including, but not limited to, quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) |
| Level 3 significant unobservable inputs (including the Funds own assumptions in determining fair value of investments based on the best information available) |
The inputs or methodology used for valuing securities are not an indication of the risks associated with investing in those securities.
Investments in registered open-end management investment companies, including money market funds, will be valued based upon the NAV of such investments and are categorized as Level 1 of the fair value hierarchy.
Fair values for long-term debt securities, including asset-backed securities, collateralized loan obligations, collateralized mortgage obligations, corporate obligations and mortgage-backed securities are normally determined on the basis of valuations provided by independent pricing services. Vendors typically value such securities based on one or more inputs, including but not limited to, benchmark yields, transactions, bids, offers, quotations from dealers and trading systems, new issues, spreads and other relationships
15
Angel Oak Strategic Credit Fund
Notes to the Financial Statements - (continued)
January 31, 2019
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
observed in the markets among comparable securities; and pricing models such as yield measurers calculated using factors such as cash flows, financial or collateral performance and other reference data. In addition to these inputs, mortgage-backed and asset-backed obligations may utilize cash flows, prepayment information, default rates, delinquency and loss assumptions, collateral characteristics, credit enhancements and specific deal information. Securities that use similar valuation techniques and inputs are categorized as Level 2 of the fair value hierarchy. To the extent the significant inputs are unobservable; the values generally would be categorized as Level 3.
Equity securities, including preferred stocks, that are traded on a national securities exchange, except those listed on the Nasdaq Global Market®, Nasdaq Global Select Market®, and the Nasdaq Capital Market® exchanges (collectively, Nasdaq), are valued at the last sale price at the close of that exchange. Securities traded on Nasdaq will be valued at the Nasdaq Official Closing Price (NOCP). If, on a particular day, an exchange-listed or Nasdaq security does not trade, then: (i) the security shall be valued at the mean between the most recent quoted bid and asked prices at the close of the exchange; or (ii) the security shall be valued at the latest sales price on the Composite Market (defined below) for the day such security is being valued. Composite Market means a consolidation of the trade information provided by national securities and foreign exchanges and over-the-counter markets (OTC) as published by a pricing service. In the event market quotations or Composite Market pricing are not readily available, Fair Value will be determined in accordance with the procedures adopted by the Board. All equity securities that are not traded on a listed exchange are valued at the last sale price at the close of the over-the counter market. If a non-exchange listed security does not trade on a particular day, then the mean between the last quoted bid and asked price will be used as long as it continues to reflect the value of the security. If the mean is not available, then bid price can be used as long as the bid price continues to reflect the value of the security. Otherwise Fair Value will be determined in accordance with the procedures adopted by the Board. These securities will generally be categorized as Level 3 securities. When using the market quotations or close prices provided by the pricing service and when the market is considered active, the security will be classified as a Level 1 security. Sometimes, an equity security owned by the funds will be valued by the pricing service with factors other than market quotations or when the market is considered inactive. When this happens, the security will be classified as a Level 2 security.
Short term debt securities having a maturity of 60 days or less are generally valued at amortized cost, which approximates fair market value. These investments are categorized as Level 2 of the fair value hierarchy. Reverse repurchase agreements and repurchase agreements are priced at their acquisition cost, which represents fair value. These securities will generally be categorized as Level 2 securities.
Financial derivative instruments, such as futures contracts, that are traded on a national securities or commodities exchange are typically valued at the settlement price determined by the relevant exchange. Swaps, such as credit default swaps, interest-rate swaps and currency swaps, are valued by a Pricing Service. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized as Level 1 of the fair value hierarchy. Over-the-counter financial derivative instruments, such as certain futures contracts or swap agreements, derive their values from underlying asset prices, indices, reference rates, other inputs or a combination of these factors. These instruments are normally valued on the basis of evaluations provided by independent pricing services or broker dealer quotations. Derivatives that use similar valuation techniques as described above are typically categorized as Level 2 of the fair value hierarchy.
Securities may be fair valued in accordance with the fair valuation procedures approved by the Board. The Valuation and Risk Management Oversight Committee is generally responsible for overseeing the Funds valuation processes and reports quarterly to the Board. The Valuation and Risk Management Oversight Committee has delegated to the Valuation Committee of Angel Oak Capital Advisors, LLC (the Adviser) the day to day responsibilities for making all necessary determinations of the fair value of portfolio securities and other assets for which market quotations are not readily available or if the prices obtained from brokers and dealers or independent pricing services are deemed to be unreliable indicators of market or fair value. Representatives of the Advisers Pricing Committee report quarterly to the Valuation and Risk Management Oversight Committee.
16
Angel Oak Strategic Credit Fund
Notes to the Financial Statements - (continued)
January 31, 2019
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
The following is a summary of the inputs used to value the Funds net assets as of January 31, 2019:
Assets | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Asset-Backed Securities |
$ | | $ | 913,226 | $ | | $ | 913,226 | ||||||||
Collateralized Loan Obligations |
| 1,168,473 | | 1,168,473 | ||||||||||||
Collateralized Mortgage Obligations |
| 2,365,896 | | 2,365,896 | ||||||||||||
Corporate Obligations |
| 980,470 | | 980,470 | ||||||||||||
Mortgage-Backed Securities U.S. Government Agency Issues |
| 780,430 | | 780,430 | ||||||||||||
Preferred Stocks |
304,200 | | | 304,200 | ||||||||||||
Short-Term Investments |
414,769 | | | 414,769 | ||||||||||||
Total |
$ | 718,969 | $ | 6,208,495 | $ | | $ | 6,927,464 | ||||||||
Other Financial Instruments* |
||||||||||||||||
Liabilities |
||||||||||||||||
Futures Contracts |
$ | (34,035 | ) | $ | | $ | | $ | (34,035 | ) |
* | Other financial instruments are derivative instruments, such as futures. Futures are reflected at the unrealized appreciation (depreciation) on the instrument. |
See the Schedule of Investments for further disaggregation of investment categories. During the year ended January 31, 2019, the Fund did not recognize any transfers to or from Level 3.
Federal Income Taxes The Fund intends to elect and continue to qualify to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. If so qualified, the Fund generally will not be subject to federal income tax to the extent they distribute substantially all of its net investment income and capital gains to shareholders. The Fund generally intends to operate in a manner such that it will not be liable for federal income or excise taxes.
The Fund has adopted financial reporting rules regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense on the Statement of Operations. During the year ended January 31, 2019, the Fund did not incur any interest or penalties. The Fund has reviewed all open tax years and major jurisdictions and concluded that no provision for income tax would be required in the Funds financial statements. The Funds Federal and state income and Federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Security Transactions and Income Recognition Investment security transactions are accounted for on trade date. Gains and losses realized on sales of securities are determined on a specific identification basis. Interest income and expense is recorded on an accrual basis. Discounts and premiums on securities purchased are accreted or amortized using the effective yield method, based on each securitys estimated life. Dividend income and corporate actions, if any, are recorded on the ex-date. Paydown gains and losses on mortgage-related and other asset-backed securities are recorded as components of interest income on the Statement of Operations. Payments received from certain investments held by the Fund may be comprised of dividends, capital gains and return of capital. The Fund originally estimates the expected classification of such payments. The amounts may subsequently be reclassified upon receipt of the information from the issuer. The actual character of distributions to the Funds shareholders will be reflected in the Form 1099 received by shareholders after the end of the calendar year.
Distributions to Shareholders Distributions from the Funds net investment income are accrued daily and typically paid monthly. The Fund intends to distribute its net realized long term capital gains and net realized short term capital gains, if any, at least annually. Distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. The treatment for financial reporting purposes of distributions made to shareholders during the period from net investment income or net realized capital gains may differ from their ultimate treatment for federal income tax purposes. These differences are caused primarily by differences in the timing of the recognition of certain components of income, expense or realized capital gain for federal income tax purposes. Where such differences are permanent in nature, they are reclassified in the components of the net assets based on their ultimate characterization for federal income tax purposes. Any such reclassifications will have no effect on net assets, results of operations or net asset values per share of the Fund. For the year ended January 31, 2019, there were no reclassifications.
17
Angel Oak Strategic Credit Fund
Notes to the Financial Statements - (continued)
January 31, 2019
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Share Valuation The NAV per share of the Fund is calculated by dividing the sum of the value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by the total number of shares outstanding, rounded to the nearest cent. The Funds NAV will not be calculated on the days on which the New York Stock Exchange is closed for trading.
Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Indemnifications Under the Trusts organizational documents, the Trust will indemnify its officers and trustees for certain liabilities that may arise from performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representatives and warranties which provide general indemnifications. The Funds maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred.
Repurchase Agreements Repurchase agreements are transactions by which the Fund purchases a security and simultaneously commits to resell that security to the seller (a bank or securities dealer) at an agreed upon price on an agreed upon date. The resale price reflects the purchase price plus an agreed upon market rate of interest which is unrelated to the coupon rate or the date of maturity of the purchased security. A repurchase agreement is accounted for as an investment by the Fund, collateralized by securities, which are delivered to the Funds custodian or to an agent bank under a tri-party agreement. The securities are marked-to-market daily and additional securities are acquired as needed, to ensure that their value equals or exceeds the repurchase price plus accrued interest. Repurchase agreements involve certain risks not associated with direct investments in the underlying securities. In the event of a default or bankruptcy by the seller, the Fund will seek to liquidate such collateral. The exercise of the Funds right to liquidate such collateral could involve certain costs or delays, and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. The Fund did not hold any repurchase agreements during the year ended January 31, 2019.
Reverse Repurchase Agreements A reverse repurchase agreement is the sale by the Fund of a security to a party for a specified price, with the simultaneous agreement by the Fund to repurchase that security from that party on a future date at a higher price. Securities sold under reverse repurchase agreements are reflected as a liability on the Statement of Assets and Liabilities. Interest payments made are recorded as a component of interest expense on the Statement of Operations. Reverse repurchase agreements involve the risk that the counterparty will become subject to bankruptcy or other insolvency proceedings or fail to return a security to the Fund. In such situations, the Fund may incur losses as a result of a possible decline in the value of the underlying security during the period while the Fund seeks to enforce its rights, a possible lack of access to income on the underlying security during this period, or expenses of enforcing its rights. The Fund will segregate assets determined to be liquid by the Adviser or otherwise covered its obligations under reverse repurchase agreement. The Fund did not hold any reverse repurchase agreements during the year ended January 31, 2019.
Mortgage-Backed and Asset-Backed Securities Risks Prepayment risk is associated with mortgage-backed and asset-backed securities, including collateralized loan obligations (CLOs). If interest rates fall, the underlying debt may be repaid ahead of schedule, reducing the value of the Funds investments. If interest rates rise, there may be fewer prepayments, which would cause the average bond maturity to rise, increasing the potential for the Fund to lose money. The value of these securities may be significantly affected by changes in interest rates, the markets perception of issuers, and the creditworthiness of the parties involved. The ability of the Fund to successfully utilize these instruments may depend on the ability of the Funds Adviser to forecast interest rates and other economic factors correctly. These securities may have a structure that makes their reaction to interest rate changes and other factors difficult to predict, making their value highly volatile. Certain mortgage-backed securities may be secured by pools of mortgages on single-family, multi-family properties, as well as commercial properties. Similarly, asset-backed securities may be secured by pools of loans, such as corporate loans, student loans, automobile loans and credit card receivables. The credit risk on such securities is affected by homeowners or borrowers defaulting on their loans. The values of assets underlying mortgage-backed and asset-backed securities, including CLOs, may decline and therefore may not be adequate to cover underlying investors. Mortgage-backed securities
18
Angel Oak Strategic Credit Fund
Notes to the Financial Statements - (continued)
January 31, 2019
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
and other securities issued by participants in housing and commercial real estate finance, as well as other real estate-related markets have experienced extraordinary weakness and volatility in recent years. Possible legislation in the area of residential mortgages, credit cards, corporate loans and other loans that may collateralize the securities in which the Fund may invest could negatively impact the value of the Funds investments. To the extent the Fund focuses its investments in particular types of mortgage-backed or asset-backed securities, including CLOs, the Fund may be more susceptible to risk factors affecting such types of securities.
Subordinated Debt of Banks and Diversified Financial Companies The Fund may invest in subordinated debt securities, sometimes also called junior debt, are debt securities for which the issuers obligations to make principal and interest payment are secondary to the issuers payment obligations to more senior debt securities. Such investments will consist primarily of debt issued by community banks or savings intuitions (or their holding companies), which are subordinated to senior debt issued by the banks and depots held by the bank, but are senior to trust preferred obligations, preferred stock and common stock issued by the bank.
Preferred Stocks The Fund may invest in preferred stock. Preferred stock is a class of stock having a preference over common stock as to the payment of dividends and the recovery of investment should a company be liquidated, although preferred stock is usually junior to the debt securities of the issuer. Preferred stock typically does not possess voting rights and its market value may change based on changes in interest rates. The fundamental risk of investing in preferred stock is the risk that the value of the stock might decrease.
Futures Contracts The Fund may enter into futures contracts to hedge various investments for risk management as well as speculative purposes. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. Secondary margin limits are required to be maintained while futures are held, as defined by each contract.
During the period a futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by marking-to-market on a daily basis to reflect the fair value of the contract at the end of each days trading. Variation margin receivables or payables represent the difference between the change in unrealized appreciation and depreciation on the open contracts and the cash deposits made on the margin accounts. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from the closing transaction and the Funds cost of entering into a contract. The use of futures contracts involves the risk of illiquid markets or imperfect correlation between the value of the instruments and the underlying securities, or that the counterparty will fail to perform its obligations.
Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contract and may realize a loss.
Options The Fund may purchase call and put options on specific securities, and may write and sell covered or uncovered call and put options for hedging purposes in pursuing its investment objectives. A put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security at a stated exercise price, typically at any time prior to the expiration of the option for American options or only at expiration for European options. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at a stated exercise price, typically at any time prior to the expiration of the option. A covered call option is a call option with respect to which the seller of the option owns the underlying security. The sale of such an option exposes the seller during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security or to possible continued holding of a security that might otherwise have been sold to protect against depreciation in the market price of the security. A covered put option is a put option with respect to which cash or liquid securities have been placed in a segregated account on the books of the Fund or with a custodian to fulfill the obligation undertaken. The sale of such an option exposes the seller during the term of the option to a decline in price of the underlying security while depriving the seller of the opportunity to invest the segregated assets.
The Fund may close out a position when writing options by purchasing an option on the same underlying security with the same exercise price and expiration date as the option that it has previously written on the security. In such a case, the Fund will realize a profit or loss if the amount paid to purchase an option is less or more than the amount received from the sale of the option. The Fund did not hold any options during the year ended January 31, 2019.
19
Angel Oak Strategic Credit Fund
Notes to the Financial Statements - (continued)
January 31, 2019
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Swaps The Fund may enter into swap contracts to hedge various investments for risk management or to pursue its investment objective. The Fund may invest in credit default swaps, total return swaps, interest rate swaps, equity swaps, currency swaps, options on foregoing swaps, and other types of swaps. Such transactions are subject to market risk, liquidity risk, risk of default by the other party to the transaction, known as counterparty risk, regulatory risk and risk of imperfect correlation between the value of such instruments and the underlying assets and may involve commissions or other costs. Swap agreements are valued by a pricing service and unrealized appreciation or depreciation is recorded daily as the difference between the prior day and current day closing price. The Fund did not hold any swaps during the year ended January 31, 2019.
NOTE 3. DERIVATIVE TRANSACTIONS
The following tables present a summary of the value of derivative instruments as of January 31, 2019 and the effect of derivative instruments on the Statement of Assets and Liabilities as of January 31, 2019
Derivatives | Type of Derivative Risk |
Statements of Assets and Liabilities Location |
Liabilities | |||
Futures Contracts |
Interest Rate | Variation Margin on Futures Contracts | $4,903 |
The effect of derivative instruments on the Statement of Operations for the year ended January 31, 2019:
Derivatives | Type of Derivative Risk |
Location of Gain (Loss) on Derivatives in Income |
Realized Gain (Loss) on Derivatives | |||
Futures Contracts |
Interest Rate | Net realized gain (loss) on futures contracts | $(4,691) |
Derivatives | Type of Derivative Risk |
Location of Gain (Loss) on Derivatives in Income |
Change
in Unrealized Appreciation (Depreciation) on Derivatives | |||
Futures Contracts |
Interest Rate | Net change in unrealized appreciation (depreciation) on futures contracts | $(34,035) |
The average monthly notional value of long and short futures contracts during the year ended January 31, 2019 was $582,429 and ($413,927), respectively.
Strategic Credit Fund | ||||||||||||
Gross Amounts Not Offset in Consolidated Statements of Assets and Liabilities | ||||||||||||
Gross Amounts of Recognized Liabilities |
Gross Amounts Offset in Consolidated Statements of Assets and Liabilities |
Net Amounts of Liabilities Presented in Consolidated Statements of Assets and Liabilities |
Financial Instruments |
Cash Collateral Pledged |
Net Amount | |||||||
Futures Contracts |
$4,903 | $ | $4,903 | $ | $4,903 | $ |
NOTE 4. FEES AND OTHER RELATED PARTY TRANSACTIONS
Under the terms of the investment advisory agreement, on behalf of the Fund (the Agreement), the Adviser manages the Funds investments subject to oversight of the Trustees. As compensation for its management services, the Fund is obligated to pay the Adviser a fee computed and accrued daily and paid monthly at an annual rate of 1.25% of the average daily net assets of the Fund.
20
Angel Oak Strategic Credit Fund
Notes to the Financial Statements - (continued)
January 31, 2019
NOTE 4. FEES AND OTHER RELATED PARTY TRANSACTIONS (continued)
The Adviser has voluntarily agreed to waive its fees and/or reimburse certain expenses (exclusive of any taxes, interest on borrowings, dividends on securities sold short, brokerage commissions, acquired fund fees and expenses, expenses incurred in connection with any merger or reorganization and extraordinary expenses) to limit the Operating Expenses after fee waiver/expense reimbursement to 0.75% of the Funds average daily net assets (the Expense Limit). The Adviser may voluntarily waive fees at different levels, from time to time. The Adviser may not recoup from the Fund any waived amount or reimbursed expenses pursuant to this arrangement. The Adviser may amend or discontinue this waiver at any time without advance notice.
Quasar Distributors, LLC (the Distributor) acts as the Funds principal underwriter in a continuous public offering of the Funds shares. For its services during the year ended January 31, 2019, the Fund paid Quasar $20,049.
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (Fund Services), an indirect wholly-owned subsidiary of U.S. Bancorp, serves as the Funds Administrator (Administrator) and, in that capacity, performs various administrative and accounting services for the Fund. Fund Services also serves as the Funds fund accountant and transfer agent. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the trustees; monitors the activities of the Funds custodian; coordinates the preparation and payment of the Funds expenses and reviews the Funds expense accruals. As compensation for its services, the Administrator is entitled to a monthly fee at an annual rate based upon the average daily net assets of the Fund. U.S. Bank, N.A. (the Custodian) serves as custodian to the Fund. Both the Administrator and Custodian are affiliates of the Distributor.
Certain officers, Trustees and shareholders of the Fund are also owners or employees of the Adviser.
NOTE 5. ORGANIZATIONAL AND OFFERING COSTS
Organization costs consist of costs incurred to establish the Fund and enable it legally to do business. Offering costs include state registration fees and legal fees regarding the preparation of the initial registration statement. These organization and offering expenses were paid by the Adviser and will not be subject to reimbursement by the Fund.
NOTE 6. INVESTMENT TRANSACTIONS
For the year ended January 31, 2019, purchases and sales of investment securities, other than short-term investments and short-term U.S. government obligations, were as follows:
Purchases | Sales | |||
$8,004,236 | $ | 3,113,952 |
For the year ended January 31, 2019, there were $1,437,467 of purchases and $866,118 of sales of U.S. Government securities for the Fund. These amounts are included in the aggregate purchases and sales of investment securities displayed in the table above.
NOTE 7. REPURCHASE OFFERS
Shares repurchased during the year ended January 31, 2019 were as follows (See Note 1):
Repurchase Offer Date |
Cash Payment Date | NAV on Repurchase Pricing Date |
Percentage of Outstanding Shares the Fund Offered to Repurchase |
Amount of Shares the Fund Offered to Repurchase |
Percentage of Shares |
Number of Shares Repurchased |
||||||||||||||||
May 25, 2018 |
June 15, 2018 | $ | 25.44 | 5 | % | 12,462 | | | ||||||||||||||
August 31, 2018 |
September 21, 2018 | $ | 25.41 | 25 | % | 68,296 | 9 | % | 25,761 | |||||||||||||
November 30, 2018 |
December 21, 2018 | $ | 24.40 | 10 | % | 26,716 | 2 | % | 6,579 |
21
Angel Oak Strategic Credit Fund
Notes to the Financial Statements - (continued)
January 31, 2019
NOTE 8. BENEFICIAL OWNERSHIP
The beneficial ownership, either directly or indirectly, of 25% or more of the voting securities of a fund creates a presumption of control of a fund, under Section 2(a)(9) of the 1940 Act. At January 31, 2019, Pershing LLC owned, as record shareholder, 95% of the outstanding shares of the Fund.
NOTE 9. FEDERAL TAX INFORMATION
The tax characterization of distributions paid for the year/period ended January 31, 2019 and January 31, 2018, were as follows:
2019 | 2018 | |||||||
Distributions paid from: |
||||||||
Ordinary Income |
$ | 472,949 | $ | 4,654 | ||||
Net Long-Term Capital Gain |
4,718 | | ||||||
Total |
$ | 477,667 | $ | 4,654 |
At January 31, 2019, the components of distributable earnings (accumulated deficit) on a tax basis were as follows:
Tax Cost of Investments |
$ | 6,997,074 | ||
Unrealized Appreciation* |
60,379 | |||
Unrealized Depreciation* |
(164,024 | ) | ||
Net Unrealized Appreciation (Depreciation)* |
$ | (103,645 | ) | |
Undistributed Ordinary Income |
1,972 | |||
Undistributed Long-Term Gain (Loss) |
| |||
Accumulated Gain (Loss) |
$ | 1,972 | ||
Other Accumulated Gain (Loss) |
(58,006 | ) | ||
Distributable Earnings (Accumulated Deficit) |
$ | (159,679 | ) |
* | Represents aggregated amounts of Funds investments and futures. |
The temporary differences between book basis and tax basis in the fund are primarily attributable to mark-to-markets.
As of January 31, 2019, the Fund did not have any capital loss carry forwards.
Certain capital losses incurred after October 31 and within the current taxable year, are deemed to arise on the first business day of the Funds following taxable year. For the tax year ended January 31, 2019, the Fund deferred $58,006 of post October losses.
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-08, Receivables Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in the ASU shorten the amortization period for certain callable debt securities, held at a premium, to be amortized to the earliest call date. The ASU does not require an accounting change for securities held at a discount; which continues to be amortized to maturity. The ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Management is currently evaluating the impact, if any, of applying this provision.
In August 2018, FASB issued Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). The primary focus of ASU
22
Angel Oak Strategic Credit Fund
Notes to the Financial Statements - (continued)
January 31, 2019
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS (continued)
2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. Management has evaluated ASU 2018-13 and has adopted the disclosure framework.
NOTE 11. SUBSEQUENT EVENT
Management of the Fund has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date these financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments other than the following.
Shares repurchased subsequent to January 31, 2019 were as follows (see Note 1):
Repurchase Offer Date |
Cash Payment Date | NAV on Repurchase Pricing Date |
Percentage of Outstanding Shares the Fund Offered to Repurchase |
Amount of Shares the Fund Offered to Repurchase |
Percentage of Shares |
Number of Shares Repurchased |
||||||||||||||||||
February 22, 2019 |
March 15, 2019 | $ | 24.50 | 5 | % | 18,827 | 4 | % | 16,700 |
23
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
Angel Oak Strategic Credit Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedules of investments and open futures contracts, of Angel Oak Strategic Credit Fund (the Fund) as of January 31, 2019, and the related statement of operations for the year then ended, the statements of changes in net assets and the financial highlights for each of the two periods in the period then ended, including the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2019, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for each of the two periods in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Funds management. Our responsibility is to express an opinion on the Funds financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of January 31, 2019, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers or counterparties were not received. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more funds advised by Angel Oak Capital Advisors, LLC since 2011.
COHEN & COMPANY, LTD.
Cleveland, Ohio
March 29, 2019
24
Additional Information (Unaudited)
1. Shareholder Notification of Federal Tax Status
For the tax year ended January 31, 2019, certain dividends paid by the Fund may be subject to a maximum tax rate of 20% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate the maximum amount allowable as taxed at a maximum rate of 20%.
For the taxable year ended January 31, 2019, the Fund paid qualified dividend income of 3.11%.
For the taxable year ended January 31, 2019, the percentage of ordinary income dividends paid by the Fund that qualifies for the dividends received deduction available to corporations was 3.11%.
For the taxable year ended January 31, 2019, the percentage of ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Section 871(k)2(c) was 1.75%.
For the taxable year ended January 31, 2019, the percentage of taxable ordinary income distributions that are designated as interest related dividends under Internal Revenue 871(k)1(c) was 87.14%.
2. Disclosure of Portfolio Holdings
The Fund will file a complete schedule of portfolio holdings with the Securities and Exchange) for the first and third quarters of each fiscal year on Form N-Q or Part F of Form N-PORT (beginning with filings after March 31, 2019). The Funds Forms N-Q or Part F of Form N-PORT are available on the SECs website at www.sec.gov and may be reviewed and copied at the SECs Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-732-0330.
3. Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio securities and information regarding how the Fund voted those proxies during the most recent twelve month period ended June 30, is available without charge upon request by (1) calling the Fund at (855) 751-4324 and (2) from Trust documents filed with the SEC on the SECs website at www.sec.gov.
4. Compensation of Trustees
Each Trustee who is not an interested person of the Trust (i.e., an Independent Trustee) receives an annual retainer of $50,000 (pro-rated for any periods less than one year), paid quarterly as well as $10,000 for attending each regularly scheduled meeting in person in connection with his or her service on the Board of the Trust and other funds advised by the Adviser. In addition, each Committee Chairman receives additional annual compensation of $12,000. Independent Trustees are permitted reimbursement for out-of-pocket expenses incurred in connection with attendance at meetings. The Funds Statement of Additional Information includes additional information about the Trustees and is available upon request by calling toll free 1-855-444-9243.
25
5. Trustees and Officers
The business of the Fund is managed under the direction of the Board. The Board formulates the general policies of the Fund and meets periodically to review the Funds performance, monitor investment activities and practices, and discuss other matters affecting the Fund. The Trustees are fiduciaries for the Funds shareholders and are governed by the laws of the State of Delaware in this regard. The names and addresses of the Trustees and officers of the Trust are listed below along with a description of their principal occupations over at least the last five years. The address of each Trustee and Officer of the Trust is c/o Angel Oak Capital Advisors, LLC, One Buckhead Plaza, 3060 Peachtree Road NW, Suite 500, Atlanta, GA 30305. The Funds Statement of Additional Information includes additional information about the Trustees and is available upon request by calling toll free 1-855-751-4324.
Name and Year of Birth |
Position with the Fund |
Term of Office and Length of Time Served |
Principal Past 5 Years |
Number of Portfolios in Fund Complex(1) Overseen by Trustee |
Other Directorships
Held During the Past 5 Years | |||||||
Independent Trustees of the Fund(2) |
||||||||||||
Ira P. Cohen 1959 |
Independent Trustee, Chairman | Trustee since 2017, Chairman since 2017; indefinite terms | Executive Vice President, Recognos Financial (investment industry data analysis provider) (since 2015); Independent financial services consultant (since 2005). | 5 | Trustee, Valued Advisers Trust (since 2010) (12 portfolios); Trustee, Griffin Institutional Access Credit Fund (since 2017); Trustee, Griffin Institutional Access Real Estate Access Fund (since 2014); Trustee, Angel Oak Funds Trust (since 2014). | |||||||
Alvin R. Albe, Jr. 1953 |
Independent Trustee | Since 2017; indefinite term |
Retired; Senior Advisor, The TCW Group, Inc. (asset manager) (2008 2013). | 5 | Director, Syntroleum Corporation (renewable energy firm) (1988 2014); Trustee, Angel Oak Funds Trust (since 2014). | |||||||
Keith M. Schappert 1951 |
Independent Trustee | Since 2017; indefinite term |
President, Schappert Consulting LLC (investment industry consulting) (since 2008). | 5 | Trustee, Mirae Asset Discovery Funds (since 2010) (6 portfolios); Trustee, Metropolitan Series Fund, Inc. (2009 2015) (30 portfolios); Trustee, Met Investors Series Trust (2012 2015) (45 portfolios); Director, Commonfund Capital, Inc. (private equity business) (since 2015); Director, The Commonfund (investment management) (since 2012); Director, Calamos Asset Management, Inc. (investment management) (2012 2017); Trustee, Angel Oak Funds Trust (since 2014). |
26
Name
and Year of Birth |
Position with the Fund |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Portfolios in Fund Complex(1) Overseen by Trustee |
Other Directorships
Held During the Past 5 Years | |||||||
Andrea N. Mullins 1967 |
Independent Trustee | Since 2019; indefinite term |
Private Investor; Independent Contractor, SWM Advisors (since 2014); Retired from Eagle Funds in 2010 as Chief Financial Officer | 5 | Trustee, Valued Advisors Trust (since 2013, Chairperson since 2017) (12 portfolios); Trustee, Angel Oak Funds Trust (since February 2019). | |||||||
James E. Stueve 1964 |
Independent Trustee | Since 2019; indefinite term | Stueve Insights LLC (consulting) (since 2018); President and Global Head of Distribution, Ridgeworth Investments (2007 2017) | 5 | Chairman, Mutual Fund Education Alliance (2013 2016); Trustee and Finance Chair, Foundation for Financial Planning (2012 2016); Trustee, Angel Oak Funds Trust (since February 2019). | |||||||
Interested Trustees of the Fund |
||||||||||||
Sreeniwas (Sreeni) V. Prabhu 1974 |
Interested Trustee | Since 2017; indefinite term |
Chief Investment Officer, Portfolio Manager, Co- Founder, Angel Oak Capital Advisors, LLC (since 2009). | 5 | Trustee, Angel Oak Funds Trust (since April 2015). | |||||||
Samuel R. Dunlap, III 1979 |
Interested Trustee | Since 2019; indefinite term |
Managing Director and Senior Portfolio Manager, Angel Oak Capital Advisors, LLC (since 2009) | 5 | Trustee, Angel Oak Funds Trust (since February 2019). |
(1) | The Fund Complex includes the Fund and each series of Angel Oak Funds Trust. |
(2) | The Trustees of the Fund who are not interested persons of the Fund as defined in the 1940 Act (Independent Trustees). |
27
Name and Year of Birth |
Position with the Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Officers of the Trust | ||||||
Dory S. Black, Esq. 1975 |
President | Since 2017; indefinite term | General Counsel, Angel Oak (since 2014); General Counsel, EARNEST Partners, LLC (investment management firm) (2014); Vice-President and Assistant General Counsel, GE Asset Management Incorporated (2004 2014). | |||
Adam Langley 1967 |
Chief Compliance Officer | Since 2017; indefinite term | Chief Compliance Officer, Angel Oak Capital Advisors, LLC (since 2015); Chief Compliance Officer, Angel Oak Funds Trust (2015); Chief Compliance Officer, Angel Oak Capital Partners II, LLC (since 2016); Chief Compliance Officer, Buckhead One Financial Opportunities, LLC (since 2017); Chief Compliance Officer, Angel Oak Consulting Group Portfolio Management, LLC (2015 2017); Compliance Manager, Chief Compliance Officer of Falcon I, LLC (since 2018); Chief Compliance Officer of Hawks I, LLC (since 2019); Invesco Advisers, Ltd. (2013 2015); Compliance Officer, Macquarie Group (2013). | |||
Lu Chang, CFA, FRM, CAIA 1975 |
Secretary | Since 2017; indefinite term | Chief Risk Officer, Angel Oak Capital Advisors, LLC (since 2014); Vice-President and Finance Manager, Wells Fargo Advisors, LLC (investment advisory firm) (2004 2014). | |||
Daniel Fazioli 1981 |
Treasurer | Since 2017; indefinite term | Controller, Angel Oak Capital Advisors, LLC (since 2015); Controller, Tang Capital Partners, LP (2014 2015); Associate, Goldman Sachs & Company, Inc. |
Each Trustee holds office for an indefinite term and until the earlier of: the Funds next meeting of shareholders and the election and qualification of his/her successor; or until the date a trustee dies, resigns or is removed in accordance with the Funds Amended and Restated Declaration of Trust and By-laws. Each Trustee shall serve during the lifetime of the Fund until he or she: (a) dies; (b) resigns; (c) has reached the mandatory retirement age, if any, as set by the Trustees; (d) is declared incompetent by a court of appropriate jurisdiction; or (e) is removed, or, if sooner, until the next meeting of shareholders called for the purpose of electing Trustees and until the election and qualification of his or her successor. Each officer holds office at the pleasure of the Board.
28
ANGEL OAK STRATEGIC CREDIT FUND
Notice of Privacy Policy & Practices
Your privacy is important to us. We are committed to maintaining the confidentiality, integrity and security of your personal information. When you provide personal information, we believe that you should be aware of policies to protect the confidentiality of that information.
We collect the following nonpublic personal information about you:
| Information we receive from you on or in applications or other forms, correspondence, or conversations, including, but not limited to, your name, address, phone number, social security number, assets, income and date of birth; and |
| Information about your transactions with us, our affiliates, or others, including, but not limited to, your account number and balance, payments history, parties to transactions, cost basis information, and other financial information. |
We do not disclose any nonpublic personal information about our current or former shareholders to nonaffiliated third parties, except as permitted by law. For example, we are permitted by law to disclose all of the information we collect, as described above, to our transfer agent to process your transactions. Furthermore, we restrict access to your nonpublic personal information to those persons who require such information to provide products or services to you. We maintain physical, electronic, and procedural safeguards that comply with federal standards to guard your nonpublic personal information.
In the event that you hold shares of the Fund through a financial intermediary, including, but not limited to, a broker-dealer, bank, or trust company, the privacy policy of your financial intermediary would govern how your nonpublic personal information would be shared with nonaffiliated third parties.
29
INVESTMENT ADVISER
Angel Oak Capital Advisors, LLC
One Buckhead Plaza
3060 Peachtree Road NW, Suite 500
Atlanta, GA 30305
DISTRIBUTOR
Quasar Distributors, LLC
777 East Wisconsin Avenue
Milwaukee, WI 53202
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Cohen & Company, Ltd.
1350 Euclid Avenue, Suite 800
Cleveland, OH 44115
LEGAL COUNSEL
Dechert LLP
1900 K Street NW
Washington, DC 20006
CUSTODIAN
U.S. Bank National Association
1555 North Rivercenter Drive, Suite 302
Milwaukee, WI 53202
ADMINISTRATOR, TRANSFER AGENT, AND FUND ACCOUNTANT
U.S Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
This report is intended only for the information of shareholders or those who have received the Funds prospectus which contains information about the Funds management fee and expenses. Please read the prospectus carefully before investing.
Item 2. Code of Ethics.
The registrant has adopted a code of ethics that applies to the registrants principal executive officer and principal financial officer. The registrant has not made any substantive amendments to its code of ethics during the period covered by this report. The registrant has not granted any waivers from any provisions of the code of ethics during the period covered by this report.
A copy of the registrants Code of Ethics is filed herewith.
Item 3. Audit Committee Financial Expert.
The registrants board of trustees has determined that there is at least one audit committee financial expert serving on its audit committee. Mr. Alvin Albe, Jr. is the audit committee financial expert and is considered to be independent as each term is defined in Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
The registrant has engaged its principal accountant to perform audit services, audit-related services, tax services and other services during the past two fiscal years. Audit services refer to performing an audit of the registrants annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. Audit-related services refer to the assurance and related services by the principal accountant that are reasonably related to the performance of the audit. Tax services refer to professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. The following table details the aggregate fees billed or expected to be billed for each of the last two fiscal years for audit fees, audit-related fees, tax fees and other fees by the principal accountant.
FYE 01/31/2019 | FYE 01/31/2018 | |||||||
Audit Fees |
$ | 30,000 | $ | 17,000 | ||||
Audit-Related Fees |
$ | 0 | $ | 0 | ||||
Tax Fees |
$ | 4,000 | $ | 3,000 | ||||
All Other Fees |
$ | 0 | $ | 0 | ||||
|
|
|
|
The audit committee has adopted pre-approval policies and procedures that require the audit committee to pre-approve all audit and non-audit services of the registrant, including services provided to any entity affiliated with the registrant.
The percentage of fees billed by Cohen & Company, Ltd. applicable to non-audit services pursuant to waiver of pre-approval requirement were as follows:
FYE 01/31/2019 | FYE 01/31/2018 | |||||||
Audit-Related Fees |
0 | % | 0 | % | ||||
Tax Fees |
0 | % | 0 | % | ||||
|
|
|
|
|||||
All Other Fees |
0 | % | 0 | % | ||||
|
|
|
|
1
All of the principal accountants hours spent on auditing the registrants financial statements were attributed to work performed by full-time permanent employees of the principal accountant.
The following table indicates the non-audit fees billed or expected to be billed by the registrants accountant for services to the registrant and to the registrants investment adviser (and any other controlling entity, etc.not sub-adviser) for the last two years. The audit committee of the board of trustees/directors has considered whether the provision of non-audit services that were rendered to the registrants investment adviser is compatible with maintaining the principal accountants independence and has concluded that the provision of such non-audit services by the accountant has not compromised the accountants independence.
Non-Audit Related Fees |
FYE 01/31/2019 | FYE 01/31/2018 | ||||||
Registrant |
$ | 4,000 | $ | 3,000 | ||||
Registrants Investment Adviser |
$ | 0 | $ | 0 | ||||
|
|
|
|
Item 5. Audit Committee of Listed Registrants.
Not applicable to registrants who are not listed issuers (as defined in Rule 10A-3 under the Securities Exchange Act of 1934).
Item 6. Investments.
Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
ANGEL OAK FUNDS TRUST
ANGEL OAK STRATEGIC CREDIT FUND
ANGEL OAK FINANCIAL STRATEGIES INCOME TERM TRUST
PROXY VOTING POLICIES AND PROCEDURES
The Boards of Trustees of Angel Oak Funds Trust, Angel Oak Strategic Credit Fund, and Angel Oak Financial Strategies Income Term Trust (each, a Trust and together, the Trusts) (the Board) recognize that the Boards right to vote proxies for Trust holdings is an important responsibility and a significant Trust asset. The Board recognizes that the investment adviser of the Trusts and the Trusts respective series, if any (each, a Fund and together with the Trusts, the Funds), Angel Oak Capital Advisors, LLC (the Adviser), is in a better position to monitor corporate actions, analyze proxy proposals, make voting decisions and ensure that proxies are submitted in a timely fashion. The Board therefore delegates the authority to vote proxies to the Adviser, subject to the supervision of the Board.
The Board must approve the Advisers proxy voting policies and procedures. The Board will monitor the implementation of these policies to ensure that the Advisers voting decisions:
| are consistent with the Advisers fiduciary duty to the Trusts and their shareholders; |
| seek to maximize shareholder return and the value of Trust investments; |
| promote sound corporate governance; and |
| are consistent with each Funds investment objective and policies. |
In the event of a conflict between the interests of the Adviser and the Trusts, the Advisers policies provide that the conflict may be disclosed to the Board or its delegate, who shall provide direction to vote the proxies. The Board has delegated this authority to the disinterested directors, and the proxy voting direction in such a case shall be determined by a majority of the disinterested directors.
Each Trust will disclose in its annual and semi-annual reports to shareholders that a description (or copy) of the Trusts proxy voting policies and procedures is available without charge, upon request, by calling toll-free 1-855-751-4324, and by accessing the Securities and Exchange Commissions (SEC) website at http://www.sec.gov. Each Trust will send a description of its proxy voting policies and procedures within three business days of receipt of a request.
Each Trust will file its complete proxy voting record with the SEC on Form N-PX on an annual basis, by no later than August 31 of each year. Each Trust also will disclose in its SAI and annual and semi-annual reports to shareholders that its proxy voting record is available without charge, upon request, by calling toll-free 1-855-751-4324, and by accessing the SECs website. Each Trust must send the information disclosed in the Trusts most recently filed Form N-PX within three business days of receipt of a request.
The Angel Oak Funds Trust will also describe its proxy voting policies and procedures in its Statement of Additional Information (SAI) in accordance with SEC requirements.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a)(1) The following provides biographical information about the individuals who are primarily responsible for the day-to-day management of the registrants portfolio (Portfolio Managers) as of the date of this filing:
Berkin Kologlu is a Managing Director of the Adviser and a Portfolio Manager of the Fund. Mr. Kologlu has over 15 years of experience in fixed income products and focuses on building and managing strategies within the Collateralized Loan Obligation (CLO) market. Prior to Angel Oak, he spent six years as an Executive Director at UBS, covering structured products and client solutions. Prior to UBS, Mr. Kologlu worked at Bank of America, where he focused on the structuring and marketing of CLOs and synthetic collateralized debt obligations (CDOs) backed by corporate credit. Before Bank of America, Mr. Kologlu worked in Turkey as a commercial banker, where he was responsible for lending to large cap corporations. He received his MBA from Duke Universitys Fuqua School of Business and his B.S. in Civil Engineering from Bogazici University in Istanbul, Turkey.
2
Matthew R. Kennedy, CFA, is a Senior Portfolio Manager of the Adviser and a Portfolio Manager of the Fund. Prior to Angel Oak, Mr. Kennedy was the Director of Rainier Investment Managements fixed income management team, and served as a Portfolio Manager and Analyst. Previously, he was a Senior Analyst and made investment recommendations for investment grade, high yield and private placement portfolios at GE Financial Assurance in Seattle, where he began his investment career in 1995. From 1991 to 1994, he was a CPA and auditor with Deloitte & Touche. Mr. Kennedy holds a B.A. degree in Business Administration, with specializations in Finance and Accounting from Washington State University. He also holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the Seattle Society of Financial Analysts.
Sreeniwas (Sreeni) V. Prabhu is co-founder, Managing Partner, and Chief Investment Officer of the Adviser and a Portfolio Manager of the Fund. Prior to Angel Oak, Mr. Prabhu was the Chief Investment Officer of the investment portfolio at Washington Mutual Bank in Seattle where he managed a $25 billion portfolio. He was also part of the macro asset strategy team at the bank. Mr. Prabhu previously worked for six years at SunTrust Bank in Atlanta, where he was responsible for investment strategies and served as Head Portfolio Manager for the $3 billion commercial mortgage-backed securities portfolio. He began his career at SunTrust in 1998 as a Bank Analyst focused on asset/liability management and liquidity strategies. Mr. Prabhu holds a B.B.A. degree in Economics from Georgia College and State University and an M.B.A. in Finance from Georgia State University.
Colin McBurnette is a Portfolio Manager of the Adviser and a Portfolio Manager of the Fund. Mr. McBurnette focuses on security and portfolio analytics. Prior to Angel Oak, Mr. McBurnette worked for Prodigus Capital Management where he was responsible for the acquisition and management of their distressed debt portfolio, as well as the development of their proprietary financial technology platform. Previously, he worked in the Real Estate Capital Markets group for Wachovia Bank and Wells Fargo where he focused on risk management for their commercial real estate REPO lines. Mr. McBurnette holds B.B.A. degrees in Banking & Finance and Real Estate from the Terry College of Business at the University of Georgia.
(a)(2) The following provides information on other accounts managed on a day-to-day basis by the Portfolio Managers listed above as of January 31, 2019:
Berkin Kologlu
Number and Assets of Other Accounts | Number and Assets of Accounts for which Advisory Fee is Performance Based |
|||||||||||||||||||||
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
|||||||||||||||||
|
5 |
|
|
2 |
|
|
6 |
|
|
0 |
|
|
1 |
|
|
0 |
| |||||
$7,197,730,465 | $ | 801,570,232 | $ | 302,535,430 | $ | 0 | $ | 116,879,056 | $ | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
3
Sreeniwas (Sreeni) V. Prabhu
Number and Assets of Other Accounts | Number and Assets of Accounts for which Advisory Fee is Performance Based |
|||||||||||||||||||||
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
|||||||||||||||||
|
7 |
|
|
7 |
|
|
0 |
|
|
0 |
|
|
6 |
|
|
0 |
| |||||
|
$7,443,054,504 |
|
$ | 1,339,860,060 | $ | 0 | $ | 0 | $ | 655,168,884 | $ | 0 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Matthew R. Kennedy
Number and Assets of Other Accounts | Number and Assets of Accounts for which Advisory Fee is Performance Based |
|||||||||||||||||||||
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
|||||||||||||||||
|
2 |
|
|
2 |
|
|
0 |
|
|
0 |
|
|
1 |
|
|
0 |
| |||||
|
$73,375,326 |
|
$ | 801,570,232 | $ | 0 | $ | 0 | $ | 116,879,056 | $ | 0 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Colin McBurnette
Number and Assets of Other Accounts | Number and Assets of Accounts for which Advisory Fee is Performance Based |
|||||||||||||||||||||
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
|||||||||||||||||
|
5 |
|
|
2 |
|
|
3 |
|
|
0 |
|
|
1 |
|
|
0 |
| |||||
$7,260,487,721 | $ | 801,570,232 | $ | 26,864,170 | $ | 0 | $ | 116,879,056 | $ | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Potential Conflicts of Interest: Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities with respect to more than one fund or other account. More specifically, portfolio managers who manage multiple funds and/or other accounts may experience the following potential conflicts: The management of multiple accounts may result in a portfolio manager devoting unequal time and attention to the management of each account. Investment decisions for client accounts are also made consistent with a clients individual investment objective and needs. Accordingly, there may be circumstances when purchases or sales of securities for one or more client accounts will have an adverse effect on other clients. The Adviser may seek to manage such competing interests by: (1) having a portfolio manager focus on a particular investment discipline; (2) utilizing a quantitative model in managing accounts; and/or (3) reviewing performance differences between similarly managed accounts on a periodic basis to ensure that any such differences are attributable by differences in investment guidelines and timing of cash flows. The Adviser also maintains a Code of Ethics to establish standards and procedures for the detection and prevention of activities by which persons having knowledge of the investments and investment intentions of the Fund may abuse their fiduciary duties to the Fund.
If a portfolio manager identifies a limited investment opportunity that may be suitable for more than one client, the Fund may not be able to take full advantage of that opportunity due to an allocation of filled purchase or sale orders across all eligible accounts. To deal with these situations, the Adviser has adopted procedures for allocating portfolio transactions across multiple accounts.
4
With respect to securities transactions for clients, the Adviser determines which broker to use to execute each order. However, the Adviser may direct securities transactions to a particular broker/dealer for various reasons including receipt of research or participation interests in initial public offerings that may or may not benefit the Fund. To deal with these situations, the Adviser has adopted procedures to help ensure best execution of all client transactions.
Finally, the appearance of a conflict of interest may arise where the Adviser has an incentive, such as a performance-based management fee, which relates to the management of one but not all accounts for which a portfolio manager has day-to-day management responsibilities.
(a)(3) The following describes how the portfolio managers are compensated as of January 31, 2019:
The Portfolio Managers receive an annual base salary from the Adviser. Mr. Prabhu has an ownership interest in the Adviser and may receive distributions from the Adviser, which may come from profits generated by the Adviser. Each of the Portfolio Managers is eligible to receive a discretionary bonus, which is based on: profitability of the Adviser; assets under management; investment performance of managed accounts; compliance with the Advisers policies and procedures; contribution to the Advisers goals and objectives; anticipated compensation levels of competitor firms; effective research; role and responsibilities; client satisfaction; asset retention; teamwork; leadership; and risk management.
(a)(4) The following provides information about the dollar range of equity securities in the registrant beneficially owned by the Portfolio Managers as of January 31, 2019:
Portfolio Manager | Dollar Range of Equity | |
Berkin Kologlu | none | |
Sreeni V. Prabhu | none | |
Matthew R. Kennedy | none | |
Colin McBurnette | none |
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
There were no purchases made by or on behalf of the Registrant or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, of shares of the Registrants equity securities that are registered by the Registrant pursuant to Section 12 of the Exchange Act made in the period covered by this report.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes since the Funds inception to the procedures by which shareholders may recommend nominees to the registrants board of trustees.
5
Item 11. Controls and Procedures.
(a) | The Registrants Principal Executive Officer and Principal Financial Officer have reviewed the Registrants disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the Act)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the Registrant and by the Registrants service provider. |
(b) | There were no changes in the Registrants internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrants internal control over financial reporting. |
Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies
The registrant did not engage in securities lending activities during the fiscal year reported on this Form N-CSR.
Item 13. Exhibits.
(a) | (1) Any code of ethics or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Filed herewith |
(2) A separate certification for each principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not Applicable.
(4) Change in the registrants independent public accountant. There was no change in the registrants independent public accountant for the period covered by this report.
(b) | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Angel Oak Strategic Credit Fund
By (Signature and Title)* /s/ Dory S. Black
Dory S. Black, President (Principal Executive Officer)
Date 3/29/2019
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title)* /s/ Dory S. Black
Dory S. Black, President (Principal Executive Officer)
Date 3/29/2019
By (Signature and Title)* /s/ Daniel Fazioli
Daniel Fazioli, Treasurer (Principal Financial Officer)
Date 3/29/2019
* | Print the name and title of each signing officer under his or her signature. |
7
ANGEL OAK FUNDS TRUST
ANGEL OAK STRATEGIC CREDIT FUND
ANGEL OAK FINANCIAL STRATEGIES INCOME TERM TRUST SARBANES
OXLEY CODE OF ETHICS FOR
PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS
I. | Introduction/Covered Persons |
Angel Oak Funds Trust, Angel Oak Strategic Credit Fund, and Angel Oak Financial Strategies Income Term Trust (each, a Trust and together, the Trusts) have been successful in large part by managing their business with honesty and integrity. The principal officers of the Trusts have an important and elevated role in corporate governance and in promoting investor confidence. To further the ends of ethical and honest conduct among officers, the Audit, Financial and Administrative Oversight Committee (the Oversight Committee) of the Boards of Trustees of the Trusts have adopted this Code of Ethics. This Code of Ethics is designed to comply with Section 406 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and the rules promulgated by the Securities and Exchange Commission (the SEC) thereunder.
This Code of Ethics applies to the principal executive officer, principal financial officer, controller and other senior financial officers of the Trusts, as may be identified from time to time by the Oversight Committee (collectively, the Covered Persons).
The Oversight Committee shall be responsible for the overall administration of this Code of Ethics, but has delegated to the Trusts Chief Compliance Officer (the Chief Compliance Officer) the responsibility to oversee the day-to-day operation of this Code of Ethics.
This Code of Ethics is in addition to, not in replacement of, the Trusts Code of Ethics for access persons (the Investment Company Code of Ethics), adopted pursuant to Rule 17j-1 under the Investment Company Act of 1940, as amended (the Investment Company Act). The Covered Persons may also be subject to the Investment Company Code of Ethics.
II. | Code of Ethics Requirements |
This | Code of Ethics requires each Covered Person to: |
1. | Act with honesty and integrity, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
2. | Provide full, fair, accurate, timely and understandable disclosure in reports submitted to or filed with the SEC and in all other public communications made by the Trusts; |
3. | Comply with laws, rules and regulations of the federal government, state governments and other regulatory agencies as they apply to the Trusts; |
4. | Disclose promptly to the Chief Compliance Officer any violations of this Code of Ethics of which the Covered Person may become aware; and |
5. | Not retaliate against any other Covered Person or any employee of the Trusts or their affiliated persons for reports of potential violations that are made in good faith. |
III. | Conflicts of Interest |
A conflict of interest occurs when a Covered Persons private interest interferes in any wayor even appears to interferewith the interests of a Trust as a whole or with the Covered Persons service to the Trusts. For example, a conflict of interest would arise if a Covered Person, or a member of his or her family, receives improper personal benefits as a result of his or her position with a Trust.
Certain conflicts of interest arise out of the relationships between Covered Persons and a Trust and already are subject to conflict of interest provisions in the Investment Company Act and the Investment Advisers Act of 1940, as amended (the Investment Advisers Act). For example, Covered Persons may not individually engage in certain transactions with a Trust (such as the purchase or sale of securities or other property, except the Trusts own mutual fund shares) because of their status as affiliated persons of the Trust. The Trusts and the investment advisers compliance programs and procedures are reasonably designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code.
Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between a Trust and its investment adviser and/or administrator of which the Covered Persons are also officers or employees. As a result, this Code recognizes that the Covered Persons will, in the normal course of their duties (whether formally for a Trust or for the adviser and/or administrator, or for both), be involved in establishing policies and implementing decisions that will have different effects on the adviser and/or administrator and the Trust. The participation of the Covered Persons in such activities is inherent in the contractual relationship between a Trust and its investment adviser and/or administrator and is consistent with the performance by the Covered Persons of their duties as officers of the Trust. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically.
Other conflicts of interest are covered by this Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under this Code, but Covered Persons should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Person should not be placed improperly before the interest of a Trust.
Each Covered Person must:
| not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting by a Trust whereby the Covered Person would benefit personally to the detriment of the Trust; and |
| not cause a Trust to take action, or fail to take action, for the individual personal benefit of the Covered Person rather than for the benefit of the Trust. |
There are some conflict of interest situations that should be discussed with the Chief Compliance Officer if material. Examples of these include:
| any ownership interest in, or any consulting or employment relationship with, any of the Trusts service providers, other than their investment adviser, principal underwriter, administrator or any affiliated person thereof; and |
| a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Trusts for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Persons employment, such as compensation or equity ownership. |
IV. | Accurate, Complete, Timely and Understandable Information |
The Covered Persons are responsible for ensuring that the Trusts shareholders and the public receive financial and other information that is accurate, complete, timely and understandable. Covered Persons are obligated to comply with all laws and regulations governing the public disclosure of Trust information. All public statements, whether oral or written, must be understandable and accurate, with no material omissions.
The books and records of the Trusts must be kept accurate and current to ensure that the public receives information that is full, fair, accurate, complete and timely. The Covered Persons must ensure that transactions are completely and accurately recorded on the Trusts books and records in accordance with generally accepted accounting principles. Economic evaluations must fairly represent all information relevant to the evaluation being made. No secret or unrecorded cash funds or other assets may be established or maintained for any purpose.
Each Covered Person shall also comply with the Trusts disclosure controls and procedures and the Trusts internal controls and procedures for financial reporting.
V. | Waivers |
The Oversight Committee may grant a waiver from one or more provisions of this Code of Ethics upon the request of a Covered Person and after a review of the relevant facts and circumstances. The decision by the Oversight Committee whether to grant a waiver from this Code of Ethics shall be final.
Waiver shall mean the approval of a material departure from a provision of this Code of Ethics. If an executive officer becomes aware of a material departure from a provision of this Code of Ethics by any Covered Person, he or she shall immediately report such violation to the Chief Compliance Officer or the Oversight Committee, as appropriate. The Chief Compliance Officer shall promptly report the violation to the Oversight Committee. If the Oversight Committee fails to take action with respect to the violation within ten business days, the Trusts shall be deemed to have made an implicit waiver from this Code of Ethics.
VI. | Amendments |
This Code of Ethics may be amended by the Oversight Committee as it deems appropriate. If a provision of the Code of Ethics that applies to any Covered Person and that relates to one or more provisions of Section II of this Code is amended, the Oversight Committee shall direct the applicable fund to include a description of the amendment in the Trusts next report on Form N- CSR relating to the applicable fund.
Technical, administrative or other non-substantive amendments to the Code of Ethics need not be disclosed.
VII. | Violations |
If the Oversight Committee becomes aware of an actual or potential violation of this Code of Ethics, it shall direct an investigation into the facts and circumstances surrounding the violation. If a violation is found, the Oversight Committee may impose on the Covered Person found to be in violation of this Code of Ethics any of a wide range of consequences as it deems appropriate, including warnings or letters of reprimand for less significant, first-time offenses, fines, reduced professional duties, suspension without pay and, in the most serious cases, termination.
VIII. | Disclosure |
The Oversight Committee shall direct the applicable Trust to make this Code of Ethics publicly available by filing the Code as an exhibit to the Trusts annual report on Form N-CSR relating to each fund.
IX. | Acknowledgement |
Each Covered Person shall, in the form attached hereto as Appendix A, acknowledge receipt of and compliance with the Code of Ethics upon adoption of this Code of Ethics or when initially hired, whichever occurs later. Each Covered Person shall annually, in the form attached hereto as Appendix B, acknowledge receipt of and compliance with this Code of Ethics.
X. | Confidentiality |
All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code or in the course of investigating any alleged violation of this Code, such matters shall not be disclosed to anyone other than the Board, counsel for independent trustees, each Trust, counsel for each Trust, the investment adviser, and its counsel.
XI. | Internal Use |
The Code is intended solely for the internal use by the Trust and does not constitute an admission, by or on behalf of any Trust, as to any fact, circumstance, or legal conclusion.
APPENDIX A
ANGEL OAK FUNDS TRUST
ANGEL OAK STRATEGIC CREDIT FUND
ANGEL OAK FINANCIAL STRATEGIES INCOME TERM TRUST
ACKNOWLEDGMENT OF RECEIPT OF
THE CODE OF ETHICS
I acknowledge that I have received, read and understand the Code of Ethics dated and represent:
1. | In accordance with the Code of Ethics, I will report all violations of the Code of Ethics to the Chief Compliance Officer; |
2. | I do not currently know of any violations of the Code of Ethics; and |
3. | I will comply with the Code of Ethics in all other respects. |
Signature |
Print Name |
Title |
Dated:
Sarbanes-Oxley Code of Ethics Exhibit A | Page 6 |
APPENDIX B
ANGEL OAK FUNDS TRUST
ANGEL OAK STRATEGIC CREDIT FUND
ANGEL OAK FINANCIAL STRATEGIES INCOME TERM TRUST
ANNUAL CERTIFICATION OF COMPLIANCE WITH
THE CODE OF ETHICS
I certify that during the past year:
1. | I have reported all violations of the Code of Ethics of which I was aware; |
2. | I have complied with the Code of Ethics in all other respects; and |
3. | I have read and understand the Code of Ethics and recognize that I am subject thereto. |
Signature |
Print Name |
Title |
Dated:
Sarbanes-Oxley Code of Ethics Exhibit B | Page 7 |
EX.99.CERT
CERTIFICATIONS
I, Dory S. Black, certify that:
1. | I have reviewed this report on Form N-CSR of Angel Oak Strategic Credit Fund; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: 3/29/2019 | /s/ Dory S. Black | |||||
Dory S. Black | ||||||
President (Principal Executive Officer) |
9
EX.99.CERT
CERTIFICATIONS
I, Daniel Fazioli, certify that:
1. | I have reviewed this report on Form N-CSR of Angel Oak Strategic Credit Fund; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: 3/29/2019 | /s/ Daniel Fazioli | |||||
Daniel Fazioli | ||||||
Treasurer (Principal Financial Officer) |
10
EX.99.906CERT
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of the Angel Oak Strategic Credit Fund, does hereby certify, to such officers knowledge, that the report on Form N-CSR of the Angel Oak Strategic Credit Fund for the year ended January 31, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that the information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of Angel Oak Strategic Credit Fund for the stated period.
/s/ Dory S. Black | /s/ Daniel Fazioli | |||
Dory S. Black | Daniel Fazioli | |||
President (Principal Executive Officer) | Treasurer (Principal Financial Officer) | |||
Angel Oak Strategic Credit Fund | Angel Oak Strategic Credit Fund | |||
Dated: 3/29/2019 | Dated: 3/29/2019 |
This statement accompanies this report on Form N-CSR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed as filed by Angel Oak Strategic Credit Fund for purposes of Section 18 of the Securities Exchange Act of 1934.
11
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