N-CSR 1 ar093010his_hif.htm DWS HIGH INCOME FUND

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM N-CSR

 

Investment Company Act file number

811-02786

 

DWS High Income Series

(Exact Name of Registrant as Specified in Charter)

 

345 Park Avenue

New York, NY 10154-0004

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s Telephone Number, including Area Code: (201) 593-6408

 

Paul Schubert

100 Plaza One

Jersey City, NJ 07311

(Name and Address of Agent for Service)

 

Date of fiscal year end:

9/30

 

Date of reporting period:

9/30/2010

 

ITEM 1.

REPORT TO STOCKHOLDERS

 

SEPTEMBER 30, 2010

Annual Report
to Shareholders

 

 

DWS High Income Fund

hif_cover310

Contents

4 Performance Summary

7 Information About Your Fund's Expenses

9 Portfolio Management Review

13 Portfolio Summary

15 Investment Portfolio

31 Statement of Assets and Liabilities

33 Statement of Operations

34 Statement of Changes in Net Assets

35 Financial Highlights

39 Notes to Financial Statements

51 Report of Independent Registered Public Accounting Firm

52 Tax Information

53 Investment Management Agreement Approval

57 Summary of Management Fee Evaluation by Independent Fee Consultant

61 Board Members and Officers

65 Account Management Resources

This report must be preceded or accompanied by a prospectus. To obtain a summary prospectus, if available, or prospectus for any of our funds, refer to the Account Management Resources information provided in the back of this booklet. We advise you to consider the fund's objectives, risks, charges and expenses carefully before investing. The summary prospectus and prospectus contain this and other important information about the fund. Please read the prospectus carefully before you invest.

Bond investments are subject to interest-rate and credit risks. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. Investments in lower-quality and non-rated securities present greater risk of loss than investments in higher-quality securities. See the prospectus for details.

DWS Investments is part of Deutsche Bank's Asset Management division and, within the US, represents the retail asset management activities of Deutsche Bank AG, Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company.

NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

Performance Summary September 30, 2010

Average Annual Total Returns as of 9/30/10

Unadjusted for Sales Charge

1-Year

3-Year

5-Year

10-Year

 

Class A

16.69%

5.69%

6.24%

6.54%

 

Class B

15.74%

4.82%

5.37%

5.68%

 

Class C

15.81%

4.82%

5.40%

5.68%

 

Adjusted for the Maximum Sales Charge

 

 

 

 

 

Class A (max 4.50% load)

11.44%

4.08%

5.27%

6.05%

 

Class B (max 4.00% CDSC)

12.74%

4.27%

5.23%

5.68%

 

Class C (max 1.00% CDSC)

15.81%

4.82%

5.40%

5.68%

 

No Sales Charges

 

 

 

 

Life of Institutional Class*

Institutional Class

17.03%

5.94%

6.57%

N/A

9.73%

Credit Suisse High Yield Index+

17.85%

7.72%

7.85%

8.21%

10.39%

Sources: Lipper, Inc. and Deutsche Investment Management Americas Inc.

* Institutional Class shares commenced operations on August 19, 2002. Index returns began on August 31, 2002.

Performance in the Average Annual Total Returns table above and the Growth of an Assumed $10,000 Investment line graph that follows is historical and does not guarantee future results. Investment return and principal fluctuate, so your shares may be worth more or less when redeemed. Current performance may differ from performance data shown. Please visit www.dws-investments.com for the Fund's most recent month-end performance. Performance includes reinvestment of all distributions. Unadjusted returns do not reflect sales charges and would have been lower if they had.

The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated February 1, 2010 are 0.96%, 1.77%, 1.72% and 0.67% for Class A, Class B, Class C and Institutional Class shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report.

The Fund may charge a 2% fee for redemptions of shares held less than 30 days.

Index returns, unlike Fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

Performance figures do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

Growth of an Assumed $10,000 Investment (Adjusted for Maximum Sales Charge)

[] DWS High Income Fund — Class A

[] Credit Suisse High Yield Index+

hif_g10k2c0

Yearly periods ended September 30

The Fund's growth of an assumed $10,000 investment is adjusted for the maximum sales charge of 4.50%. This results in a net initial investment of $9,550.

The growth of $10,000 is cumulative.

Performance of other share classes will vary based on the sales charges and the fee structure of those classes.

+ The Credit Suisse High Yield Index is an unmanaged trader-priced portfolio constructed to mirror the global high-yield debt market.

Net Asset Value and Distribution Information

 

Class A

Class B

Class C

Institutional Class

Net Asset Value:

9/30/10

$ 4.77

$ 4.77

$ 4.78

$ 4.77

9/30/09

$ 4.44

$ 4.44

$ 4.44

$ 4.44

Distribution Information:

Twelve Months as of 9/30/10:

Income Dividends

$ .38

$ .34

$ .35

$ .40

September Income Dividend

$ .0322

$ .0290

$ .0293

$ .0333

SEC 30-day Yield++

6.60%

6.18%

6.16%

7.27%

Current Annualized Distribution Rate++

8.10%

7.30%

7.36%

8.38%

++ The SEC yield is net investment income per share earned over the month ended September 30, 2010, shown as the annualized percentage of the maximum offering price per share on the last day of the period. The SEC yield is computed in accordance with a standardized method prescribed by the Securities and Exchange Commission. Current annualized distribution rate is the latest monthly dividend as an annualized percentage of net asset value on September 30, 2010. Distribution rate simply measures the level of dividends and is not a complete measure of performance. Yields and distribution rates are historical, not guaranteed, and will fluctuate.

Lipper Rankings — High Current Yield Funds Category as of 9/30/10

Period

Rank

 

Number of Fund Classes Tracked

Percentile Ranking (%)

Class A

1-Year

212

of

482

44

3-Year

240

of

416

58

5-Year

193

of

351

55

10-Year

105

of

234

45

Class B

1-Year

313

of

482

65

3-Year

312

of

416

75

5-Year

292

of

351

83

10-Year

167

of

234

72

Class C

1-Year

305

of

482

64

3-Year

314

of

416

76

5-Year

290

of

351

83

10-Year

166

of

234

71

Institutional Class

1-Year

173

of

482

36

3-Year

220

of

416

53

5-Year

150

of

351

43

Source: Lipper Inc. Rankings are historical and do not guarantee future results. Rankings are based on total return unadjusted for sales charges with distributions reinvested. If sales charges had been included, rankings might have been less favorable.

Information About Your Fund's Expenses

As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include sales charges (loads), redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (April 1, 2010 to September 30, 2010).

The tables illustrate your Fund's expenses in two ways:

• Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

• Hypothetical 5% Fund Return. This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended September 30, 2010

Actual Fund Return

Class A

Class B

Class C

Institutional Class

Beginning Account Value 4/1/10

$ 1,000.00

$ 1,000.00

$ 1,000.00

$ 1,000.00

Ending Account Value 9/30/10

$ 1,060.00

$ 1,055.70

$ 1,056.00

$ 1,061.60

Expenses Paid per $1,000*

$ 4.96

$ 8.86

$ 8.81

$ 3.51

Hypothetical 5% Fund Return

Class A

Class B

Class C

Institutional Class

Beginning Account Value 4/1/10

$ 1,000.00

$ 1,000.00

$ 1,000.00

$ 1,000.00

Ending Account Value 9/30/10

$ 1,020.26

$ 1,016.44

$ 1,016.50

$ 1,021.66

Expenses Paid per $1,000*

$ 4.86

$ 8.69

$ 8.64

$ 3.45

* Expenses are equal to the Fund's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

Class B

Class C

Institutional Class

DWS High Income Fund

.96%

1.72%

1.71%

.68%

For more information, please refer to the Fund's prospectus.

Portfolio Management Review

DWS High Income Fund: A Team Approach to Investing

Deutsche Investment Management Americas Inc. ("DIMA" or the "Advisor"), which is part of Deutsche Asset Management, is the investment advisor for DWS High Income Fund. DIMA and its predecessors have more than 80 years of experience managing mutual funds and DIMA provides a full range of investment advisory services to both institutional and retail clients.

DIMA is an indirect, wholly owned subsidiary of Deutsche Bank AG. Deutsche Bank AG is a major global banking institution that is engaged in a wide range of financial services, including investment management, mutual funds, retail, private and commercial banking, investment banking and insurance.

DWS Investments is the retail brand name of the US asset management activities of Deutsche Bank AG and DIMA, representing a wide range of investing expertise and resources. This well-resourced global investment platform brings together a wide variety of experience and investment insight across industries, regions, asset classes and investing styles.

Portfolio Manager

Gary Russell, CFA

Portfolio Manager

Market Overview and Fund Performance

The views expressed in the following discussion reflect those of the portfolio manager only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk.

High-yield bonds delivered an outstanding return during the fund's annual reporting period. The Credit Suisse High Yield Index — the fund's benchmark — returned 17.85%, strongly outperforming the 8.16% return of the broader bond market, as gauged by the Barclays Capital US Aggregate Bond Index.1,2 The Credit Suisse High Yield Index has outpaced the Barclays Capital US Aggregate Bond Index during the three-, five- and 10-year periods ended September 30, 2010.

The outperformance of high yield during the past year resulted from both a favorable environment for the broader financial markets and from several positive developments specific to the asset class.

Looking first at the overall market backdrop, the key factor for the high-yield sector was the extremely low rates available in government bonds and short-term fixed-income investments. Investors were compelled to look for opportunities in higher-risk segments of the market, such as high-yield bonds, in order to generate yield in their portfolios. While short-lived bouts of increased risk aversion weighed on the high-yield market at various times throughout the year, in general the accommodative policy of the US Federal Reserve Board (the Fed) gave investors the "green light" to take on more risk in their search for yield.

In terms of factors specific to high yield, the most notable development was a plunge in the Moody's trailing 12-month US speculative bond par default rate to 1.78% from 19.7% one year ago.3 One reason for this significant improvement was that rising investor optimism facilitated a record level of new issuance in the first nine months of 2010, during which approximately $211 billion in new issues came to the market. About 68% of this was refinancing activity by companies that sought to extend maturities. The result of this heavy refinancing activity was an improved ability of high-yield companies to meet debt service requirements — a trend that contributed to the declining default rate.

These developments were reflected in a continued decline in the yield spread of high-yield bonds relative to Treasuries.4 While at the beginning of the annual period this gap stood at 764 basis points (7.64 percentage points), it stood at 642 on September 30, 2010 — indicating outperformance for high yield. This strong performance was even more remarkable given that yields on US Treasury bonds declined substantially across all maturities.

In this environment, the Class A shares of the fund produced a strong return of 16.69%, but underperformed the 17.85% return of the benchmark. The primary reason for this underperformance was that our portfolio had a lower risk profile than the high-yield market as a whole, reflecting the abundance of attractive relative values among higher-rated securities. This positioning led to a shortfall in our relative performance at a time in which lower-rated, higher-risk securities produced market-beating returns. (Returns are unadjusted for sales charges. If sales charges had been included, returns would have been lower. Past performance is no guarantee of future results. Please see pages 4 through 6 for complete performance information.)

Positive Contributors to Fund Performance

The largest contributor to our performance in the past year was our position in bonds issued by Ford Motor Co. Ford benefited from rising sales, increased market share and declining debt, all of which set the stage of an upgrade to its credit quality rating.5

Our security selection in the chemicals sector proved helpful to performance. Key contributors were our positions in Hexion Specialty Chemicals,* Ashland, Inc. and Huntsman International LLC.

The refinancing activity that helped the performance of the broader high-yield market also proved to be a positive for the fund. We were overweight in the secured bond of Viskase Companies, Inc., which demonstrated improving credit fundamentals and refinanced this secured bond at a premium early in the year.6 We see this as a prime example of how companies with improved cost structures were able to refinance debt and improve their liquidity. We also held an overweight in the convertible notes of Advanced Micro Devices, Inc.,* as we anticipated a strong semiconductor cycle. The company tendered for about two-thirds of these notes, causing them to rise in price.

Our relative performance was also helped by our risk management process, which we believe can help us avoid securities that may be in jeopardy of underperformance. A prime example was Edison Mission Energy, a benchmark component that we underweighted due to its exposure to falling natural gas prices and its potential vulnerability to activist environmental policies. Edison's bonds indeed underperformed, so our decision to underweight this issuer was a positive for our relative performance.

Negative Contributors to Fund Performance

As stated previously, the primary factor in our underperformance was our overweight in higher-rated securities. One outcome of this positioning was our underweight or non-holdings in certain high-volatility securities that performed very well in the rising market, such as CIT Group, Inc., Realogy Corp.* and Residential Capital.* In all cases, we saw a heightened level of risk stemming from these issuers' exposure to the real estate market. On the other side of the ledger, overweights in certain lower-volatility securities — such as NRG Energy, Inc. and HCA, Inc. — prevented us from keeping pace with the rising market.

These detractors demonstrate that at times our risk management process can cause us to miss some winners, however, we believe a focus on risk and reward — rather than trying to chase short-term performance in the hottest areas of the market — remains a prudent strategy.

Outlook and Positioning

We continue to hold an upbeat outlook for high-yield bonds. We believe all of the market's key fundamental underpinnings remain sound, including robust liquidity, improving balance sheets, supportive US Federal Reserve Board policy, rising merger and acquisition activity, and a low default rate. Even with these positives in place, however, investors should be aware that high-yield bonds are unlikely to maintain a rate of return as strong as that of the past 18 months. Still, we believe the asset class remains well-supported by its significant yield advantage relative to other segments of the bond market.

We also continue to look for opportunities across the full range of corporations' capital structure, which underpins our approximate 6% average weighting in bank loans. We continue to overweight the single-B credit tier, where we see the best trade-off of risk and reward. We hold an underweight in issues rated BB and a modest underweight in those rated CCC.

1 The Credit Suisse High Yield Index is an unmanaged, trader-priced portfolio constructed to mirror the global high-yield debt market.
2 The Barclays Capital US Aggregate Bond Index is an unmanaged, market-value- weighted measure of Treasury issues, agency issues, corporate bond issues and mortgage securities.
Index returns, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
3 Moody's trailing 12-month US speculative bond par default rate incorporates the last 12 months of data (as opposed to one month or three months, for instance). The ratings of Moody's Investors Service, Inc. (Moody's) represent these companies' opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The fund's credit quality does not remove market risk.
4 "Spread" refers to the excess yield various bond sectors offer over Treasuries with similar maturities. When spreads widen, yield differences are increasing between bonds in the two sectors being compared. When spreads narrow, the opposite is true.
5 Credit quality is a measure of a bond issuer's ability to repay interest and principal in a timely manner. Rating agencies assign letter designations such as AAA, AA and so forth. The lower the rating, the higher the probability of default. The fund's credit quality does not remove market risk and is subject to change.
6 "Overweight" means the fund holds a higher weighting in a given sector or security than the benchmark. "Underweight" means the fund holds a lower weighting.
* Not held in the portfolio as of September 30, 2010.

Portfolio Summary

Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral)

9/30/10

9/30/09

 

 

 

Corporate Bonds

93%

89%

Loan Participations and Assignments

6%

9%

Cash Equivalents

1%

2%

 

100%

100%

Sector Diversification

(As a % of Investment Portfolio excluding Cash Equivalents and Securities Lending Collateral)

9/30/10

9/30/09

 

 

 

Consumer Discretionary

20%

18%

Financials

16%

16%

Energy

13%

12%

Materials

12%

13%

Industrials

10%

8%

Telecommunication Services

10%

11%

Information Technology

6%

4%

Health Care

5%

6%

Utilities

4%

8%

Consumer Staples

4%

4%

 

100%

100%

Quality (As a % of Investment Portfolio excluding Cash Equivalents and Securities Lending Collateral)

9/30/10

9/30/09

 

 

 

BBB

0%

1%

BB

15%

16%

B

57%

48%

CCC

25%

25%

CC

0%

4%

C

0%

1%

D

0%

3%

Not Rated

3%

2%

 

100%

100%

Asset allocation, sector diversification and quality exclude derivatives and are subject to change.

The quality ratings represents the lower of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings. The ratings of Moody's and S&P represent their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The Fund's credit quality does not remove market risk and is subject to change.

Interest Rate Sensitivity

9/30/10

9/30/09

 

 

 

Effective Maturity

5.8 years

4.8 years

Effective Duration

3.6 years

3.0 years

Effective maturity is the weighted average of the bonds held by the Fund taking into consideration any maturity shortening features.

Effective duration is the measurable change in the value of a security in response to a change in interest rates.

Interest rate sensitivity is subject to change.

For more complete details about the Fund's investment portfolio, see page 15. A quarterly Fact Sheet is available upon request. Please see the Account Management Resources section for contact information.

Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330. The Fund's portfolio holdings are also posted on www.dws-investments.com from time to time. Please see the Fund's current prospectus for more information.

Investment Portfolio as of September 30, 2010

 

Principal Amount ($) (a)

Value ($)

 

 

Corporate Bonds 92.4%

Consumer Discretionary 16.6%

AMC Entertainment, Inc.:

 

8.0%, 3/1/2014

 

4,818,000

4,860,157

 

8.75%, 6/1/2019

 

5,685,000

5,990,569

American Achievement Corp., 144A, 8.25%, 4/1/2012

 

1,720,000

1,713,550

Ameristar Casinos, Inc., 9.25%, 6/1/2014 (b)

 

4,220,000

4,504,850

Asbury Automotive Group, Inc.:

 

7.625%, 3/15/2017

 

3,990,000

3,890,250

 

8.0%, 3/15/2014

 

1,710,000

1,727,100

Ashtead Holdings PLC, 144A, 8.625%, 8/1/2015

 

4,040,000

4,161,200

Avis Budget Car Rental LLC, 9.625%, 3/15/2018

 

2,120,000

2,241,900

Bon-Ton Department Stores, Inc., 10.25%, 3/15/2014

 

1,985,000

1,955,225

Brunswick Corp., 144A, 11.25%, 11/1/2016

 

2,310,000

2,662,275

Cablevision Systems Corp.:

 

7.75%, 4/15/2018

 

520,000

549,900

 

8.0%, 4/15/2020

 

520,000

559,650

CanWest MediaWorks LP, 144A, 9.25%, 8/1/2015**

 

2,875,000

517,500

Carrols Corp., 9.0%, 1/15/2013

 

1,810,000

1,823,575

CCO Holdings LLC:

 

144A, 7.25%, 10/30/2017

 

4,005,000

4,060,069

 

144A, 7.875%, 4/30/2018

 

1,800,000

1,867,500

 

144A, 8.125%, 4/30/2020

 

1,200,000

1,272,000

Cequel Communications Holdings I LLC, 144A, 8.625%, 11/15/2017

 

9,770,000

10,307,350

Claire's Stores, Inc., 9.625%, 6/1/2015 (PIK) (b)

 

1,719,818

1,616,629

Clear Channel Worldwide Holdings, Inc.:

 

Series A, 9.25%, 12/15/2017

 

775,000

821,500

 

Series B, 9.25%, 12/15/2017

 

1,150,000

1,227,625

Cooper-Standard Automotive, Inc., 144A, 8.5%, 5/1/2018

 

1,200,000

1,245,000

CSC Holdings LLC:

 

8.5%, 4/15/2014

 

4,720,000

5,197,900

 

8.5%, 6/15/2015

 

3,410,000

3,725,425

DISH DBS Corp., 7.125%, 2/1/2016

 

1,820,000

1,913,275

Easton-Bell Sports, Inc., 9.75%, 12/1/2016

 

575,000

624,594

Fontainebleau Las Vegas Holdings LLC, 144A, 11.0%, 6/15/2015**

 

3,640,000

546

Ford Motor Co., 7.45%, 7/16/2031 (b)

 

8,215,000

8,564,137

Gannett Co., Inc.:

 

144A, 8.75%, 11/15/2014

 

1,145,000

1,256,638

 

144A, 9.375%, 11/15/2017

 

2,295,000

2,507,287

Goodyear Tire & Rubber Co., 10.5%, 5/15/2016

 

1,780,000

2,015,850

Great Canadian Gaming Corp., 144A, 7.25%, 2/15/2015

 

3,395,000

3,450,169

Group 1 Automotive, Inc., 144A, 3.0%, 3/15/2020

 

3,020,000

2,869,000

Harrah's Operating Co., Inc.:

 

10.0%, 12/15/2018

 

4,425,000

3,534,469

 

11.25%, 6/1/2017

 

13,410,000

14,683,950

 

144A, 12.75%, 4/15/2018

 

2,405,000

2,242,662

Hertz Corp.:

 

144A, 7.5%, 10/15/2018

 

6,940,000

6,940,000

 

8.875%, 1/1/2014

 

10,460,000

10,734,575

Lear Corp.:

 

7.875%, 3/15/2018

 

1,885,000

1,998,100

 

8.125%, 3/15/2020

 

1,880,000

2,009,250

Levi Strauss & Co., 7.625%, 5/15/2020

 

2,080,000

2,158,000

Mediacom Broadband LLC, 8.5%, 10/15/2015

 

2,690,000

2,750,525

Mediacom LLC, 9.125%, 8/15/2019 (b)

 

1,745,000

1,806,075

MGM Resorts International:

 

144A, 4.25%, 4/15/2015

 

405,000

373,106

 

144A, 9.0%, 3/15/2020

 

1,315,000

1,384,037

 

10.375%, 5/15/2014

 

2,660,000

2,959,250

 

11.125%, 11/15/2017

 

3,585,000

4,082,419

Michaels Stores, Inc., Step-up Coupon, 0% to 11/1/2011, 13.0% to 11/1/2016

 

1,205,000

1,159,813

Motors Liquidation Co.:

 

6.75%, 5/1/2028** (b)

 

2,090,000

647,900

 

8.375%, 7/15/2033** (b)

 

3,485,000

1,176,188

Neiman Marcus Group, Inc., 10.375%, 10/15/2015

 

1,180,000

1,239,000

Netflix, Inc., 8.5%, 11/15/2017

 

1,145,000

1,276,675

Norcraft Companies LP, 10.5%, 12/15/2015

 

8,730,000

9,122,850

Norcraft Holdings LP, 9.75%, 9/1/2012

 

4,356,000

4,083,750

Penn National Gaming, Inc., 8.75%, 8/15/2019

 

1,245,000

1,322,812

Penske Automotive Group, Inc., 7.75%, 12/15/2016

 

8,910,000

8,698,387

Phillips-Van Heusen Corp., 7.375%, 5/15/2020

 

1,250,000

1,317,187

Regal Entertainment Group, 9.125%, 8/15/2018

 

1,070,000

1,122,163

Sabre Holdings Corp., 8.35%, 3/15/2016

 

5,070,000

5,171,400

Sears Holdings Corp., 144A, 6.625%, 10/15/2018 (c)

 

2,640,000

2,640,000

Seminole Indian Tribe of Florida, 144A, 7.804%, 10/1/2020

 

3,505,000

3,188,779

Simmons Bedding Co., 144A, 11.25%, 7/15/2015

 

2,445,000

2,625,319

Sirius XM Radio, Inc., 144A, 8.75%, 4/1/2015

 

2,760,000

2,932,500

Sonic Automotive, Inc.:

 

5.0%, 10/1/2029

 

1,180,000

1,249,325

 

Series B, 9.0%, 3/15/2018

 

4,530,000

4,699,875

Standard Pacific Corp.:

 

8.375%, 5/15/2018

 

610,000

610,000

 

10.75%, 9/15/2016

 

3,555,000

3,874,950

Tenneco, Inc., 144A, 7.75%, 8/15/2018

 

535,000

548,375

Toys "R" Us, Inc., 7.375%, 10/15/2018

 

1,610,000

1,537,550

Toys "R" Us-Delaware, Inc., 144A, 7.375%, 9/1/2016

 

1,510,000

1,536,425

Travelport LLC:

 

4.922%***, 9/1/2014

 

2,640,000

2,455,200

 

144A, 9.0%, 3/1/2016

 

2,950,000

2,935,250

 

9.875%, 9/1/2014

 

2,085,000

2,144,944

 

11.875%, 9/1/2016

 

1,210,000

1,294,700

United Components, Inc., 9.375%, 6/15/2013

 

570,000

579,975

Unitymedia GmbH, 144A, 9.625%, 12/1/2019

EUR

4,290,000

6,316,211

Unitymedia Hessen GmbH & Co., KG, 144A, 8.125%, 12/1/2017

 

7,460,000

7,758,400

UPC Holding BV, 144A, 8.0%, 11/1/2016

EUR

3,515,000

4,935,580

Vertis, Inc., 13.5%, 4/1/2014 (PIK)

 

1,620,958

502,497

Videotron Ltd., 9.125%, 4/15/2018 (b)

 

3,625,000

4,078,125

Visant Corp., 144A, 10.0%, 10/1/2017

 

3,535,000

3,694,075

Wynn Las Vegas LLC, 144A, 7.75%, 8/15/2020

 

2,140,000

2,257,700

Young Broadcasting, Inc., 8.75%, 1/15/2014**

 

15,800,000

158

 

250,090,651

Consumer Staples 4.0%

Alliance One International, Inc., 10.0%, 7/15/2016

 

1,145,000

1,239,463

B&G Foods, Inc., 7.625%, 1/15/2018

 

1,320,000

1,374,450

Central Garden & Pet Co., 8.25%, 3/1/2018

 

1,765,000

1,802,506

Cott Beverages, Inc., 144A, 8.375%, 11/15/2017

 

1,145,000

1,213,700

Dole Food Co., Inc., 144A, 8.0%, 10/1/2016

 

1,700,000

1,778,625

FAGE Dairy Industry SA, 144A, 9.875%, 2/1/2020

 

4,250,000

3,931,250

General Nutrition Centers, Inc., 5.75%***, 3/15/2014 (PIK)

 

1,960,000

1,942,850

Michael Foods, Inc., 144A, 9.75%, 7/15/2018 (b)

 

4,050,000

4,333,500

NBTY, Inc., 144A, 9.0%, 10/1/2018 (c)

 

1,065,000

1,118,250

North Atlantic Trading Co., 144A, 10.0%, 3/1/2012

 

13,632,250

12,269,025

Reddy Ice Corp., 11.25%, 3/15/2015

 

1,305,000

1,334,363

Rite Aid Corp.:

 

7.5%, 3/1/2017

 

1,675,000

1,543,094

 

144A, 8.0%, 8/15/2020

 

4,435,000

4,501,525

Smithfield Foods, Inc.:

 

7.75%, 7/1/2017

 

10,015,000

10,152,706

 

144A, 10.0%, 7/15/2014

 

4,375,000

5,031,250

SUPERVALU, Inc., 8.0%, 5/1/2016 (b)

 

1,650,000

1,662,375

Tops Markets LLC, 144A, 10.125%, 10/15/2015

 

2,815,000

3,022,606

TreeHouse Foods, Inc., 7.75%, 3/1/2018

 

1,185,000

1,273,875

 

59,525,413

Energy 13.3%

Arch Coal, Inc., 7.25%, 10/1/2020

 

855,000

903,094

Atlas Energy Operating Co., LLC:

 

10.75%, 2/1/2018

 

7,030,000

7,785,725

 

12.125%, 8/1/2017 (b)

 

2,385,000

2,757,656

Belden & Blake Corp., 8.75%, 7/15/2012

 

15,945,000

15,626,100

Berry Petroleum Co., 10.25%, 6/1/2014

 

3,305,000

3,726,387

Bill Barrett Corp., 9.875%, 7/15/2016

 

2,415,000

2,638,388

Brigham Exploration Co., 144A, 8.75%, 10/1/2018

 

1,065,000

1,096,950

Bristow Group, Inc., 7.5%, 9/15/2017

 

3,800,000

3,895,000

Chaparral Energy, Inc., 8.5%, 12/1/2015

 

10,555,000

10,264,737

Chesapeake Energy Corp.:

 

6.625%, 8/15/2020 (b)

 

2,790,000

2,915,550

 

6.875%, 8/15/2018

 

1,395,000

1,461,263

 

6.875%, 11/15/2020

 

3,885,000

4,118,100

 

7.25%, 12/15/2018

 

3,145,000

3,388,737

 

9.5%, 2/15/2015

 

570,000

659,775

CITGO Petroleum Corp., 144A, 11.5%, 7/1/2017

 

4,500,000

4,983,750

Cloud Peak Energy Resources LLC:

 

8.25%, 12/15/2017

 

1,140,000

1,204,125

 

8.5%, 12/15/2019

 

1,140,000

1,222,650

Coffeyville Resources LLC, 144A, 9.0%, 4/1/2015

 

3,285,000

3,465,675

CONSOL Energy, Inc.:

 

144A, 8.0%, 4/1/2017 (b)

 

5,295,000

5,731,837

 

144A, 8.25%, 4/1/2020 (b)

 

2,395,000

2,616,538

Continental Resources, Inc.:

 

144A, 7.125%, 4/1/2021

 

1,335,000

1,388,400

 

144A, 7.375%, 10/1/2020

 

1,560,000

1,645,800

 

8.25%, 10/1/2019

 

855,000

936,225

Crosstex Energy LP, 8.875%, 2/15/2018

 

2,765,000

2,896,337

Dynegy Holdings, Inc., 7.75%, 6/1/2019 (b)

 

4,620,000

3,164,700

El Paso Corp., 8.25%, 2/15/2016

 

2,455,000

2,731,188

Energy Transfer Equity LP, 7.5%, 10/15/2020

 

1,635,000

1,720,838

Frontier Oil Corp., 8.5%, 9/15/2016

 

2,045,000

2,126,800

Global Geophysical Services, Inc., 144A, 10.5%, 5/1/2017

 

5,975,000

6,079,562

Harvest Operations Corp., 144A, 6.875%, 10/1/2017 (c)

 

1,065,000

1,088,963

Holly Corp., 9.875%, 6/15/2017

 

4,250,000

4,499,687

Holly Energy Partners LP, 144A, 8.25%, 3/15/2018

 

2,670,000

2,783,475

Inergy LP, 144A, 7.0%, 10/1/2018

 

2,670,000

2,736,750

Linn Energy LLC:

 

144A, 7.75%, 2/1/2021

 

2,670,000

2,693,363

 

144A, 8.625%, 4/15/2020

 

2,460,000

2,607,600

 

11.75%, 5/15/2017

 

5,075,000

5,823,562

Murray Energy Corp., 144A, 10.25%, 10/15/2015

 

2,045,000

2,121,688

Newfield Exploration Co., 7.125%, 5/15/2018

 

5,250,000

5,604,375

Niska Gas Storage US LLC, 144A, 8.875%, 3/15/2018

 

2,610,000

2,792,700

OPTI Canada, Inc.:

 

7.875%, 12/15/2014

 

9,320,000

7,013,300

 

8.25%, 12/15/2014

 

3,240,000

2,462,400

 

144A, 9.0%, 12/15/2012

 

1,100,000

1,113,750

Petrohawk Energy Corp.:

 

144A, 7.25%, 8/15/2018

 

2,135,000

2,177,700

 

7.875%, 6/1/2015

 

1,785,000

1,869,788

 

10.5%, 8/1/2014

 

2,225,000

2,519,813

Plains Exploration & Production Co.:

 

7.0%, 3/15/2017

 

3,000,000

3,075,000

 

7.625%, 6/1/2018

 

5,955,000

6,252,750

 

8.625%, 10/15/2019

 

1,620,000

1,769,850

Quicksilver Resources, Inc., 11.75%, 1/1/2016

 

3,095,000

3,628,887

Range Resources Corp., 6.75%, 8/1/2020

 

800,000

832,000

Regency Energy Partners LP:

 

8.375%, 12/15/2013

 

4,020,000

4,190,850

 

144A, 9.375%, 6/1/2016 (b)

 

5,775,000

6,366,937

Sabine Pass LNG LP:

 

7.25%, 11/30/2013

 

7,095,000

6,846,675

 

7.5%, 11/30/2016

 

890,000

812,125

SandRidge Energy, Inc., 8.625%, 4/1/2015 (PIK)

 

1,065,000

1,065,000

Southwestern Energy Co., 7.5%, 2/1/2018

 

2,230,000

2,519,900

Stone Energy Corp.:

 

6.75%, 12/15/2014

 

5,200,000

4,784,000

 

8.625%, 2/1/2017

 

3,445,000

3,384,712

Whiting Petroleum Corp., 6.5%, 10/1/2018

 

1,005,000

1,027,613

 

199,617,100

Financials 14.4%

Algoma Acquisition Corp., 144A, 9.875%, 6/15/2015

 

6,360,000

5,668,350

Ally Financial, Inc.:

 

7.0%, 2/1/2012

 

4,155,000

4,295,231

 

7.25%, 3/2/2011

 

30,000

30,525

 

144A, 7.5%, 9/15/2020

 

5,355,000

5,703,075

 

144A, 8.0%, 3/15/2020

 

5,395,000

5,894,037

 

8.0%, 11/1/2031

 

3,365,000

3,608,962

 

144A, 8.3%, 2/12/2015

 

1,770,000

1,929,300

Antero Resources Finance Corp., 9.375%, 12/1/2017

 

1,660,000

1,763,750

Ardagh Packaging Finance PLC:

 

144A, 7.375%, 10/15/2017 (c)

EUR

1,150,000

1,567,738

 

144A, 7.375%, 10/15/2017 (c)

 

1,665,000

1,665,000

Ashton Woods USA LLC, 144A, Step-up Coupon, 0% to 6/30/2012, 11.0% to 6/30/2015

 

4,745,000

2,372,500

Buffalo Thunder Development Authority, 144A, 9.375%, 12/15/2014**

 

1,705,000

443,300

Calpine Construction Finance Co., LP, 144A, 8.0%, 6/1/2016 (b)

 

4,430,000

4,740,100

Case New Holland, Inc., 7.75%, 9/1/2013

 

2,310,000

2,509,238

CIT Group, Inc.:

 

7.0%, 5/1/2013

 

3,435,000

3,452,175

 

7.0%, 5/1/2015

 

4,713,700

4,678,347

 

7.0%, 5/1/2017

 

15,790,000

15,454,462

DuPont Fabros Technology LP, (REIT),
8.5%, 12/15/2017

 

3,340,000

3,582,150

E*TRADE Financial Corp.:

 

7.375%, 9/15/2013

 

11,675,000

11,412,312

 

12.5%, 11/30/2017 (PIK)

 

4,818,000

5,492,520

Eaton Vance Corp., CDO II, Series C-X, 13.68%, 7/15/2012**

 

3,290,106

0

Express LLC, 8.75%, 3/1/2018

 

2,205,000

2,326,275

FCE Bank PLC, 9.375%, 1/17/2014

EUR

5,550,000

8,417,219

Fibria Overseas Finance Ltd., 144A, 7.5%, 5/4/2020 (b)

 

2,022,000

2,145,848

Ford Motor Credit Co., LLC:

 

6.625%, 8/15/2017

 

2,705,000

2,882,004

 

8.125%, 1/15/2020

 

685,000

787,110

Fresenius US Finance II, Inc., 144A, 9.0%, 7/15/2015

 

1,640,000

1,869,600

Hellas Telecommunications Finance SCA, 144A, 8.835%, 7/15/2015 (PIK)*

EUR

2,522,281

2,063

Hexion US Finance Corp., 8.875%, 2/1/2018

 

9,385,000

9,197,300

Inmarsat Finance PLC, 144A, 7.375%, 12/1/2017

 

1,940,000

2,027,300

International Lease Finance Corp.:

 

144A, 8.625%, 9/15/2015

 

1,885,000

2,016,950

 

144A, 8.75%, 3/15/2017

 

3,805,000

4,080,862

iPayment, Inc., 9.75%, 5/15/2014

 

3,155,000

2,878,938

JBS Finance II Ltd., 144A, 8.25%, 1/29/2018

 

1,275,000

1,314,844

National Money Mart Co., 10.375%, 12/15/2016

 

6,100,000

6,496,500

Nielsen Finance LLC:

 

Step-up Coupon, 0% to 8/1/2011, 12.5% to 8/1/2016

 

7,500,000

7,509,375

 

144A, 7.75%, 10/15/2018 (c)

 

1,160,000

1,151,497

 

11.5%, 5/1/2016

 

1,220,000

1,384,700

Nuveen Investments, Inc., 10.5%, 11/15/2015

 

4,990,000

4,958,812

Offshore Group Investments Ltd., 144A, 11.5%, 8/1/2015

 

2,090,000

2,194,500

OMEGA Healthcare Investors, Inc., 144A, (REIT), 6.75%, 10/15/2022

 

925,000

916,328

Orascom Telecom Finance SCA, 144A,
7.875%, 2/8/2014

 

4,580,000

4,431,150

Pinafore LLC, 144A, 9.0%, 10/1/2018

 

1,770,000

1,858,500

Pinnacle Foods Finance LLC:

 

144A, 8.25%, 9/1/2017 (b)

 

3,215,000

3,255,187

 

9.25%, 4/1/2015

 

2,690,000

2,797,600

 

144A, 9.25%, 4/1/2015

 

2,710,000

2,818,400

Reynolds Group Issuer, Inc.:

 

144A, 7.75%, 10/15/2016

 

4,280,000

4,354,900

 

144A, 8.5%, 5/15/2018

 

4,590,000

4,486,725

Roadhouse Financing, Inc., 144A,
10.75%, 10/15/2017 (c)

 

1,770,000

1,814,250

SLM Corp., 8.0%, 3/25/2020

 

2,570,000

2,550,283

Susser Holdings LLC, 8.5%, 5/15/2016

 

1,360,000

1,414,400

Telemovil Finance Co., Ltd, 144A, 8.0%, 10/1/2017

 

2,645,000

2,717,311

Toys "R" Us Property Co. I, LLC, 10.75%, 7/15/2017

 

3,105,000

3,508,650

Tropicana Entertainment LLC, 9.625%, 12/15/2014**

 

8,975,000

18,848

UCI Holdco, Inc., 9.25%***, 12/15/2013 (PIK)

 

5,093,835

4,941,020

Virgin Media Finance PLC, Series 1, 9.5%, 8/15/2016

 

11,135,000

12,582,550

Wind Acquisition Finance SA:

 

144A, 11.75%, 7/15/2017 (b)

 

5,550,000

6,219,469

 

144A, 11.75%, 7/15/2017

EUR

1,625,000

2,458,963

Wind Acquisition Holdings Finance SA, 144A, 12.25%, 7/15/2017 (PIK)

EUR

770,078

1,118,047

WMG Acquisition Corp., 9.5%, 6/15/2016

 

2,920,000

3,124,400

 

217,291,750

Health Care 4.6%

Community Health Systems, Inc., 8.875%, 7/15/2015

 

21,785,000

23,146,562

HCA, Inc.:

 

9.25%, 11/15/2016

 

12,485,000

13,515,013

 

9.625%, 11/15/2016 (PIK)

 

6,511,000

7,064,435

 

9.875%, 2/15/2017

 

270,000

298,350

IASIS Healthcare LLC, 8.75%, 6/15/2014

 

4,180,000

4,274,050

LifePoint Hospitals, Inc., 144A, 6.625%, 10/1/2020

 

1,385,000

1,412,700

Mylan, Inc., 144A, 7.875%, 7/15/2020

 

730,000

782,013

The Cooper Companies, Inc., 7.125%, 2/15/2015

 

5,700,000

5,757,000

Valeant Pharmaceuticals International:

 

144A, 6.75%, 10/1/2017

 

1,870,000

1,907,400

 

144A, 7.0%, 10/1/2020

 

2,930,000

2,995,925

Vanguard Health Holding Co. II, LLC:

 

8.0%, 2/1/2018 (b)

 

2,430,000

2,466,450

 

144A, 8.0%, 2/1/2018

 

2,105,000

2,105,000

Warner Chilcott Co., LLC, 144A, 7.75%, 9/15/2018

 

3,200,000

3,288,000

 

69,012,898

Industrials 9.8%

Acco Brands Corp., 10.625%, 3/15/2015

 

850,000

949,875

Accuride Corp., 144A, 9.5%, 8/1/2018 (b)

 

3,085,000

3,239,250

Actuant Corp., 6.875%, 6/15/2017

 

2,290,000

2,335,800

Aircastle Ltd., 144A, 9.75%, 8/1/2018

 

1,180,000

1,205,075

ARAMARK Corp., 8.5%, 2/1/2015

 

4,345,000

4,518,800

ArvinMeritor, Inc.:

 

8.125%, 9/15/2015 (b)

 

2,385,000

2,414,813

 

10.625%, 3/15/2018

 

2,870,000

3,178,525

BE Aerospace, Inc.:

 

6.875%, 10/1/2020

 

1,600,000

1,632,000

 

8.5%, 7/1/2018

 

1,000,000

1,090,000

Belden, Inc.:

 

7.0%, 3/15/2017

 

2,840,000

2,847,100

 

144A, 9.25%, 6/15/2019

 

2,635,000

2,845,800

Cenveo Corp.:

 

8.875%, 2/1/2018

 

7,095,000

7,015,181

 

144A, 10.5%, 8/15/2016

 

910,000

930,475

CHC Helicopter SA, 144A, 9.25%, 10/15/2020 (c)

 

4,120,000

4,161,200

Clean Harbors, Inc., 7.625%, 8/15/2016

 

1,683,000

1,750,320

Congoleum Corp., 8.625%, 8/19/2019**

 

6,765,000

1,555,950

Corrections Corp. of America, 7.75%, 6/1/2017

 

1,170,000

1,257,750

Delta Air Lines, Inc., 144A, 9.5%, 9/15/2014

 

755,000

819,175

DynCorp International, Inc., 144A, 10.375%, 7/1/2017

 

3,745,000

3,726,275

Esco Corp., 144A, 4.167%***, 12/15/2013

 

1,875,000

1,715,625

FTI Consulting, Inc., 144A, 6.75%, 10/1/2020

 

1,510,000

1,521,325

Garda World Security Corp., 144A, 9.75%, 3/15/2017

 

3,020,000

3,216,300

Great Lakes Dredge & Dock Co., 7.75%, 12/15/2013

 

2,365,000

2,376,825

Iron Mountain, Inc., 8.375%, 8/15/2021

 

605,000

654,156

K. Hovnanian Enterprises, Inc.:

 

8.875%, 4/1/2012

 

3,470,000

3,331,200

 

10.625%, 10/15/2016

 

2,865,000

2,868,581

Kansas City Southern de Mexico SA de CV:

 

7.375%, 6/1/2014

 

8,085,000

8,367,975

 

144A, 8.0%, 2/1/2018

 

5,545,000

5,960,875

Kansas City Southern Railway Co., 8.0%, 6/1/2015

 

5,425,000

5,838,656

Mobile Mini, Inc., 9.75%, 8/1/2014

 

3,435,000

3,589,575

Navios Maritime Holdings, Inc.:

 

144A, 8.875%, 11/1/2017

 

1,650,000

1,740,750

 

9.5%, 12/15/2014

 

5,285,000

5,390,700

Oshkosh Corp.:

 

8.25%, 3/1/2017

 

585,000

628,875

 

8.5%, 3/1/2020

 

1,180,000

1,277,350

Ply Gem Industries, Inc., 13.125%, 7/15/2014

 

4,105,000

4,181,969

RailAmerica, Inc., 9.25%, 7/1/2017

 

2,376,000

2,604,690

RBS Global, Inc. & Rexnord Corp.:

 

8.5%, 5/1/2018

 

5,400,000

5,487,750

 

11.75%, 8/1/2016

 

925,000

989,750

Rearden G Holdings EINS GmbH, 144A, 7.875%, 3/30/2020

 

1,085,000

1,160,950

Sitel LLC, 144A, 11.5%, 4/1/2018

 

4,540,000

3,632,000

Spirit AeroSystems, Inc., 7.5%, 10/1/2017

 

1,730,000

1,786,225

SPX Corp., 144A, 6.875%, 9/1/2017

 

985,000

1,044,100

Titan International, Inc.:

 

144A, 7.875%, 10/1/2017 (c)

 

7,215,000

7,287,150

 

8.0%, 1/15/2012

 

10,405,000

11,185,375

Triumph Group, Inc., 8.0%, 11/15/2017

 

575,000

589,375

United Rentals North America, Inc.:

 

9.25%, 12/15/2019

 

6,780,000

7,339,350

 

10.875%, 6/15/2016

 

2,520,000

2,844,450

USG Corp., 144A, 9.75%, 8/1/2014

 

1,675,000

1,746,187

 

147,831,453

Information Technology 5.6%

Alcatel-Lucent USA, Inc., 6.45%, 3/15/2029

 

4,445,000

3,233,737

Amkor Technology, Inc., 144A, 7.375%, 5/1/2018

 

1,930,000

1,954,125

Aspect Software, Inc., 144A, 10.625%, 5/15/2017

 

2,655,000

2,757,881

CDW LLC, 144A, 11.0%, 10/12/2015

 

3,330,000

3,371,625

Equinix, Inc., 8.125%, 3/1/2018

 

5,890,000

6,287,575

Fidelity National Information Services, Inc.:

 

144A, 7.625%, 7/15/2017

 

765,000

816,638

 

144A, 7.875%, 7/15/2020

 

1,020,000

1,099,050

First Data Corp.:

 

144A, 8.875%, 8/15/2020 (b)

 

3,745,000

3,885,437

 

9.875%, 9/24/2015

 

4,670,000

3,817,725

Freescale Semiconductor, Inc., 144A, 9.25%, 4/15/2018

 

12,195,000

12,682,800

Jabil Circuit, Inc., 7.75%, 7/15/2016

 

1,130,000

1,238,763

JDA Software Group, Inc., 144A, 8.0%, 12/15/2014

 

1,140,000

1,208,400

MasTec, Inc., 7.625%, 2/1/2017

 

3,985,000

3,975,037

NXP BV:

 

3.276%***, 10/15/2013 (b)

 

5,875,000

5,551,875

 

7.875%, 10/15/2014

 

4,095,000

4,238,325

 

144A, 9.75%, 8/1/2018

 

1,530,000

1,629,450

Seagate HDD Cayman, 144A, 6.875%, 5/1/2020

 

965,000

943,288

Seagate Technology International, 144A, 10.0%, 5/1/2014

 

1,820,000

2,147,600

STATS ChipPAC Ltd., 144A, 7.5%, 8/12/2015

 

2,160,000

2,327,400

SunGard Data Systems, Inc.:

 

10.25%, 8/15/2015

 

10,985,000

11,561,712

 

10.625%, 5/15/2015

 

2,865,000

3,194,475

Unisys Corp., 144A, 12.75%, 10/15/2014

 

3,065,000

3,647,350

Vangent, Inc., 9.625%, 2/15/2015

 

2,270,000

2,079,888

 

83,650,156

Materials 10.9%

Appleton Papers, Inc., 144A, 11.25%, 12/15/2015

 

1,681,000

1,243,940

Berry Plastics Corp.:

 

8.25%, 11/15/2015

 

5,135,000

5,289,050

 

9.5%, 5/15/2018 (b)

 

3,000,000

2,820,000

Boise Paper Holdings LLC, 8.0%, 4/1/2020

 

1,375,000

1,423,125

Celanese US Holdings LLC, 144A, 6.625%, 10/15/2018

 

1,510,000

1,543,975

CF Industries, Inc., 6.875%, 5/1/2018

 

1,210,000

1,302,263

Chemtura Corp., 144A, 7.875%, 9/1/2018

 

1,070,000

1,118,150

Compass Minerals International, Inc., 8.0%, 6/1/2019

 

3,305,000

3,490,906

CPG International I, Inc., 10.5%, 7/1/2013

 

7,400,000

7,474,000

Crown Americas LLC, 7.625%, 5/15/2017

 

1,210,000

1,306,800

Crown European Holdings SA, 144A,
7.125%, 8/15/2018

EUR

965,000

1,381,313

Domtar Corp., 10.75%, 6/1/2017

 

2,940,000

3,660,300

Essar Steel Algoma, Inc., 144A, 9.375%, 3/15/2015

 

11,480,000

11,537,400

Exopack Holding Corp., 11.25%, 2/1/2014

 

9,845,000

10,066,512

GEO Specialty Chemicals, Inc.:

 

144A, 7.5%, 3/31/2015 (PIK)

 

7,287,779

6,413,246

 

10.0%, 3/31/2015

 

7,174,400

6,313,472

Georgia-Pacific LLC:

 

144A, 7.125%, 1/15/2017

 

3,515,000

3,721,506

 

144A, 8.25%, 5/1/2016

 

4,315,000

4,795,044

Graham Packaging Co. LP, 144A, 8.25%, 10/1/2018

 

1,060,000

1,077,225

Graphic Packaging International, Inc.:

 

7.875%, 10/1/2018

 

535,000

549,713

 

9.5%, 6/15/2017

 

6,355,000

6,768,075

Greif, Inc., 7.75%, 8/1/2019

 

910,000

983,938

Hexcel Corp., 6.75%, 2/1/2015

 

3,390,000

3,398,475

Huntsman International LLC:

 

8.625%, 3/15/2020

 

4,540,000

4,698,900

 

144A, 8.625%, 3/15/2021

 

1,065,000

1,102,275

Ineos Finance PLC:

 

144A, 9.0%, 5/15/2015

 

2,470,000

2,578,062

 

144A, 9.25%, 5/15/2015

EUR

925,000

1,336,667

Koppers, Inc., 7.875%, 12/1/2019

 

3,425,000

3,570,562

Lumena Resources Corp., 144A, 12.0%, 10/27/2014

 

8,740,000

8,259,300

Lyondell Chemical Co., 144A, 8.0%, 11/1/2017

 

2,535,000

2,769,487

Millar Western Forest Products Ltd.,
7.75%, 11/15/2013

 

1,450,000

1,294,125

Momentive Performance Materials, Inc.:

 

9.0%, 12/1/2014

EUR

4,695,000

6,304,453

 

9.75%, 12/1/2014 (b)

 

2,945,000

3,018,625

NewMarket Corp., 7.125%, 12/15/2016

 

6,860,000

6,791,400

NewPage Corp., 11.375%, 12/31/2014 (b)

 

2,930,000

2,651,650

Novelis, Inc., 11.5%, 2/15/2015

 

2,830,000

3,233,275

OI European Group BV, 144A, 6.75%, 9/15/2020

EUR

985,000

1,373,149

Plastipak Holdings, Inc., 144A, 10.625%, 8/15/2019

 

610,000

677,100

Radnor Holdings Corp., 11.0%, 3/15/2010**

 

1,510,000

151

Silgan Holdings, Inc., 7.25%, 8/15/2016

 

3,235,000

3,433,144

Solo Cup Co., 10.5%, 11/1/2013

 

5,080,000

5,257,800

Texas Industries, Inc., 144A, 9.25%, 8/15/2020

 

3,550,000

3,683,125

United States Steel Corp., 7.375%, 4/1/2020 (b)

 

3,860,000

4,024,050

Viskase Companies, Inc., 144A, 9.875%, 1/15/2018

 

7,215,000

7,359,300

Wolverine Tube, Inc., 15.0%, 3/31/2012 (PIK)

 

5,530,333

2,903,425

 

163,998,453

Telecommunication Services 9.8%

Cincinnati Bell, Inc.:

 

8.25%, 10/15/2017 (b)

 

7,515,000

7,590,150

 

8.75%, 3/15/2018

 

3,155,000

3,076,125

Clearwire Communications LLC, 144A, 12.0%, 12/1/2015

 

1,885,000

2,035,800

Cricket Communications, Inc.:

 

9.375%, 11/1/2014

 

10,345,000

10,707,075

 

10.0%, 7/15/2015 (b)

 

2,380,000

2,570,400

Crown Castle International Corp., 9.0%, 1/15/2015

 

6,170,000

6,802,425

Digicel Group Ltd., 144A, 10.5%, 4/15/2018 (b)

 

4,005,000

4,395,487

Digicel Ltd., 144A, 8.25%, 9/1/2017

 

8,815,000

9,255,750

ERC Ireland Preferred Equity Ltd., 144A, 7.899%***, 2/15/2017 (PIK)

EUR

4,020,338

821,598

Frontier Communications Corp.:

 

7.875%, 4/15/2015

 

530,000

572,400

 

8.25%, 4/15/2017

 

3,170,000

3,467,188

 

8.5%, 4/15/2020

 

4,235,000

4,674,381

 

8.75%, 4/15/2022

 

545,000

599,500

Grupo Iusacell Celular SA de CV, 10.0%, 3/31/2012**

 

1,566,608

503,273

Hughes Network Systems LLC, 9.5%, 4/15/2014

 

8,630,000

8,932,050

Intelsat Corp., 9.25%, 6/15/2016

 

13,985,000

14,911,506

Intelsat Jackson Holdings SA:

 

144A, 7.25%, 10/15/2020

 

5,335,000

5,361,675

 

11.25%, 6/15/2016

 

2,895,000

3,148,313

Intelsat Luxembourg SA, 11.5%, 2/4/2017 (PIK)

 

1,600,000

1,734,000

Intelsat Subsidiary Holding Co. SA:

 

Series B, 144A, 8.875%, 1/15/2015

 

1,600,000

1,648,000

 

8.875%, 1/15/2015

 

7,115,000

7,364,025

MetroPCS Wireless, Inc.:

 

7.875%, 9/1/2018

 

1,065,000

1,096,950

 

9.25%, 11/1/2014

 

4,225,000

4,425,688

Nextel Communications, Inc., Series E, 6.875%, 10/31/2013

 

2,960,000

2,978,500

SBA Telecommunications, Inc.:

 

8.0%, 8/15/2016

 

945,000

1,015,875

 

8.25%, 8/15/2019

 

1,260,000

1,386,000

Sprint Nextel Corp., 8.375%, 8/15/2017 (b)

 

5,650,000

6,130,250

Telesat Canada, 11.0%, 11/1/2015

 

12,100,000

13,673,000

West Corp.:

 

144A, 8.625%, 10/1/2018

 

565,000

565,000

 

9.5%, 10/15/2014

 

3,280,000

3,431,700

Windstream Corp.:

 

7.0%, 3/15/2019

 

3,405,000

3,336,900

 

7.875%, 11/1/2017

 

6,425,000

6,698,062

 

144A, 8.125%, 9/1/2018

 

1,730,000

1,790,550

 

8.625%, 8/1/2016

 

575,000

608,063

 

147,307,659

Utilities 3.4%

AES Corp.:

 

8.0%, 10/15/2017

 

2,680,000

2,894,400

 

8.0%, 6/1/2020 (b)

 

4,120,000

4,470,200

Calpine Corp., 144A, 7.875%, 7/31/2020

 

4,270,000

4,387,425

Edison Mission Energy, 7.0%, 5/15/2017

 

1,390,000

1,004,275

GenOn Escrow Corp., 144A, 9.5%, 10/15/2018 (c)

 

1,065,000

1,025,063

IPALCO Enterprises, Inc., 144A, 7.25%, 4/1/2016

 

2,675,000

2,875,625

NRG Energy, Inc.:

 

7.25%, 2/1/2014

 

9,605,000

9,857,131

 

7.375%, 1/15/2017 (b)

 

9,440,000

9,676,000

 

144A, 8.25%, 9/1/2020

 

3,740,000

3,856,875

NV Energy, Inc.:

 

6.75%, 8/15/2017

 

3,900,000

4,014,278

 

8.625%, 3/15/2014

 

1,263,000

1,299,311

RRI Energy, Inc., 7.875%, 6/15/2017

 

1,205,000

1,123,662

Texas Competitive Electric Holdings Co., LLC, Series A, 10.25%, 11/1/2015

 

7,330,000

4,801,150

 

51,285,395

Total Corporate Bonds (Cost $1,374,165,242)

1,389,610,928

 

Loan Participations and Assignments 5.8%

Senior Loans***

Alliance Mortgage Cycle Loan, Term Loan A, 9.5%, 6/1/2010**

 

3,500,000

0

Big West Oil LLC, Term Loan, 12.0%, 7/23/2015

 

1,462,500

1,491,750

Buffets, Inc.:

 

Letter of Credit, First Lien, 7.525%, 4/22/2015

 

615,758

500,303

 

Term Loan B, 12.0%, 4/21/2015

 

2,932,601

2,745,134

Charter Communications Operating LLC, Term Loan, 7.25%, 3/6/2014

 

9,858,809

10,200,319

Clarke American Corp., Term Loan B,
2.789%, 6/30/2014

 

1,074,037

940,856

Hawker Beechcraft Acquisition Co., LLC:

 

Term Loan, 2.256%, 3/26/2014

 

7,711,572

6,251,540

 

Letter of Credit, 2.633%, 3/26/2014

 

459,808

372,794

 

Term Loan, 10.5%, 3/26/2014

 

2,456,438

2,447,226

IASIS Healthcare LLC, Term Loan, 5.725%, 6/13/2014 (PIK)

 

5,294,849

5,054,383

Kabel Deutschland GmbH, Term Loan, 7.983%, 11/19/2014 (PIK)

EUR

13,852,956

18,866,729

Nuveen Investments, Inc., First Lien Term Loan, 3.289%, 11/13/2014

 

4,630,000

4,174,524

OSI Restaurant Partners LLC:

 

Term Loan, 2.625%, 6/14/2013

 

455,067

418,835

 

Term Loan B, 2.625%, 6/14/2014

 

5,006,536

4,607,915

Pinafore LLC, Term Loan B, 6.75%, 9/21/2016

 

4,680,000

4,725,209

Sabre, Inc., Term Loan B, 2.256%, 9/30/2014

 

2,758,873

2,559,434

Sbarro, Inc., Term Loan, 4.775%, 1/31/2014

 

2,380,666

2,154,503

Texas Competitive Electric Holdings Co., LLC:

 

Term Loan B3, 3.758%, 10/10/2014

 

13,391,280

10,397,592

 

Term Loan B2, 4.066%, 10/10/2014

 

2,765,707

2,155,274

Tribune Co., Term Loan B, LIBOR plus 3.0%, 6/4/2014**

 

4,948,125

3,242,432

US Foodservice, Inc., Term Loan B, 2.76%, 5/29/2012

 

3,760,615

3,416,406

Total Loan Participations and Assignments (Cost $93,708,101)

86,723,158

 

Preferred Security 0.4%

Materials

Hercules, Inc., 6.5%, 6/30/2029 (Cost $4,476,982)

 

6,975,000

5,702,063

 


Units

Value ($)

 

 

Other Investments 0.0%

Consumer Discretionary

AOT Bedding Super Holdings LLC* (Cost $221,000)

 

221

221,000

 


Shares

Value ($)

 

 

Common Stocks 0.2%

Consumer Discretionary 0.0%

Buffets Restaurants Holdings, Inc.*

124,104

285,439

Dex One Corp.*

31,010

380,803

SuperMedia, Inc.* (b)

5,784

61,137

Trump Entertainment Resorts, Inc.*

366

6,674

Vertis Holdings, Inc.*

66,836

0

 

734,053

Industrials 0.0%

Quad Graphics, Inc.*

4,378

204,540

Materials 0.2%

GEO Specialty Chemicals, Inc.*

136,705

116,199

GEO Specialty Chemicals, Inc. 144A*

12,448

10,581

LyondellBasell Industries NV "B"*

98,779

2,355,879

 

2,482,659

Total Common Stocks (Cost $19,516,988)

3,421,252

 

Warrants 0.0%

Consumer Discretionary 0.0%

Reader's Digest Association, Inc., Expiration Date 2/19/2014*

7,982

239

Materials 0.0%

Ashland, Inc., Expiration Date 3/31/2029*

6,700

0

Total Warrants (Cost $1,482,531)

239

 

Securities Lending Collateral 6.3%

Daily Assets Fund Institutional, 0.29% (d) (e) (Cost $94,773,020)

94,773,020

94,773,020

 

Cash Equivalents 0.6%

Central Cash Management Fund, 0.21% (d) (Cost $9,540,812)

9,540,812

9,540,812

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $1,597,884,676)+

105.7

1,589,992,472

Other Assets and Liabilities, Net (b)

(5.7)

(85,432,347)

Net Assets

100.0

1,504,560,125

* Non-income producing security.
** Non-income producing security. Issuer has defaulted on the payment of principal or interest or has filed for bankruptcy. The following table represents bonds and senior loans that are in default:

Securities

Coupon

Maturity Date

Principal Amount ($)

Acquisition Cost ($)

Value ($)

Alliance Mortgage Cycle Loan

9.5%

6/1/2010

3,500,000

USD

3,508,969

0

Buffalo Thunder Development Authority

9.375%

12/15/2014

1,705,000

USD

1,705,294

443,300

CanWest MediaWorks LP

9.25%

8/1/2015

2,875,000

USD

2,875,000

517,500

Congoleum Corp.

8.625%

8/19/2019

6,765,000

USD

6,665,724

1,555,950

Eaton Vance Corp., CDO II

13.68%

7/15/2012

3,290,106

USD

1,697,739

0

Fontainebleau Las Vegas Holdings LLC

11.0%

6/15/2015

3,640,000

USD

3,678,587

546

Grupo Iusacell Celular SA de CV

10.0%

3/31/2012

1,566,608

USD

1,490,778

503,273

Motors Liquidation Co.

8.375%

7/15/2033

3,485,000

USD

1,245,888

1,176,188

Motors Liquidation Co.

6.75%

5/1/2028

2,090,000

USD

663,575

647,900

Radnor Holdings Corp.

11.0%

3/15/2010

1,510,000

USD

1,333,438

151

Tribune Co.

LIBOR plus 3.0%

6/4/2014

4,948,125

USD

4,945,032

3,242,432

Tropicana Entertainment LLC

9.625%

12/15/2014

8,975,000

USD

7,018,944

18,848

Young Broadcasting, Inc.

8.75%

1/15/2014

15,800,000

USD

15,022,233

158

 

 

 

 

51,851,201

8,106,246

*** These securities are shown at their current rate as of September 30, 2010. Floating rate securities' yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate.
+ The cost for federal income tax purposes was $1,601,162,458. At September 30, 2010, net unrealized depreciation for all securities based on tax cost was $11,169,986. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $81,697,504 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $92,867,490.
(a) Principal amount stated in US dollars unless otherwise noted.
(b) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned as of September 30, 2010 amounted to $91,082,175, which is 6.1% of net assets.
(c) When-issued security.
(d) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(e) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates.

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

CDO: Collateralized Debt Obligation.
LIBOR: London Interbank Offered Rate.
PIK: Denotes that all or a portion of the income is paid in-kind.

REIT: Real Estate Investment Trust

At September 30, 2010, open credit default swap contracts sold were as follows:

Effective/
Expiration Date

Notional Amount ($) (f)

Fixed Cash Flows Received

Underlying Debt Obligation/
Quality Rating (g)

Value ($)

Upfront Payments Paid/
(Received) ($)

Unrealized Appreciation ($)

6/21/2010
9/20/2013

3,025,0001

5.0%

Ford Motor Co., 6.5%, 8/1/2018, B

160,976

37,078

123,898

6/21/2010
9/20/2013

9,610,0002

5.0%

Ford Motor Co., 6.5%, 8/1/2018, B

511,398

(295,381)

806,779

6/21/2010
9/20/2015

4,270,0003

5.0%

Ford Motor Co., 6.5%, 8/1/2018, B

70,648

(76,117)

146,765

6/21/2010
9/20/2015

1,500,0004

5.0%

Ford Motor Co., 6.5%, 8/1/2018, B

24,818

(142,500)

167,318

6/21/2010
9/20/2015

2,430,0005

5.0%

Ford Motor Co., 6.5%, 8/1/2018, B

40,204

(210,900)

251,104

6/21/2010
9/20/2015

900,0002

5.0%

Ford Motor Co., 6.5%, 8/1/2018, B

14,890

(62,061)

76,951

Total unrealized appreciation

1,572,815

(f) The maximum potential amount of future undiscounted payments that the Fund could be required to make under a credit default swap contract would be the notional amount of the contract. These potential amounts would be partially offset by any recovery values of the referenced debt obligation or net amounts received from the settlement of buy protection credit default swap contracts entered into by the Fund for the same referenced debt obligation.
(g) The quality ratings represent the lower of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") credit ratings and are unaudited.

Counterparties:

1 Citigroup, Inc.
2 The Goldman Sachs & Co.
3 Bank of America
4 JPMorgan Chase Securities, Inc.
5 Credit Suisse

At September 30, 2010, the Fund had the following open forward foreign currency exchange contracts:

Contracts to Deliver

 

In Exchange For

 

Settlement Date

Unrealized Appreciation ($)

Counterparty

USD

1,628,782

 
 EUR

1,200,000

 

10/27/2010

6,784

JPMorgan Chase Securities, Inc.

Contracts to Deliver

 

In Exchange For

 

Settlement Date

Unrealized Depreciation ($)

Counterparty

EUR

41,395,900

 
 USD

55,171,711

 

10/27/2010

(1,249,713)

Citigroup, Inc.

Currency Abbreviations

EUR Euro
USD United States Dollar

For information on the Fund's policy and additional disclosures regarding credit default swap contracts and forward foreign currency exchange contracts, please refer to Note B in the accompanying Notes to Financial Statements.

Fair Value Measurements

Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used as of September 30, 2010 in valuing the Fund's investments. For information on the Fund's policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements.

Assets

Level 1

Level 2

Level 3

Total

 

Fixed Income Investments (h)

 

Corporate Bonds

$ —

$ 1,373,954,953

$ 15,655,975

$ 1,389,610,928

Loan Participations and Assignments

—

86,723,158

0

86,723,158

Preferred Security

—

5,702,063

—

5,702,063

Other Investments

—

—

221,000

221,000

Common Stocks (h)

3,287,798

—

133,454

3,421,252

Warrants (h)

—

—

239

239

Short-Term Investments (h)

104,313,832

—

—

104,313,832

Derivatives (i)

—

1,579,599

—

1,579,599

Total

$ 107,601,630

$ 1,467,959,773

$ 16,010,668

$ 1,591,572,071

Liabilities

 

 

 

 

Derivatives (i)

$ —

$ (1,249,713)

$ —

$ (1,249,713)

Total

$ —

$ (1,249,713)

$ —

$ (1,249,713)

There have been no significant transfers in and out of Level 1 and Level 2 fair value measurements during the year ended September 30, 2010.

(h) See Investment Portfolio for additional detailed categorizations.
(i) Derivatives include unrealized appreciation (depreciation) on open credit default swap contracts and open forward foreign currency exchange contracts.

Level 3 Reconciliation

The following is a reconciliation of the Fund's Level 3 investments for which significant unobservable inputs were used in determining value:

 

Corporate Bonds

Loan Participations and Assignments

Other Investments

 

Balance as of September 30, 2009

$ 14,572,411

$ 2,320,597

$ —

 

Realized gain (loss)

—

(1,900,027)

—

 

Change in unrealized appreciation (depreciation)

1,332,326

1,834,755

—

 

Amortization premium/discount

164,263

15,551

—

 

Net purchases (sales)

1,298,201

(1,325,876)

221,000

 

Transfers into Level 3

19,750 (j)

—

—

 

Transfers (out) of Level 3

(1,730,976) (k)

(945,000) (l)

—

 

Balance as of September 30, 2010

$ 15,655,975

$ 0

$ 221,000

 

Net change in unrealized appreciation (depreciation) from investments still held as of September 30, 2010

$ 1,332,326

$ (7,618)

$ —

 

 

Common Stocks

Convertible Preferred Stocks

Warrants

Total

Balance as of September 30, 2009

$ 126,780

$ 0

$ 66,030

$ 17,085,818

Realized gain (loss)

(738)

(40,954)

—

(1,941,719)

Change in unrealized appreciation (depreciation)

—

40,954

(22,441)

3,185,594

Amortization premium/discount

—

—

—

179,814

Net purchases (sales)

7,412

—

—

200,737

Transfers into Level 3

0 (j)

—

—

19,750

Transfers (out) of Level 3

—

—

(43,350) (k)

(2,719,326)

Balance as of September 30, 2010

$ 133,454

$ —

$ 239

$ 16,010,668

Net change in unrealized appreciation (depreciation) from investments still held as of September 30, 2010

$ (738)

$ —

$ 239

$ 1,324,209

Transfers between price levels are recognized at the beginning of the reporting period.
(j) The investment was transferred from Level 2 to Level 3 because of the lack of observable market data due to a decrease in market activity.
(k) The investment was transferred from Level 3 to Level 2 as a result of the availability of a pricing source supported by observable inputs.
(l) The investment was transferred from Level 3 to Level 2 as a result of the availability of observable market data due to increased market activity.

The accompanying notes are an integral part of the financial statements.

Statement of Assets and Liabilities

as of September 30, 2010

Assets

Investments:

Investments in securities, at value (cost $1,493,570,844) — including $91,082,175 of securities loaned

$ 1,485,678,640

Investment in Daily Assets Fund Institutional (cost $94,773,020)*

94,773,020

Investment in Central Cash Management Fund (cost $9,540,812)

9,540,812

Total investments, at value (cost $1,597,884,676)

1,589,992,472

Cash

1,783,172

Foreign currency, at value (cost $1,618,143)

1,637,057

Receivable for investments sold

14,155,774

Receivable for investments sold — when-issued securities

1,080,700

Receivable for Fund shares sold

798,932

Interest receivable

31,221,141

Unrealized appreciation on open forward foreign currency exchange contracts

6,784

Unrealized appreciation on open swap contracts

1,572,815

Upfront payments paid on swap contracts

37,078

Foreign taxes recoverable

17,167

Other assets

36,527

Total assets

1,642,339,619

Liabilities

Payable upon return of securities loaned

94,773,020

Payable for investments purchased

12,059,377

Payable for investments purchased — when-issued securities

24,306,356

Payable for Fund shares redeemed

2,356,924

Unrealized depreciation on open forward foreign currency exchange contracts

1,249,713

Upfront payments received on swap contracts

786,959

Accrued management fee

593,072

Other accrued expenses and payables

1,654,073

Total liabilities

137,779,494

Net assets, at value

$ 1,504,560,125

* Represents collateral on securities loaned.

The accompanying notes are an integral part of the financial statements.

Statement of Assets and Liabilities as of September 30, 2010 (continued)

Net Assets Consist of

Undistributed net investment income

9,918,216

Net unrealized appreciation (depreciation) on:

Investments

(7,892,204)

Swap contracts

1,572,815

Foreign currency

(1,193,335)

Accumulated net realized gain (loss)

(1,197,766,629)

Paid-in capital

2,699,921,262

Net assets, at value

$ 1,504,560,125

Net Asset Value

Class A

Net Asset Value and redemption price(a) per share ($1,293,860,481 ÷ 271,280,902 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized)

$ 4.77

Maximum offering price per share (100 ÷ 95.50 of $4.77)

$ 4.99

Class B

Net Asset Value, offering and redemption price(a) (subject to contingent deferred sales charge) per share ($33,935,291 ÷ 7,115,304 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized)

$ 4.77

Class C

Net Asset Value, offering and redemption price(a) (subject to contingent deferred sales charge) per share ($109,750,622 ÷ 22,983,737 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized)

$ 4.78

Institutional Class

Net Asset Value, offering and redemption price(a) per share ($67,013,731 ÷ 14,041,002 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized)

$ 4.77

(a) Redemption price per share for shares held less than 30 days is equal to net asset value less a 2% redemption fee.

The accompanying notes are an integral part of the financial statements.

Statement of Operations

for the year ended September 30, 2010

Investment Income

Income:
Interest (net of foreign taxes withheld of $2,751)

$ 137,806,033

Income distributions — affiliated cash management vehicles

31,837

Securities lending income, including income from Daily Assets Fund Institutional, net of borrower rebates

157,340

Total income

137,995,210

Expenses:
Management fee

6,716,689

Administration fee

1,498,067

Services to shareholders

1,848,673

Custodian fee

64,412

Distribution and service fees

4,441,197

Professional fees

323,818

Trustees' fees and expenses

47,619

Reports to shareholders

127,771

Registration fees

89,168

Other

112,621

Total expenses

15,270,035

Net investment income

122,725,175

Realized and Unrealized Gain (Loss)

Net realized gain (loss) from:
Investments

12,399,496

Swap contracts

430,284

Foreign currency

11,492,607

 

24,322,387

Change in net unrealized appreciation (depreciation) on:
Investments

83,737,814

Swap contracts

1,572,815

Foreign currency

(2,004,740)

 

83,305,889

Net gain (loss)

107,628,276

Net increase (decrease) in net assets resulting from operations

$ 230,353,451

The accompanying notes are an integral part of the financial statements.

Statement of Changes in Net Assets

Increase (Decrease) in Net Assets

Years Ended September 30,

2010

2009

Operations:
Net investment income

$ 122,725,175

$ 118,694,272

Net realized gain (loss)

24,322,387

(176,022,758)

Change in net unrealized appreciation (depreciation)

83,305,889

213,091,722

Net increase (decrease) in net assets resulting from operations

230,353,451

155,763,236

Distributions to shareholders from:
Net investment income:

Class A

(105,727,078)

(100,951,682)

Class B

(2,876,109)

(3,755,029)

Class C

(8,282,708)

(7,984,878)

Institutional Class

(5,960,583)

(6,452,177)

Return of capital:

Class A

—

(452,048)

Class B

—

(16,814)

Class C

—

(35,755)

Institutional Class

—

(28,892)

Total distributions

(122,846,478)

(119,677,275)

Fund share transactions:
Proceeds from shares sold

188,865,568

264,807,760

Reinvestment of distributions

88,861,049

76,686,756

Cost of shares redeemed

(398,573,365)

(381,039,641)

Redemption fees

58,724

52,483

Net increase (decrease) in net assets from Fund share transactions

(120,788,024)

(39,492,642)

Increase from regulatory settlements (see Note H)

251,550

—

Increase (decrease) in net assets

(13,029,501)

(3,406,681)

Net assets at beginning of period

1,517,589,626

1,520,996,307

Net assets at end of period (including undistributed net investment income and distributions in excess of net investment income of $9,918,216 and $1,793,953, respectively)

$ 1,504,560,125

$ 1,517,589,626

The accompanying notes are an integral part of the financial statements.

Financial Highlights

Class A

Years Ended September 30,

2010

2009

2008

2007

2006

Selected Per Share Data

Net asset value, beginning of period

$ 4.44

$ 4.32

$ 5.24

$ 5.37

$ 5.42

Income (loss) from investment operations:

Net investment incomea

.38

.35

.39

.42

.42

Net realized and unrealized gain (loss)

.33

.12

(.90)

(.08)

(.02)

Total from investment operations

.71

.47

(.51)

.34

.40

Less distributions from:

Net investment income

(.38)

(.35)

(.41)

(.47)

(.45)

Return of capital

—

(.00)*

—

—

—

Total distributions

(.38)

(.35)

(.41)

(.47)

(.45)

Redemption fees

.00*

.00*

.00*

.00*

.00*

Net asset value, end of period

$ 4.77

$ 4.44

$ 4.32

$ 5.24

$ 5.37

Total Return (%)b

16.69

12.91

(10.40)c

6.39c

7.77

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

1,294

1,271

1,277

1,715

1,809

Ratio of expenses before expense reductions (%)

.96

.96

.99

.97

.96

Ratio of expenses after expense reductions (%)

.96

.96

.98

.96

.96

Ratio of net investment income (%)

8.26

9.16

7.92

7.70

7.84

Portfolio turnover rate (%)

73

69

61

66

100

a Based on average shares outstanding during the period.
b Total return does not reflect the effect of any sales charges.
c Total return would have been lower had certain expenses not been reduced.
* Amount is less than $.005.

Class B

Years Ended September 30,

2010

2009

2008

2007

2006

Selected Per Share Data

Net asset value, beginning of period

$ 4.44

$ 4.32

$ 5.24

$ 5.37

$ 5.42

Income (loss) from investment operations:

Net investment incomea

.34

.32

.35

.37

.38

Net realized and unrealized gain (loss)

.33

.12

(.90)

(.08)

(.02)

Total from investment operations

.67

.44

(.55)

.29

.36

Less distributions from:

Net investment income

(.34)

(.32)

(.37)

(.42)

(.41)

Return of capital

—

(.00)*

—

—

—

Total distributions

(.34)

(.32)

(.37)

(.42)

(.41)

Redemption fees

.00*

.00*

.00*

.00*

.00*

Net asset value, end of period

$ 4.77

$ 4.44

$ 4.32

$ 5.24

$ 5.37

Total Return (%)b

15.74

11.98

(11.13)c

5.53c

6.87

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

34

44

62

115

165

Ratio of expenses before expense reductions (%)

1.75

1.77

1.81

1.76

1.76

Ratio of expenses after expense reductions (%)

1.75

1.77

1.80

1.76

1.76

Ratio of net investment income (%)

7.46

8.35

7.10

6.90

7.04

Portfolio turnover rate (%)

73

69

61

66

100

a Based on average shares outstanding during the period.
b Total return does not reflect the effect of any sales charges.
c Total return would have been lower had certain expenses not been reduced.
* Amount is less than $.005.

Class C

Years Ended September 30,

2010

2009

2008

2007

2006

Selected Per Share Data

Net asset value, beginning of period

$ 4.44

$ 4.33

$ 5.25

$ 5.38

$ 5.43

Income (loss) from investment operations:

Net investment incomea

.35

.32

.35

.38

.38

Net realized and unrealized gain (loss)

.34

.12

(.90)

(.08)

(.02)

Total from investment operations

.69

.44

(.55)

.30

.36

Less distributions from:

Net investment income

(.35)

(.33)

(.37)

(.43)

(.41)

Return of capital

—

(.00)*

—

—

—

Total distributions

(.35)

(.33)

(.37)

(.43)

(.41)

Redemption fees

.00*

.00*

.00*

.00*

.00*

Net asset value, end of period

$ 4.78

$ 4.44

$ 4.33

$ 5.25

$ 5.38

Total Return (%)b

15.81

11.80

(11.04)c

5.59c

6.94

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

110

110

111

162

159

Ratio of expenses before expense reductions (%)

1.71

1.72

1.75

1.72

1.71

Ratio of expenses after expense reductions (%)

1.71

1.72

1.74

1.72

1.71

Ratio of net investment income (%)

7.50

8.40

7.16

6.94

7.09

Portfolio turnover rate (%)

73

69

61

66

100

a Based on average shares outstanding during the period.
b Total return does not reflect the effect of sales charges.
c Total return would have been lower had certain expenses not been reduced.
* Amount is less than $.005.

Institutional Class

Years Ended September 30,

2010

2009

2008

2007

2006

Selected Per Share Data

Net asset value, beginning of period

$ 4.44

$ 4.33

$ 5.25

$ 5.38

$ 5.42

Income (loss) from investment operations:

Net investment incomea

.39

.36

.40

.43

.44

Net realized and unrealized gain (loss)

.34

.12

(.90)

(.08)

(.01)

Total from investment operations

.73

.48

(.50)

.35

.43

Less distributions from:

Net investment income

(.40)

(.37)

(.42)

(.48)

(.47)

Return of capital

—

(.00)*

—

—

—

Total distributions

(.40)

(.37)

(.42)

(.48)

(.47)

Redemption fees

.00*

.00*

.00*

.00*

.00*

Net asset value, end of period

$ 4.77

$ 4.44

$ 4.33

$ 5.25

$ 5.38

Total Return (%)

17.03

13.00

(10.09)b

6.70b

8.33b

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

67

92

71

31

18

Ratio of expenses before expense reductions (%)

.68

.67

.70

.65

.69

Ratio of expenses after expense reductions (%)

.68

.67

.69

.64

.68

Ratio of net investment income (%)

8.53

9.45

8.21

8.02

8.12

Portfolio turnover rate (%)

73

69

61

66

100

a Based on average shares outstanding during the period.
b Total return would have been lower had certain expenses not been reduced.
* Amount is less than $.005.

Notes to Financial Statements

A. Organization and Significant Accounting Policies

DWS High Income Fund (the "Fund"), is a diversified series of the DWS High Income Series (the "Trust"), which is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end investment management company organized as a Massachusetts business trust.

The Fund offers multiple classes of shares which provide investors with different purchase options. Class A shares are offered to investors subject to an initial sales charge. Class B shares of the Fund are closed to new purchases, except exchanges or the reinvestment of dividends or other distributions. Class B shares were offered to investors without an initial sales charge and are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class B shares automatically convert to Class A shares six years after issuance. Class C shares are offered to investors without an initial sales charge and are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions within one year of purchase. Class C shares do not automatically convert into another class. Institutional Class shares are offered to a limited group of investors, are not subject to initial or contingent deferred sales charges and have lower ongoing expenses than other classes.

Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of shares, except that each class bears certain expenses unique to that class such as distribution and service fees, services to shareholders and certain other class-specific expenses. Differences in class-level expenses may result in payment of different per share dividends by class. All shares of the Fund have equal rights with respect to voting subject to class-specific arrangements.

The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates. Actual results could differ from those estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements.

Security Valuation. Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading.

Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

Equity securities are valued at the most recent sale price or official closing price reported on the exchange (US or foreign) or over-the-counter market on which they trade and are categorized as Level 1 securities. Securities for which no sales are reported are valued at the calculated mean between the most recent bid and asked quotations on the relevant market or, if a mean cannot be determined, at the most recent bid quotation.

Debt securities and senior loans are valued by independent pricing services approved by the Fund's Board. If the pricing services are unable to provide valuations, securities are valued at the most recent bid quotation or evaluated price, as applicable, obtained from one or more broker-dealers. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes. These securities are generally categorized as Level 2.

Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and are categorized as Level 2.

Swap contracts are valued daily based upon prices supplied by a Board approved pricing vendor, if available, and otherwise are valued at the price provided by the broker-dealer. Swaps contracts are generally categorized as Level 2.

Money market instruments purchased with an original or remaining maturity of sixty days or less, maturing at par, are valued at amortized cost, which approximates value, and are categorized as Level 2. Investments in open-end investment companies are valued at their net asset value each business day and are categorized as Level 1.

Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Board and are generally categorized as Level 3. In accordance with the Fund's valuation procedures, factors used in determining value may include, but are not limited to, the type of the security, the size of the holding, the initial cost of the security, the existence of any contractual restrictions on the security's disposition, the price and extent of public trading in similar securities of the issuer or of comparable companies, quotations or evaluated prices from broker-dealers and/or pricing services, information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities), an analysis of the company's or issuer's financial statements, an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold and with respect to debt securities, the maturity, coupon, creditworthiness, currency denomination, and the movement of the market in which the security is normally traded. The value determined under these procedures may differ from published values for the same securities.

Disclosure about the classification of fair value measurements is included in a table following the Fund's Investment Portfolio.

Foreign Currency Translations. The books and records of the Fund are maintained in US dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into US dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into US dollars at the prevailing exchange rates on the respective dates of the transactions.

Net realized and unrealized gains and losses on foreign currency transactions represent net gains and losses between trade and settlement dates on securities transactions, the disposition of forward foreign currency exchange contracts and foreign currencies, and the difference between the amount of net investment income accrued and the US dollar amount actually received. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed but is included with net realized and unrealized gains/appreciation and loss/depreciation on investments.

Securities Lending. The Fund lends securities to certain financial institutions. The Fund retains beneficial ownership of the securities it has loaned and continues to receive interest and dividends paid by the issuer of securities and to participate in any changes in their market value. The Fund requires the borrowers of the securities to maintain collateral with the Fund consisting of either cash or liquid, unencumbered assets having a value at least equal to the value of the securities loaned. When the collateral falls below specified amounts, the lending agent will use its best efforts to obtain additional collateral on the next business day to meet required amounts under the security lending agreement. The Fund may invest the cash collateral into a joint trading account in an affiliated money market fund pursuant to Exemptive Orders issued by the SEC. The Fund receives compensation for lending its securities either in the form of fees or by earning interest on invested cash collateral net of borrower rebates and fees paid to a lending agent. Either the Fund or the borrower may terminate the loan. There may be risks of delay and costs in recovery of securities or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund is also subject to all investment risks associated with the reinvestment of any cash collateral received, including, but not limited to, interest rate, credit and liquidity risk associated with such investments.

Senior Loans. Senior loans are portions of loans originated by banks and sold in pieces to investors. These US dollar-denominated fixed and floating rate loans ("Loans") in which the Fund invests, are arranged through private negotiations between the borrower and one or more financial institutions ("Lenders"). The Fund invests in such Loans in the form of participations in Loans ("Participations") or assignments of all or a portion of loans from third parties ("Assignments"). Participations typically result in the Fund having a contractual relationship only with the Lender, not with the borrower. The Fund has the right to receive payments of principal, interest and any fees to which it is entitled from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, nor any rights of set-off against the borrower, and the Fund will not benefit directly from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. Assignments typically result in the Fund having a direct contractual relationship with the borrower, and the Fund may enforce compliance by the borrower with the terms of the loan agreement. All Senior Loans involve interest rate risk, liquidity risk and credit risk, including the potential default or insolvency of the borrower.

When-Issued/Delayed Delivery Securities. The Fund may purchase securities with delivery or payment to occur at a later date beyond the normal settlement period. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The price of such security and the date when the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. No interest accrues to the Fund until payment takes place. At the time the Fund enters into this type of transaction it is required to segregate cash or other liquid assets at least equal to the amount of the commitment.

Certain risks may arise upon entering into when-issued or delayed delivery securities from the potential inability of counterparties to meet the terms of their contracts or if the issuer does not issue the securities due to political, economic, or other factors. Additionally, losses may arise due to changes in the value of the underlying securities.

Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies, and to distribute all of its taxable income to its shareholders.

At September 30, 2010, the Fund had a net tax basis capital loss carryforward of approximately $1,166,149,000, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until September 30, 2011 ($620,426,000), September 30, 2012 ($194,012,000), September 30, 2013 ($13,591,000), September 30, 2014 ($44,333,000), September 30, 2015 ($38,251,000), September 30, 2016 ($21,744,000), September 30, 2017 ($132,681,000) and September 30, 2018 ($101,111,000), the respective expiration dates, whichever occurs first. During the year ended September 30, 2010, the Fund lost, through expiration, $283,200,000 of prior year capital loss carryforward.

In addition, from November 1, 2009 through September 30, 2010, the Fund incurred approximately $28,340,000 of net realized capital losses. As permitted by tax regulations, the Fund intends to elect to defer these losses and treat them as arising in the fiscal year ended September 30, 2011.

The Fund has reviewed the tax positions for the open tax years as of September 30, 2010, and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service.

Distribution of Income and Gains. Net investment income of the Fund is declared and distributed to shareholders monthly. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed, and, therefore, will be distributed to shareholders at least annually.

The timing and characterization of certain income and capital gain distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to premium amortization on debt securities and certain securities sold at a loss and regulatory settlements. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.

At September 30, 2010, the Fund's components of distributable earnings (accumulated losses) on a tax-basis are as follows:

Undistributed ordinary income*

$ 10,692,265

Capital loss carryforwards

$(1,166,149,000)

Net unrealized appreciation (depreciation) on investments

$ (11,169,986)

In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:

 

Years Ended September 30,

 

2010

2009

Distributions from ordinary income*

$ 122,846,478

$ 119,143,766

Return of capital

$ —

$ 533,509

* For tax purposes, short-term capital gain distributions are considered ordinary income distributions.

Redemption Fees. The Fund imposes a redemption fee of 2% of the total redemption amount on all Fund shares redeemed or exchanged within 30 days of buying them, either by purchase or exchange. This fee is assessed and retained by the Fund for the benefit of the remaining shareholders. The redemption fee is accounted for as an addition to paid-in capital.

Contingencies. In the normal course of business, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.

Other. Investment transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Realized gains and losses from investment transactions are recorded on an identified cost basis. All premiums and discounts are amortized/accreted for financial reporting purposes, with the exception of securities in default of principal.

B. Derivative Instruments

Credit Default Swap Contracts. A credit default swap is a contract between a buyer and a seller of protection against pre-defined credit events for the reference entity. For the year ended September 30, 2010, the Fund bought or sold credit default swap contracts to gain exposure to an underlying issuer's credit quality characteristics without directly investing in that issuer, or to hedge the risk of default on Fund securities. As a seller in the credit default swap contract, the Fund is required to pay the par (or other agreed-upon) value of the referenced entity to the counterparty with the occurrence of a credit event by a third party, such as a US or foreign corporate issuer, on the reference entity, which would likely result in a loss to the Fund. In return, the Fund receives from the counterparty a periodic stream of payments over the term of the contract provided that no credit event has occurred. If no credit event occurs, the Fund keeps the stream of payments with no payment obligations. The Fund also buys credit default swap contracts in order to hedge against the risk of a credit event on debt securities, in which case the Fund functions as the counterparty referenced above. This involves the risk that the contract may expire worthless. It also involves counterparty risk that the seller may fail to satisfy its payment obligations to the Fund with the occurrence of a credit event. When the Fund sells a credit default swap contract it will cover its commitment. This may be achieved by, among other methods, maintaining cash or liquid assets equal to the aggregate notional value of the reference entities for all outstanding credit default swap contracts sold by the Fund.

The value of the credit default swap is adjusted daily and the change in value, if any, is recorded daily as unrealized appreciation or depreciation in the Statement of Assets and Liabilities. An upfront payment made by the Fund is recorded as an asset in the Statement of Assets and Liabilities. An upfront payment received by the Fund is recorded as a liability in the Statement of Assets and Liabilities. Under the terms of the credit default swap contracts, the Fund receives or makes quarterly payments based on a specified interest rate on a fixed notional amount. These payments are recorded as a realized gain or loss in the Statement of Operations. Payments received or made as a result of a credit event or termination of the contract are recognized, net of a proportional amount of the upfront payment, as realized gains or losses in the Statement of Operations.

A summary of the open credit default swap contracts as of September 30, 2010 is included in a table following the Fund's Investment Portfolio. For the year ended September 30, 2010, the Fund invested in credit default swap contracts with a total notional amount generally indicative of a range from $0 to approximately $21,735,000.

Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange contract ("forward currency contract") is a commitment to purchase or sell a foreign currency at the settlement date at a negotiated rate. For the year ended September 30, 2010, the Fund entered into forward currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign currency denominated portfolio holdings and to facilitate transactions in foreign currency denominated securities.

Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and unrealized gain (loss) is recorded daily. On the settlement date of the forward currency contract, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was closed. Certain risks may arise upon entering into forward currency contracts from the potential inability of counterparties to meet the terms of their contracts. The maximum counterparty credit risk to the Fund is measured by the unrealized gain on appreciated contracts. Additionally, when utilizing forward currency contracts to hedge, the Fund gives up the opportunity to profit from favorable exchange rate movements during the term of the contract.

A summary of the open forward currency contracts as of September 30, 2010 is included in a table following the Fund's Investment Portfolio. For the year ended September 30, 2010, the Fund invested in forward currency contracts with a total contract value generally indicative of a range from approximately $56,800,000 to $110,994,000.

The following tables summarize the value of the Fund's derivative instruments held as of September 30, 2010 and the related location in the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:

Asset Derivatives

Forward Contracts

Swap Contracts

Total

Credit Contracts (a)

$ —

$ 1,572,815

$ 1,572,815

Foreign Exchange Contracts (b)

6,784

—

6,784

 

$ 6,784

$ 1,572,815

$ 1,579,599

Each of the above derivatives is located in the following Statement of Assets and Liabilities accounts:

(a) Unrealized appreciation on open swap contracts
(b) Unrealized appreciation on open forward foreign currency exchange contracts

Liability Derivative

Forward Contracts

Foreign Exchange Contracts (a)

$ (1,249,713)

The above derivative is located in the following Statement of Assets and Liabilities account:

(a) Unrealized depreciation on open forward foreign currency exchange contracts

Additionally, the amount of unrealized and realized gains and losses on derivative instruments recognized in Fund earnings during the year ended September 30, 2010 and the related location in the accompanying Statement of Operations is summarized in the following tables by primary underlying risk exposure:

Realized Gain (Loss)

Forward Contracts

Swap Contracts

Total

Credit Contracts (a)

$ —

$ 430,284

$ 430,284

Foreign Exchange Contracts (b)

12,055,407

—

12,055,407

 

$ 12,055,407

$ 430,284

$ 12,485,691

Each of the above derivatives is located in the following Statement of Operations accounts:

(a) Net realized gain (loss) from swap contracts
(b) Net realized gain (loss) from foreign currency (Statement of Operations includes both forward currency contracts and foreign currency transactions)

Change in Net Unrealized Appreciation (Depreciation)

Forward Contracts

Swap Contracts

Total

Credit Contracts (a)

$ —

$ 1,572,815

$ 1,572,815

Foreign Exchange Contracts (b)

(1,941,203)

—

(1,941,203)

 

$ (1,941,203)

$ 1,572,815

$ (368,388)

Each of the above derivatives is located in the following Statement of Operations accounts:

(a) Change in net unrealized appreciation (depreciation) on swap contracts
(b) Change in net unrealized appreciation (depreciation) on foreign currency (Statement of Operations includes both forward currency contracts and foreign currency transactions)

C. Purchases and Sales of Securities

During the year ended September 30, 2010, purchases and sales of investment securities (excluding short-term investments) aggregated $1,077,507,009 and $1,184,440,099, respectively.

D. Related Parties

Management Agreement. Under the Investment Management Agreement with Deutsche Investment Management Americas Inc. ("DIMA" or the "Advisor"), an indirect, wholly owned subsidiary of Deutsche Bank AG, the Advisor directs the investments of the Fund in accordance with its investment objectives, policies and restrictions. The Advisor determines the securities, instruments and other contracts relating to investments to be purchased, sold or entered into by the Fund.

Under the Investment Management Agreement with the Advisor, the Fund paid a monthly management fee, computed and accrued daily and payable monthly, at the following annual rates:

First $250 million of the Fund's average daily net assets

.48%

Next $750 million of such net assets

.45%

Next $1.5 billion of such net assets

.43%

Next $2.5 billion of such net assets

.41%

Next $2.5 billion of such net assets

.38%

Next $2.5 billion of such net assets

.36%

Next $2.5 billion of such net assets

.34%

Over $12.5 billion of such net assets

.32%

Accordingly, for the year ended September 30, 2010, the fee pursuant to the Investment Management Agreement was equivalent to an annual effective rate of 0.45% of the Fund's average daily net assets.

Administration Fee. Pursuant to an Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays the Advisor an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the year ended September 30, 2010, the Administration Fee was $1,498,067, of which $121,554 is unpaid.

Service Provider Fees. DWS Investments Service Company ("DISC"), an affiliate of the Advisor, is the transfer agent, dividend-paying agent and shareholder service agent for the Fund. Pursuant to a sub-transfer agency agreement between DISC and DST Systems, Inc. ("DST"), DISC has delegated certain transfer agent, dividend-paying agent and shareholder service agent functions to DST. DISC compensates DST out of the shareholder servicing fee it receives from the Fund. For the year ended September 30, 2010, the amounts charged to the Fund by DISC were as follows:

Service Provider Fees

Total Aggregated

Unpaid at September 30, 2010

Class A

$ 1,033,635

$ 341,966

Class B

43,203

13,691

Class C

81,218

26,306

Institutional Class

39,539

10,652

 

$ 1,197,595

$ 392,615

Distribution and Service Fees. Under the Fund's Class B and Class C 12b-1 plans, DWS Investments Distributors, Inc. ("DIDI"), an affiliate of the Advisor, receives a fee ("Distribution Fee") of 0.75% of average daily net assets of each of Class B and C shares. In accordance with the Fund's Underwriting and Distribution Services agreement, DIDI enters into related selling group agreements with various firms at various rates for sales of Class B and C shares. For the year ended September 30, 2010, the Distribution Fee was as follows:

Distribution Fee

Total Aggregated

Unpaid at September 30, 2010

Class B

$ 291,732

$ 23,002

Class C

826,719

66,206

 

$ 1,118,451

$ 89,208

In addition, DIDI provides information and administrative services for a fee ("Service Fee") to Class A, B and C shareholders at an annual rate of up to 0.25% of average daily net assets for each such class. DIDI in turn has various agreements with financial services firms that provide these services and pay these fees based upon the assets of shareholder accounts the firms service. For the year ended September 30, 2010, the Service Fee was as follows:

Service Fee

Total Aggregated

Unpaid at September 30, 2010

Annual Effective Rate

Class A

$ 2,962,774

$ 686,418

.23%

Class B

93,732

15,458

.24%

Class C

266,240

40,484

.24%

 

$ 3,322,746

$ 742,360

 

Underwriting Agreement and Contingent Deferred Sales Charge. DIDI is the principal underwriter for the Fund. Underwriting commissions paid in connection with the distribution of Class A shares for the year ended September 30, 2010, aggregated $112,464.

In addition, DIDI receives any contingent deferred sales charge ("CDSC") from Class B share redemptions occurring within six years of purchase and Class C share redemptions occurring within one year of purchase. There is no such charge upon redemption of any share appreciation or reinvested dividends. The CDSC is based on declining rates ranging from 4% to 1% for Class B and 1% for Class C, of the value of the shares redeemed. For the year ended September 30, 2010, the CDSC for Class B and C shares aggregated $80,224 and $12,688, respectively. A deferred sales charge of up to 0.85% is assessed on certain redemptions of Class A shares. For the year ended September 30, 2010, DIDI received an aggregate CDSC of $7,676 for Class A shares.

Typesetting and Filing Service Fees. Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the year ended September 30, 2010, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $18,214, of which $8,433 is unpaid.

Trustees' Fees and Expenses. The Fund paid each Trustee not affiliated with the Advisor retainer fees plus specified amounts for various committee services and for the Board Chairperson.

Affiliated Cash Management Vehicles. The Fund may invest uninvested cash balances in affiliated funds managed by the Advisor. Affiliated cash management vehicles do not pay the Advisor a management fee. The Fund currently invests in Central Cash Management Fund. Prior to October 2, 2009, the Fund invested in Cash Management QP Trust ("QP Trust"). Effective October 2, 2009, QP Trust merged into Central Cash Management Fund. Central Cash Management Fund seeks to provide a high level of current income consistent with liquidity and the preservation of capital.

E. Investing in High Yield Securities

The Fund's performance could be hurt if a security declines in credit quality or goes into default, or if an issuer does not make timely payments of interest or principal. Because the issuers of high-yield debt securities or junk bonds (debt securities rated below the fourth-highest category) may be in uncertain financial health, the prices of their debt securities can be more vulnerable to bad economic news, or even the expectation of bad news, than investment-grade debt securities. Because the Fund may invest in securities not paying current interest or in securities already in default, these risks may be more pronounced.

F. Line of Credit

The Fund and other affiliated funds (the "Participants") share in a $450 million revolving credit facility provided by a syndication of banks. The Fund may borrow for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Participants are charged an annual commitment fee, which is allocated based on net assets, among each of the Participants. Interest is calculated at a rate per annum equal to the sum of the Federal Funds Rate plus 1.25 percent plus if LIBOR exceeds the Federal Funds Rate the amount of such excess. The Fund may borrow up to a maximum of 33 percent of its net assets under the agreement.

G. Share Transactions

The following table summarizes share and dollar activity in the Fund:

 

Year Ended September 30, 2010

Year Ended September 30, 2009

 

Shares

Dollars

Shares

Dollars

Shares sold

Class A

28,802,744

$ 133,409,680

49,413,043

$ 184,947,526

Class B

434,301

1,986,260

1,230,102

4,738,838

Class C

3,147,106

14,585,747

4,679,566

18,184,027

Institutional Class

8,357,573

38,883,881

14,498,711

56,937,369

 

 

$ 188,865,568

 

$ 264,807,760

Shares issued to shareholders in reinvestment of distributions

Class A

16,608,297

$ 76,507,433

17,636,800

$ 66,663,380

Class B

380,387

1,750,202

509,476

1,903,523

Class C

1,255,850

5,795,404

1,292,344

4,875,407

Institutional Class

1,044,169

4,808,010

847,298

3,244,446

 

 

$ 88,861,049

 

$ 76,686,756

Shares redeemed

Class A

(60,413,827)

$ (278,736,552)

(76,100,298)

$ (288,457,474)

Class B

(3,664,628)

(16,864,785)

(6,200,974)

(23,484,402)

Class C

(6,265,285)

(28,845,580)

(6,757,735)

(25,981,936)

Institutional Class

(16,088,734)

(74,126,448)

(10,943,180)

(43,115,829)

 

 

$ (398,573,365)

 

$ (381,039,641)

Redemption fees

 

$ 58,724

 

$ 52,483

Net increase (decrease)

Class A

(15,002,786)

$ (68,765,196)

(9,050,455)

$ (36,799,146)

Class B

(2,849,940)

(13,128,268)

(4,461,396)

(16,840,451)

Class C

(1,862,329)

(8,460,394)

(785,825)

(2,921,048)

Institutional Class

(6,686,992)

(30,434,166)

4,402,829

17,068,003

 

 

$ (120,788,024)

 

$ (39,492,642)

H. Regulatory Settlements

On March 30, 2010, the Fund received $251,550 as part of a settlement with the SEC by a non-affiliated third party broker. The payment is included in "Increase from regulatory settlements" on the Statement of Changes in Net Assets. The amount of the payment was 0.02% of the Fund's average net assets, thus having no impact on the Fund's total return.

Report of Independent Registered Public Accounting Firm

To the Board of Trustees of DWS High Income Series and the Shareholders of DWS High Income Fund:

We have audited the accompanying statement of assets and liabilities of DWS High Income Fund (the "Fund"), including the investment portfolio, as of September 30, 2010, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2010 by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of DWS High Income Fund at September 30, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.

Boston, Massachusetts
November 23, 2010

 

hif_eny0

Tax Information (Unaudited)

Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please call (800) 621-1048.

Investment Management Agreement Approval

The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DWS") in September 2010.

In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:

• In September 2010, all but one of the Fund's Trustees were independent of DWS and its affiliates.

• The Trustees meet frequently to discuss fund matters. Each year, the Trustees dedicate substantial time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Fixed Income and Quant Oversight Committee, reviewed comprehensive materials received from DWS, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by the Fund's independent fee consultant. The Board also received extensive information throughout the year regarding performance of the Fund.

• The Independent Trustees regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Trustees were also advised by the Fund's independent fee consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the independent fee consultant in connection with their deliberations (the "IFC Report").

• In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, administrative services agreement, transfer agency agreement and other material service agreements.

• Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Independent Trustees as a group. The Independent Trustees reviewed the Contract Committee's findings and recommendations and presented their recommendations to the full Board.

In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DWS and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DWS managed the Fund, and that the Agreement was approved by the Fund's shareholders. DWS is part of Deutsche Bank, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are significant advantages to being part of a global asset management business that offers a wide range of investing expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.

While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DWS's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.

Nature, Quality and Extent of Services. The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DWS provides portfolio management services to the Fund and that, pursuant to a separate administrative services agreement, DWS provides administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DWS to attract and retain high-quality personnel, and the organizational depth and stability of DWS. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market indices and a peer universe compiled by the independent fee consultant using information supplied by Lipper Inc. ("Lipper"). The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by Lipper), and receives more frequent reporting and information from DWS regarding such funds, along with DWS's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2009, the Fund's performance (Class A shares) was in the 3rd quartile of the applicable Lipper universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has underperformed its benchmark in the one-, three- and five-year periods ended December 31, 2009.

On the basis of this evaluation and the ongoing review of investment results by the Board, the Board concluded that the nature, quality and extent of services provided by DWS historically have been and continue to be satisfactory.

Fees and Expenses. The Board considered the Fund's investment management fee schedule, operating expenses, and total expense ratios, and comparative information provided by Lipper and the independent fee consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund, which include the 0.10% fee paid to DWS under the Fund's administrative services agreement, were lower than the median (2nd quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 2009). The Board noted that the Fund's Class A shares total (net) operating expenses (excluding 12b-1 fees) were expected to be lower than the median (1st quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2009, and analyzing Lipper expense universe Class A expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DWS and certain of its affiliates for comparable mutual funds and considered differences in fund and fee structures between the DWS Funds. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size).

The information considered by the Board as part of its review of management fees included information regarding fees charged by DWS and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS US mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Europe funds made it difficult to compare such fees.

On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DWS.

Profitability. The Board reviewed detailed information regarding revenues received by DWS under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DWS from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board reviewed DWS's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DWS in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DWS and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DWS and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.

Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DWS of such economies of scale as may exist in the management of the Fund at current asset levels.

Other Benefits to DWS and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DWS and its affiliates, including any fees received by DWS for administrative services provided to the Fund and any fees received by an affiliate of DWS for distribution services. The Board also considered benefits to DWS related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DWS related to DWS Funds advertising and cross-selling opportunities among DWS products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.

Compliance. The Board considered the significant attention and resources dedicated by DWS to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DWS's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DWS compliance personnel; and (iii) the substantial commitment of resources by DWS and its affiliates to compliance matters.

Based on all of the information considered and the conclusions reached, the Board unanimously (including the Independent Trustees) determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Trustees may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.

Summary of Management Fee Evaluation by Independent Fee Consultant

October 3, 2010

Pursuant to an Order entered into by Deutsche Investment Management Americas and affiliates (collectively, "DeAM") with the Attorney General of New York, I, Thomas H. Mack, have been appointed the Independent Fee Consultant for the DWS Funds (formerly the DWS Scudder Funds). My duties include preparing an annual written evaluation of the management fees DeAM charges the Funds, considering among other factors the management fees charged by other mutual fund companies for like services, management fees DeAM charges other clients for like services, DeAM's costs of supplying services under the management agreements and related profit margins, possible economies of scale if a Fund grows larger, and the nature and quality of DeAM's services, including fund performance. This report summarizes my evaluation for 2010, including my qualifications, the evaluation process for each of the DWS Funds, consideration of certain complex-level factors, and my conclusions. I served in substantially the same capacity in 2007, 2008, and 2009.

Qualifications

For more than 35 years I have served in various professional capacities within the investment management business. I have held investment analysis and advisory positions, including securities analyst, portfolio strategist and director of investment policy with a large investment firm. I have also performed business management functions, including business development, financial management and marketing research and analysis.

Since 1991, I have been an independent consultant within the asset management industry. I have provided services to over 125 client organizations, including investment managers, mutual fund boards, product distributors and related organizations. Over the past ten years I have completed a number of assignments for mutual fund boards, specifically including assisting boards with management contract renewal.

I hold a Master of Business Administration degree, with highest honors, from Harvard University and Master of Science and Bachelor of Science (highest honors) degrees from the University of California at Berkeley. I am an independent director and audit committee financial expert for two closed-end mutual funds and have served in various leadership and financial oversight capacities with non-profit organizations.

Evaluation of Fees for each DWS Fund

My work focused primarily on evaluating, fund-by-fund, the fees charged to each of the 118 publicly offered Fund portfolios in the DWS Fund family. For each Fund, I considered each of the key factors mentioned above, as well as any other relevant information. In doing so I worked closely with the Funds' Independent Directors in their annual contract renewal process, as well as in their approval of contracts for several new funds (documented separately).

In evaluating each Fund's fees, I reviewed comprehensive materials provided by or on behalf of DeAM, including expense information prepared by Lipper Analytical, comparative performance information, profitability data, manager histories, and other materials. I also accessed certain additional information from the Lipper and Morningstar databases and drew on my industry knowledge and experience.

To facilitate evaluating this considerable body of information, I prepared for each Fund a document summarizing the key data elements in each area as well as additional analytics discussed below. This made it possible to consider each key data element in the context of the others.

In the course of contract renewal, DeAM agreed to implement a number of fee and expense adjustments requested by the Independent Directors which will favorably impact future fees and expenses, and my evaluation includes the effects of these changes.

Fees and Expenses Compared with Other Funds

The competitive fee and expense evaluation for each fund focused on two primary comparisons:

The Fund's contractual management fee (the advisory fee plus the administration fee where applicable) compared with those of a group of typically 12-15 funds in the same Lipper investment category (e.g. Large Capitalization Growth) having similar distribution arrangements and being of similar size.

The Fund's total expenses compared with a broader universe of funds from the same Lipper investment category and having similar distribution arrangements.

These two comparisons provide a view of not only the level of the fee compared with funds of similar scale but also the total expense the Fund bears for all the services it receives, in comparison with the investment choices available in the Fund's investment category and distribution channel. The principal figure-of-merit used in these comparisons was the subject Fund's percentile ranking against peers.

DeAM's Fees for Similar Services to Others

DeAM provided management fee schedules for all of its US domiciled fund and non-fund investment management accounts in any of the investment categories where there is a DWS Fund. These similar products included the other DWS Funds, non-fund pooled accounts, institutional accounts and sub-advisory accounts. Using this information, I calculated for each Fund the fee that would be charged to each similar product, at the subject Fund's asset level.

Evaluating information regarding non-fund products is difficult because there are varying levels of services required for different types of accounts, with mutual funds generally requiring considerably more regulatory and administrative types of service as well as having more frequent cash flows than other types of accounts. Also, while mutual fund fees for similar fund products can be expected to be similar, there will be some differences due to different pricing conditions in different distribution channels (e.g. retail funds versus those used in variable insurance products), differences in underlying investment processes and other factors.

Costs and Profit Margins

DeAM provided a detailed profitability analysis for each Fund. After making some adjustments so that the presentation would be more comparable to the available industry figures, I reviewed profit margins from investment management alone, from investment management plus other fund services (excluding distribution) provided to the Funds by DeAM (principally shareholder services), and DeAM profits from all sources, including distribution. A later section comments on overall profitability.

Economies of Scale

Economies of scale — an expected decline in management cost per dollar of fund assets as fund assets grow — are very rarely quantified and documented because of inherent difficulties in collecting and analyzing relevant data. However, in virtually every investment category that I reviewed, larger funds tend to have lower fees and lower total expenses than smaller funds. To see how each DWS Fund compares with this industry observation, I reviewed:

The trend in Fund assets over the last five years and the accompanying trend in total expenses. This shows if the Fund has grown and, if so, whether total expense (management fees as well as other expenses) have declined as a percent of assets.

Whether the Fund has break-points in its management fee schedule, the extent of the fee reduction built into the schedule and the asset levels where the breaks take effect, and in the case of a sub-advised Fund how the Fund's break-points compare with those of the sub-advisory fee schedule.

How the Fund's contractual fee schedule compares with trends in the industry data. To accomplish this, I constructed a chart showing how actual latest-fiscal-year contractual fees of the Fund and of other similar funds relate to average fund assets, with the subject Fund's contractual fee schedule superimposed.

Quality of Service — Performance

The quality-of-service evaluation focused on investment performance, which is the principal result of the investment management service. Each Fund's performance was reviewed over the past 1, 3, 5 and 10 years, as applicable, and compared with that of other funds in the same investment category and with a suitable market index.

In addition, I calculated and reviewed risk-adjusted returns relative to an index of similar mutual funds' returns and a suitable market index. The risk-adjusted returns analysis provides a way of determining the extent to which the Fund's return comparisons are mainly the product of investment value-added (or lack thereof) or alternatively taking considerably more or less risk than is typical in its investment category.

I also received and considered the history of portfolio manager changes for each Fund, as this provided an important context for evaluating the performance results.

Complex-Level Considerations

While this evaluation was conducted mainly at the individual fund level, there are some issues relating to the reasonableness of fees that can alternatively be considered across the whole fund complex:

I reviewed DeAM's profitability analysis for all DWS Funds, with a view toward determining if the allocation procedures used were reasonable and how profit levels compared with public data for other investment managers.

I considered whether DeAM and affiliates receive any significant ancillary or "fall-out" benefits that should be considered in interpreting the direct profitability results. These would be situations where serving as the investment manager of the Funds is beneficial to another part of the Deutsche Bank organization.

I considered how aggregated DWS Fund expenses had varied over the years, by asset class and in the context of trends in asset levels.

I reviewed the structure of the DeAM organization, trends in staffing levels, and information on compensation of investment management and other professionals compared with industry data.

Findings

Based on the process and analysis discussed above, which included reviewing a wide range of information from management and external data sources and considering among other factors the fees DeAM charges other clients, the fees charged by other fund managers, DeAM's costs and profits associated with managing the Funds, economies of scale, possible fall-out benefits, and the nature and quality of services provided, in my opinion the management fees charged the DWS Funds are reasonable.

hif_sigmack0
Thomas H. Mack

Board Members and Officers

The following table presents certain information regarding the Board Members and Officers of the Trust as of September 30, 2010. Each Board Member's year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each Board Member has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity; and (ii) the address of each Independent Board Member is c/o Paul K. Freeman, Independent Chairman, DWS Funds, PO Box 101833, Denver, CO 80250-1833. Except as otherwise noted below, the term of office for each Board Member is until the election and qualification of a successor, or until such Board Member sooner dies, resigns, is removed or as otherwise provided in the governing documents of the fund. Because the fund does not hold an annual meeting of shareholders, each Board Member will hold office for an indeterminate period. The Board Members may also serve in similar capacities with other funds in the fund complex. The Length of Time Served represents the year in which the Board Member joined the board of one or more DWS funds now overseen by the Board.

Independent Board Members

Name, Year of Birth, Position with the Fund and Length of Time Served1

Business Experience and Directorships During the Past Five Years

Number of Funds in DWS Fund Complex Overseen

Paul K. Freeman (1950)
Chairperson since 2009
Board Member since 1993
 Consultant, World Bank/Inter-American Development Bank; Governing Council of the Independent Directors Council (governance, education committees); formerly, Project Leader, International Institute for Applied Systems Analysis (1998-2001); Chief Executive Officer, The Eric Group, Inc. (environmental insurance) (1986-1998)

123

John W. Ballantine (1946)
Board Member since 1999
 Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996-1998); Executive Vice President and Head of International Banking (1995-1996). Directorships: Healthways, Inc. (provider of disease and care management services); Portland General Electric (utility company); Stockwell Capital Investments PLC (private equity). Former Directorships: First Oak Brook Bancshares, Inc. and Oak Brook Bank; Prisma Energy International

123

Henry P. Becton, Jr. (1943)
Board Member since 1990
 Vice Chair and former President, WGBH Educational Foundation. Directorships: Association of Public Television Stations; Lead Director, Becton Dickinson and Company3 (medical technology company); Lead Director, Belo Corporation3 (media company); Public Radio International; Public Radio Exchange (PRX); The PBS Foundation. Former Directorships: Boston Museum of Science; American Public Television; Concord Academy; New England Aquarium; Mass. Corporation for Educational Telecommunications; Committee for Economic Development; Public Broadcasting Service

123

Dawn-Marie Driscoll (1946)
Board Member since 1987
 President, Driscoll Associates (consulting firm); Executive Fellow, Center for Business Ethics, Bentley University; formerly, Partner, Palmer & Dodge (1988-1990); Vice President of Corporate Affairs and General Counsel, Filene's (1978-1988). Directorships: Trustee of 20 open-end mutual funds managed by Sun Capital Advisers, Inc. (since 2007); Director of ICI Mutual Insurance Company (since 2007); Advisory Board, Center for Business Ethics, Bentley University; Trustee, Southwest Florida Community Foundation (charitable organization). Former Directorships: Investment Company Institute (audit, executive, nominating committees) and Independent Directors Council (governance, executive committees)

123

Keith R. Fox (1954)
Board Member since 1996
 Managing General Partner, Exeter Capital Partners (a series of private investment funds). Directorships: Progressive Holding Corporation (kitchen goods importer and distributor); Box Top Media Inc. (advertising); The Kennel Shop (retailer); former Chairman, National Association of Small Business Investment Companies

123

Kenneth C. Froewiss (1945)
Board Member since 2001
 Adjunct Professor of Finance, NYU Stern School of Business (September 2009-present; Clinical Professor from 1997-September 2009); Member, Finance Committee, Association for Asian Studies (2002-present); Director, Mitsui Sumitomo Insurance Group (US) (2004-present); prior thereto, Managing Director, J.P. Morgan (investment banking firm) (until 1996)

123

Richard J. Herring (1946)
Board Member since 1990
 Jacob Safra Professor of International Banking and Professor, Finance Department, The Wharton School, University of Pennsylvania (since July 1972); Co-Director, Wharton Financial Institutions Center (since July 2000); Director, Japan Equity Fund, Inc. (since September 2007), Thai Capital Fund, Inc. (since September 2007), Singapore Fund, Inc. (since September 2007). Formerly, Vice Dean and Director, Wharton Undergraduate Division (July 1995-June 2000); Director, Lauder Institute of International Management Studies (July 2000-June 2006)

123

William McClayton (1944)
Board Member since 2004
 Private equity investor (since October 2009); previously, Managing Director, Diamond Management & Technology Consultants, Inc. (global consulting firm) (2001-2009); Directorship: Board of Managers, YMCA of Metropolitan Chicago; formerly: Senior Partner, Arthur Andersen LLP (accounting) (1966-2001); Trustee, Ravinia Festival

123

Rebecca W. Rimel (1951)
Board Member since 1995
 President and Chief Executive Officer, The Pew Charitable Trusts (charitable organization) (1994 to present); Trustee, Thomas Jefferson Foundation (charitable organization) (1994 to present); Trustee, Executive Committee, Philadelphia Chamber of Commerce (2001-2007); Trustee, Pro Publica (2007-present) (charitable organization); Director, CardioNet, Inc.2 (2009-present) (health care). Formerly, Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983-2004); Board Member, Investor Education (charitable organization) (2004-2005); Director, Viasys Health Care2 (January 2007-June 2007)

123

William N. Searcy, Jr. (1946)
Board Member since 1993
 Private investor since October 2003; Trustee of 20 open-end mutual funds managed by Sun Capital Advisers, Inc. (since October 1998). Formerly, Pension & Savings Trust Officer, Sprint Corporation2 (telecommunications) (November 1989-September 2003)

123

Jean Gleason Stromberg (1943)
Board Member since 1997
 Retired. Formerly, Consultant (1997-2001); Director, Financial Markets US Government Accountability Office (1996-1997); Partner, Fulbright & Jaworski, L.L.P. (law firm) (1978-1996). Directorships: The William and Flora Hewlett Foundation. Former Directorships: Service Source, Inc., Mutual Fund Directors Forum (2002-2004), American Bar Retirement Association (funding vehicle for retirement plans) (1987-1990 and 1994-1996)

123

Robert H. Wadsworth
(1940)
Board Member since 1999
 President, Robert H. Wadsworth & Associates, Inc. (consulting firm) (1983 to present); Director, The Phoenix Boys Choir Association

126

Interested Board Member and Officer4

Name, Year of Birth, Position with the Trust/
Corporation and Length of Time Served1,5

Business Experience and Directorships During the Past Five Years

Number of Funds in DWS Fund Complex Overseen

Ingo Gefeke7 (1967)
Board Member since 2010
Executive Vice President since 2010
 Managing Director3, Deutsche Asset Management; Global Head of Distribution and Product Management, DWS Global Head of Trading and Securities Lending. Member of the Board of Directors of DWS Investment GmbH Frankfurt (since July 2009) and DWS Holding & Service GmbH Frankfurt (since January 2010); formerly, Global Chief Administrative Officer, Deutsche Asset Management (2004-2009); Global Chief Operating Officer, Global Transaction Banking, Deutsche Bank AG, New York (2001-2004); Chief Operating Officer, Global Banking Division Americas, Deutsche Bank AG, New York (1999-2001); Central Management, Global Banking Services, Deutsche Bank AG, Frankfurt (1998-1999); Relationship Management, Deutsche Bank AG, Tokyo, Japan (1997-1998) 

56

Officers4

Name, Year of Birth, Position with the Fund and Length of Time Served5

Principal Occupation(s) During Past 5 Years and Other Directorships Held

Michael G. Clark6 (1965)
President, 2006-present
 Managing Director3, Deutsche Asset Management (2006-present); President of DWS family of funds; Director, ICI Mutual Insurance Company (since October 2007); formerly, Director of Fund Board Relations (2004-2006) and Director of Product Development (2000-2004), Merrill Lynch Investment Managers; Senior Vice President Operations, Merrill Lynch Asset Management (1999-2000)
John Millette8 (1962)
Vice President and Secretary, 1999-present
 Director3, Deutsche Asset Management
Paul H. Schubert6 (1963)
Chief Financial Officer, 2004-present
Treasurer, 2005-present
 Managing Director3, Deutsche Asset Management (since July 2004); formerly, Executive Director, Head of Mutual Fund Services and Treasurer for UBS Family of Funds (1998-2004); Vice President and Director of Mutual Fund Finance at UBS Global Asset Management (1994-1998)
Caroline Pearson8 (1962)
Chief Legal Officer, April 2010-present
 Managing Director3, Deutsche Asset Management; formerly, Assistant Secretary for DWS family of funds (1997-2010)
Rita Rubin9 (1970)
Assistant Secretary, 2009-present
 Vice President and Counsel, Deutsche Asset Management (since October 2007); formerly, Vice President, Morgan Stanley Investment Management (2004-2007)
Paul Antosca8 (1957)
Assistant Treasurer, 2007-present
 Director3, Deutsche Asset Management (since 2006); Vice President, The Manufacturers Life Insurance Company (U.S.A.) (1990-2006)
Jack Clark8 (1967)
Assistant Treasurer, 2007-present
 Director3, Deutsche Asset Management (since 2007); formerly, Vice President, State Street Corporation (2002-2007)
Diane Kenneally8 (1966)
Assistant Treasurer, 2007-present
 Director3, Deutsche Asset Management
John Caruso10 (1965)
Anti-Money Laundering Compliance Officer, 2010-present
 Managing Director3, Deutsche Asset Management
Robert Kloby9 (1962)
Chief Compliance Officer, 2006-present
 Managing Director3, Deutsche Asset Management
1 The length of time served represents the year in which the Board Member joined the board of one or more DWS funds currently overseen by the Board.
2 A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
3 Executive title, not a board directorship.
4 As a result of their respective positions held with the Advisor, these individuals are considered "interested persons" of the Advisor within the meaning of the 1940 Act. Interested persons receive no compensation from the fund.
5 The length of time served represents the year in which the officer was first elected in such capacity for one or more DWS funds.
6 Address: 100 Plaza One, Jersey City, NJ 07311.
7 The mailing address of Mr. Gefeke is 345 Park Avenue, New York, New York 10154. In addition, Mr. Gefeke is an interested Board Member of certain DWS funds by virtue of his positions with Deutsche Asset Management. As an interested person, Mr. Gefeke receives no compensation from the fund.
8 Address: One Beacon Street, Boston, MA 02108.
9 Address: 280 Park Avenue, New York, New York 10017.
10 Address: 60 Wall Street, New York, New York 10005.

The fund's Statement of Additional Information ("SAI") includes additional information about the Board Members. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: (800) 621-1048.

Account Management Resources

 

For More Information

The automated telephone system allows you to access personalized account information and obtain information on other DWS funds using either your voice or your telephone keypad. Certain account types within Classes A, B and C also have the ability to purchase, exchange or redeem shares using this system.
For more information, contact your financial advisor. You may also access our automated telephone system or speak with a DWS Investments representative by calling the appropriate number below:

For shareholders of Classes A, B, C and Institutional Class:

(800) 621-1048

Web Site

www.dws-investments.com

View your account transactions and balances, trade shares, monitor your asset allocation, and change your address, 24 hours a day.
Obtain prospectuses and applications, blank forms, interactive worksheets, news about DWS funds, subscription to fund updates by e-mail, retirement planning information, and more.

Written Correspondence

DWS Investments

PO Box 219151
Kansas City, MO 64121-9151

Proxy Voting

The fund's policies and procedures for voting proxies for portfolio securities and information about how the fund voted proxies related to its portfolio securities during the 12-month period ended June 30 are available on our Web site — www.dws-investments.com (click on "proxy voting"at the bottom of the page) — or on the SEC's Web site — www.sec.gov. To obtain a written copy of the fund's policies and procedures without charge, upon request, call us toll free at (800) 621-1048.

Principal Underwriter

If you have questions, comments or complaints, contact:

DWS Investments Distributors, Inc.

222 South Riverside Plaza
Chicago, IL 60606-5808
(800) 621-1148

 

Class A

Class B

Class C

Institutional Class

Nasdaq Symbol

KHYAX
 KHYBX
 KHYCX
 KHYIX

CUSIP Number

23337M 107
 23337M 206
 23337M 305
 23337M 404

Fund Number

008
 208
 308
 513

Notes

hif_backcover0

 

 

ITEM 2.

CODE OF ETHICS

 

 

 

As of the end of the period covered by this report, the registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, that applies to its Principal Executive Officer and Principal Financial Officer.

 

There have been no amendments to, or waivers from, a provision of the code of ethics during the period covered by this report that would require disclosure under Item 2.

 

A copy of the code of ethics is filed as an exhibit to this Form N-CSR.

 

 

ITEM 3.

AUDIT COMMITTEE FINANCIAL EXPERT

 

 

 

The fund’s audit committee is comprised solely of trustees who are "independent" (as such term has been defined by the Securities and Exchange Commission ("SEC") in regulations implementing Section 407 of the Sarbanes-Oxley Act (the "Regulations")). The fund’s Board of Trustees has determined that there are several "audit committee financial experts" (as such term has been defined by the Regulations) serving on the fund’s audit committee including Mr. William McClayton, the chair of the fund’s audit committee. An “audit committee financial expert” is not an “expert” for any purpose, including for purposes of Section 11 of the Securities Act of 1933 and the designation or identification of a person as an “audit committee financial expert” does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification.

 

 

ITEM 4.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

 

DWS HIGH INCOME FUND

FORM N-CSR DISCLOSURE RE: AUDIT FEES

The following table shows the amount of fees that Ernst & Young LLP (“E&Y”), the Fund’s Independent Registered Public Accounting Firm, billed to the Fund during the Fund’s last two fiscal years. The Audit Committee approved in advance all audit services and non-audit services that E&Y provided to the Fund.

Services that the Fund’s Independent Registered Public Accounting Firm Billed to the Fund

Fiscal Year
Ended
September 30,

Audit Fees Billed to Fund

Audit-Related
Fees Billed to Fund

Tax Fees Billed to Fund

All
Other Fees Billed to Fund

2010

$78,414

$0

$13,097

$0

2009

$68,192

$0

$9,299

$0

 

The above “Tax Fees” were billed for professional services rendered for tax return preparation.

 

Services that the Fund’s Independent Registered Public Accounting Firm Billed to the Adviser and Affiliated Fund Service Providers

The following table shows the amount of fees billed by E&Y to Deutsche Investment Management Americas, Inc. (“DIMA” or the “Adviser”), and any entity controlling, controlled by or under common control with DIMA (“Control Affiliate”) that provides ongoing services to the Fund (“Affiliated Fund Service Provider”), for engagements directly related to the Fund’s operations and financial reporting, during the Fund’s last two fiscal years.

 

Fiscal Year
Ended
September 30,

Audit-Related
Fees Billed to Adviser and Affiliated Fund Service Providers

Tax Fees Billed to Adviser and Affiliated Fund Service Providers

All
Other Fees Billed to Adviser and Affiliated Fund Service Providers

2010

$0

$307,930

$0

2009

$0

$420,000

$0

 

The above “Tax Fees” were billed in connection with tax compliance services and agreed upon procedures.

 

Non-Audit Services

The following table shows the amount of fees that E&Y billed during the Fund’s last two fiscal years for non-audit services. The Audit Committee pre-approved all non-audit services that E&Y provided to the Adviser and any Affiliated Fund Service Provider that related directly to the Fund’s operations and financial reporting. The Audit Committee requested and received information from E&Y about any non-audit services that E&Y rendered during the Fund’s last fiscal year to the Adviser and any Affiliated Fund Service Provider. The Committee considered this information in evaluating E&Y’s independence.

 

Fiscal Year
Ended
September 30,

Total
Non-Audit Fees Billed to Fund

(A)

Total Non-Audit Fees billed to Adviser and Affiliated Fund Service Providers (engagements related directly to the operations and financial reporting of the Fund)

(B)

Total Non-Audit Fees billed to Adviser and Affiliated Fund Service Providers (all other engagements)

(C)

Total of (A), (B)

and (C)

2010

$13,097

$307,930

$645,807

$966,834

2009

$9,299

$420,000

$719,000

$1,148,299

 

 

All other engagement fees were billed for services in connection with internal control reviews, agreed upon procedures and tax compliance for DIMA and other related entities that provide support for the operations of the Fund.

 

Audit Committee Pre-Approval Policies and Procedures. Generally, each Fund’s Audit Committee must pre approve (i) all services to be performed for a Fund by a Fund’s Independent Registered Public Accounting Firm and (ii) all non-audit services to be performed by a Fund’s Independent Registered Public Accounting Firm for the DIMA Entities with respect to operations and financial reporting of the Fund, except that the Chairperson or Vice Chairperson of each Fund’s Audit Committee may grant the pre-approval for non-audit services described in items (i) and (ii) above for non-prohibited services for engagements of less than $100,000. All such delegated pre approvals shall be presented to each Fund’s Audit Committee no later than the next Audit Committee meeting.

 

There were no amounts that were approved by the Audit Committee pursuant to the de minimis exception under Rule 2-01 of Regulation S-X.

 

According to the registrant’s principal Independent Registered Public Accounting Firm, substantially all of the principal Independent Registered Public Accounting Firm's hours spent on auditing the registrant's financial statements were attributed to work performed by full-time permanent employees of the principal Independent Registered Public Accounting Firm.

 

***

In connection with the audit of the 2009 and 2010 financial statements, the Fund entered into an engagement letter with E&Y. The terms of the engagement letter required by E&Y, and agreed to by the Audit Committee, include provisions in which the parties consent to the sole jurisdiction of federal courts in New York, Boston or the Northern District of Illinois, as well as a waiver of right to a trial by jury and an exclusion of punitive damages.

 

***

 

E&Y advised the Fund’s Audit Committee that E&Y had identified three matters that it determined to be inconsistent with the SEC’s auditor independence rules.

 

First, E&Y advised the Fund’s Audit Committee that, in 2007 and 2008, Deutsche Bank AG (“DB”) provided standard overdraft protection on a depository account to the E&Y member firm in India (“E&Y India”). DB is within the “Investment Company Complex” (as defined by SEC rules) and therefore covered by the SEC auditor independence rules applicable to the Fund. E&Y advised the Audit Committee that E&Y India utilized this arrangement twice in 2007; therefore, the arrangement constituted a lending type arrangement in violation of Rule 2-01(c)(1)(ii)(A) of Regulation S-X as described above. E&Y advised the Audit Committee that E&Y believes its independence has not been impacted as it relates to the audit of the Fund. In reaching this conclusion, E&Y noted a number of factors, including that the arrangement did not create a mutual or conflicting interest between E&Y and the Fund and that the arrangement did not involve the Fund, but rather affiliates of the Fund in the Investment Company Complex. E&Y informed the Audit Committee that E&Y India has cancelled the overdraft arrangement.

 

Second, E&Y advised the Fund’s Audit Committee that, in 2008, an E&Y professional purchased interests in a fund sponsored by a subsidiary of Deutsche Bank AG that is not audited by E&Y. Subsequent to the purchase, the E&Y professional became a Covered Person (as defined by SEC rules) of the Fund as a result of providing non-audit services to a DB entity within the Investment Company Complex. E&Y informed the Audit Committee that this investment constituted an investment in an affiliate of an audit client in violation of the Rule 2-01(c)(1) of Regulation S-X. E&Y advised the Audit Committee that E&Y believes its independence has not been impacted as it relates to the audit of the Fund. In reaching this conclusion, E&Y noted a number of factors, including that the E&Y professional did not have any financial interest in the Fund and was not involved with the provision of audit services to the Fund. E&Y informed the Audit Committee that the E&Y professional no longer provides any services to any entity within the Investment Company Complex and is no longer deemed to be a Covered Person with respect to the Fund.

 

Finally, E&Y advised the Fund’s Audit Committee that, in 2008, an E&Y professional whose spouse owned interests in two DWS Funds that are not audited by E&Y, became a Covered Person of the Fund as a result of providing attest services to a DB entity within the Investment Company Complex. E&Y informed the Audit Committee that this investment constituted an investment in an affiliate of an audit client in violation of the Rule 2-01(c)(1) of Regulation S-X. E&Y advised the Audit Committee that E&Y believes its independence has not been impacted as it relates to the audit of the Fund. In reaching this conclusion, E&Y noted a number of factors, including that the E&Y professional did not have any financial interest in the Fund and was not involved with the provision of audit services to the Fund. E&Y informed the Audit Committee that the E&Y professional no longer provides any services to any entity within the Investment Company Complex and is no longer deemed to be a Covered Person with respect to the Fund.

 

 

 

 

ITEM 5.

AUDIT COMMITTEE OF LISTED REGISTRANTS

 

 

 

Not applicable

 

 

ITEM 6.

SCHEDULE OF INVESTMENTS

 

 

 

Not applicable

 

 

ITEM 7.

DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES

 

 

 

Not applicable

 

 

ITEM 8.

PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES

 

 

 

Not applicable

 

 

ITEM 9.

PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS

 

 

 

Not Applicable.

 

 

ITEM 10.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

 

There were no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board. The primary function of the Nominating and Governance Committee is to identify and recommend individuals for membership on the Board and oversee the administration of the Board Governance Guidelines. Shareholders may recommend candidates for Board positions by forwarding their correspondence by U.S. mail or courier service to Paul K. Freeman, Independent Chairman, DWS Funds, P.O. Box 101833, Denver, CO 80250-1833.

 

 

ITEM 11.

CONTROLS AND PROCEDURES

 

 

 

(a)          The Chief Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on the evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.

 

 

 

(b)         There have been no changes in the registrant’s 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 registrant’s internal controls over financial reporting.

 

 

ITEM 12.

EXHIBITS

 

 

 

(a)(1)     Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached hereto as EX-99.CODE ETH.

 

 

 

(a)(2)     Certification pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit 99.CERT.

 

 

 

(b)         Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)) is furnished and attached hereto as Exhibit 99.906CERT.

 

 

Form N-CSR Item F

 

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:

DWS High Income Fund, a series of DWS High Income Series

 

 

 

 

By:

/s/Michael G. Clark

Michael G. Clark

President

 

 

Date:

November 30, 2010

 

 

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:

/s/Michael G. Clark

Michael G. Clark

President

 

 

Date:

November 30, 2010

 

 

 

 

 

 

By:

/s/Paul Schubert

Paul Schubert

Chief Financial Officer and Treasurer

 

 

Date:

November 30, 2010