Form N-CSR ADVENT CONVERTIBLE & For: Oct 31

December 30, 2021 4:46 PM EST

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-21309

Advent Convertible and Income Fund
(Exact name of registrant as specified in charter)


888 Seventh Ave, 31st Floor, New York, NY 10019
(Address of principal executive offices) (Zip code)

 

Robert White, Treasurer

888 Seventh Ave, 31st Floor, New York, NY 10019
(Name and address of agent for service)

Registrant's telephone number, including area code: (212) 482-1600

Date of fiscal year end: October 31

Date of reporting period: November 1, 2020 - October 31, 2021

 

 

 

Item 1. Reports to Stockholders.

The registrant's annual report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “Investment Company Act”), is as follows:

 

 

 

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GUGGENHEIMINVESTMENTS.COM/AVK

...YOUR BRIDGE TO THE LATEST, MOST UP-TO-DATE INFORMATION ABOUT THE ADVENT

CONVERTIBLE AND INCOME FUND

The shareholder report you are reading right now is just the beginning of the story.

Online at guggenheiminvestments.com/avk, you will find:

• Daily, weekly and monthly data on share prices, net asset values, dividends and more

• Portfolio overviews and performance analyses

• Announcements, press releases and special notices

• Fund and adviser contact information

Advent Capital Management and Guggenheim Investments are continually updating and expanding shareholder information services on the Fund’s website in an ongoing effort to provide you with the most current information about how your Fund’s assets are managed and the results of our efforts. It is just one more small way we are working to keep you better informed about your investment in the Fund.


 
 

 

 

(Unaudited) October 31, 2021

 

DEAR SHAREHOLDER

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Tracy V. Maitland

President and Chief Executive Officer

We thank you for your investment in the Advent Convertible and Income Fund (the “Fund” or “AVK”). This report covers the Fund’s performance for the fiscal year ended October 31, 2021.

The ongoing economic recovery from the COVID-19 pandemic has been faster than many expected. Consumer confidence has held up well as massive fiscal support drove positive personal income growth and a swift monetary policy response led to gains in household net worth. However, certain travel restrictions, quarantines and other measures remain in place, adversely impacting local and global economies. While fiscal support and COVID-19 vaccines continue to be deployed, disruptions in the economy and markets caused by the COVID-19 pandemic may continue and materially impact the Fund and its assets.

Advent Capital Management, LLC (“Advent” or the “Investment Adviser”) serves as the Fund’s Investment Adviser. Based in New York, New York, with additional investment personnel in London, England, Advent is a credit-oriented firm specializing in the management of global convertible, high-yield and equity securities across three lines of business—long-only strategies, alternatives and NYSE-listed closed-end funds. As of October 31, 2021, Advent managed more than $11 billion in assets.

Guggenheim Funds Distributors, LLC (the “Servicing Agent”) serves as the servicing agent to the Fund. The Servicing Agent is an affiliate of Guggenheim Partners, LLC, a global diversified financial services firm.

The Fund’s investment objective is to provide total return through a combination of capital appreciation and current income. Under normal market conditions, the Fund invests at least 80% of its managed assets in a diversified portfolio of convertible securities and non-convertible income securities. Under normal market conditions, the Fund will invest at least 30% of its managed assets in convertible securities and may invest up to 70% of its managed assets in non-convertible income securities. The Fund may invest without limitation in foreign securities. The Fund also uses a strategy of writing (selling) covered call options on up to 25% of the securities held in the portfolio, thus generating option writing premiums.

All AVK returns cited—whether based on net asset value (“NAV”) or market price—assume the reinvestment of all distributions. For the fiscal year ended October 31, 2021, the Fund generated a total return based on market price of 52.60% and a total return of 34.59% based on NAV. As of October 31, 2021, the Fund’s market price of $19.23 represented a discount of 4.52% to NAV of $20.14

Past performance is not a guarantee of future results. All NAV returns include the deduction of management fees, operating expenses, and all other Fund expenses. The market price of the Fund’s shares fluctuates from time to time and may be higher or lower than the Fund’s NAV.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 3


 
 

  

DEAR SHAREHOLDER (Unaudited) continued October 31, 2021

 

The Fund paid a distribution each month of the period. The most recent monthly distribution of $0.1172, paid on October 29, 2021, represents an annualized distribution rate of 7.31% based upon the last closing market price of $19.23 on October 31, 2021.

There is no guarantee of any future distribution or that the current returns and distribution rate will be maintained. The Fund’s distribution rate is not constant and the amount of distributions, when declared by the Fund’s Board of Trustees, is subject to change based on the performance of the Fund. Please see the Management Discussion of Fund Performance section beginning on page 5 for more information on distributions for the period.

We encourage shareholders to consider the opportunity to reinvest their distributions from the Fund through the Dividend Reinvestment Plan (“DRIP”), which is described in detail on page 83 of this report. When shares trade at a discount to NAV, the DRIP takes advantage of the discount by reinvesting the monthly dividend distribution in common shares of the Fund purchased in the market at a price less than NAV. Conversely, when the market price of the Fund’s common shares is at a premium above NAV, the DRIP reinvests participants’ dividends in newly issued common shares at the greater of NAV per share or 95% of the market price per share. The DRIP provides a cost-effective means to accumulate additional shares and enjoy the benefits of compounding returns over time.

The Fund is managed by a team of experienced and seasoned professionals led by myself in my capacity as Chief Investment Officer (as well as President and Founder) of Advent Capital Management, LLC. We encourage you to read the following Management Discussion of Fund Performance section, which provides additional information regarding the factors that influenced the Fund’s performance.

We thank you for your investment in the Fund, and we are honored that you have chosen the Advent Convertible and Income Fund as part of your investment portfolio. For the most up-to-date information regarding your investment, including related investment risks, please visit the Fund’s website at guggenheiminvestments.com/avk.

Sincerely,

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Tracy V. Maitland

President and Chief Executive Officer of the
Advent Convertible and Income Fund

November 30, 2021

 

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MANAGEMENT DISCUSSION OF FUND  
PERFORMANCE (Unaudited) October 31, 2021

 

The individuals who are primarily responsible for the day-to-day management of the portfolio (the “Portfolio Managers”) of Advent Convertible and Income Fund (the “Fund” or “AVK”) include Tracy Maitland (President and Chief Investment Officer of Advent), Paul Latronica (Managing Director of Advent) and Tony Huang (Director of Advent). Mr. Maitland and Mr. Latronica are portfolio managers and Mr. Huang is an associate portfolio manager. The Portfolio Managers are supported by teams of investment professionals who make investment decisions for the Fund’s core portfolios of convertible bonds, the Fund’s high yield securities investments and the Fund’s leverage allocation, respectively. In the following interview, the management team discusses the convertible securities and high yield markets and Fund performance for the fiscal year ended October 31, 2021.

Please describe the Fund’s objective and management strategies.

The Fund’s investment objective is to provide total return through a combination of capital appreciation and current income. Under normal market conditions, the Fund invests at least 80% of its managed assets in a diversified portfolio of convertible securities and non-convertible income producing securities. Under normal market conditions, the Fund will invest at least 30% of its managed assets in convertible securities and may invest up to 70% of its managed assets in non-convertible income securities. The Fund may invest without limitation in foreign securities.

The Fund also uses a strategy of writing (selling) covered call options on up to 25% of the securities held in the portfolio. The objective of this strategy is to generate current gains from option premiums to enhance distributions payable to the holders of common shares. In addition, the Fund may invest in other derivatives, such as options purchased and written, forward foreign currency exchange contracts, futures contracts and swap agreements.

The Fund uses financial leverage to finance the purchase of additional securities. Although financial leverage may create an opportunity for increased return for shareholders, it also results in additional risks and can magnify the effect of any losses. There is no assurance that the strategy will be successful. If income and gains earned on securities purchased with the financial leverage proceeds are greater than the cost of the financial leverage, shareholders’ return will be greater than if financial leverage had not been used. Conversely, if the income or gains from the securities purchased with the proceeds of financial leverage are less than the cost of the financial leverage, shareholders’ return will be less than if financial leverage had not been used.

Discuss Advent’s investment approach.

Advent’s approach involves core portfolios of convertible bonds that are managed, subject to the Fund’s investment policies and restrictions, in a manner similar to that of Advent’s Balanced Convertible Strategy and Global Balanced Convertible Strategy, which seek high total returns by investing in a portfolio of U.S. dollar convertible securities and global convertible securities, respectively, that provide equity-like returns while seeking to limit downside risk.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 5


 
 

 

MANAGEMENT DISCUSSION OF FUND  
PERFORMANCE (Unaudited) continued October 31, 2021

 

These core portfolios are supplemented by investments in high yield securities selected in a manner similar to that of Advent’s High Yield Strategy, which seeks income and total return by investing primarily in high yielding corporate credit using fundamental and relative value analysis to identify undervalued securities.

Advent uses a separate portion of the Fund’s portfolio to increase or decrease relative overall exposure to convertible securities, high yield securities, and equities. This portion of the Fund’s portfolio incorporates leverage and operates as an asset-allocation tool reflecting Advent’s conservative management philosophy and its views on the relative value of these three asset classes under changing market conditions.

Please describe the economic and market environment over the last 12 months.

Equity and corporate bond markets followed developments on the global economy’s recovery from the COVID-19 pandemic as the year progressed. Early in the fiscal year, the resolution of the U.S. elections as well as positive data on vaccine efficacy drove higher equity multiples and lower corporate bond spreads as investors anticipated economic acceleration. Beginning in 2021, U.S. vaccine distribution provided the momentum for recovery in a wide range of economic activities including travel, office work, events, and manufacturing. As the accelerated economic activity was particularly acute in the second calendar quarter, bond markets began to forecast an eventual reduction or stop to the U.S. Federal Reserve’s (the “Fed”) buying of securities. Subsequently, long-term interest rates began rising.

The increased cost of long-term borrowing had a negative impact on growth sectors, particularly more speculative companies, as these valuations are heavily dependent on long-term interest rates that drive discount rate calculations. The Fed began to signal its tapering of its bond purchases in reaction to accelerating inflation resulting in a flattening Treasury yield curve in anticipation of the breakneck economic growth slowing. As a result, growth shares reaccelerated again later in the fiscal year. Further amplifying these trends was the circulation of a virulent strain of COVID-19, named Delta, which slowed U.S. economic growth markedly in the third calendar quarter and illustrated the uneven nature of both commercial and market recoveries. Other developed nations had a more muted recovery given slower vaccination distribution and a delayed reaction to Delta at the end of the fiscal year. The impact of inflation exiting the fiscal year was front and center with many commodities having accelerated price gains and robust demand causing supply chain shortages and more pressure on raw materials and labor.

How did the Fund perform in this environment?

All AVK returns cited—whether based on net asset value (“NAV”) or market price—assume the reinvestment of all distributions. For the fiscal year ended October 31, 2021, the Fund generated a total return based on market price of 52.60% and a total return of 34.59% based on NAV. As of October 31, 2021, the Fund’s market price of $19.23 represented a discount of 4.52% to NAV of $20.14. As of October 31, 2020, the Fund’s market price of $13.62 represented a discount of 15.19% to NAV of $16.06.

 

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MANAGEMENT DISCUSSION OF FUND  
PERFORMANCE (Unaudited) continued October 31, 2021

 

Past performance is not a guarantee of future results. All NAV returns include the deduction of management fees, operating expenses, and all other Fund expenses. The market price of the Fund’s shares fluctuates from time to time, and may be higher or lower than the Fund’s NAV.

How did other markets perform in this environment for the 12-month period ended October 31, 2021?

Index Total Return
Bloomberg U.S. Aggregate Bond Index -0.48%
ICE Bank of America (“BofA”) Merrill Lynch U.S. Convertible Index 32.95%
ICE BofA Merrill Lynch U.S. High Yield Index 10.74%
Refinitiv Global Focus Convertible U.S. Dollar Hedged Index 15.45%
MSCI World Index 41.08%
MSCI World 100% Hedged to USD Index 40.79%
Standard & Poor’s 500 (“S&P 500”) Index 42.89%

 

What contributed to Fund performance?

Convertible bonds continued a string of strong yearly performances with the third-straight year of over 10% returns, measured from October 2020 to October 2021. As stated in the semiannual report, the first fiscal half saw the ICE BofA Merrill Lynch U.S. Convertible Index nearly match the 29% return of the S&P 500 Index. In the second half of the fiscal year, relative returns were more muted with the ICE BofA Merrill Lynch U.S. Convertible Index returning 4.42% versus the S&P 500 Index returning 10.91%, as issuers tied to the economic recovery suffered with the surge of the Delta variant while the performance of the S&P 500 Index was weighted more in large-capitalization companies which are less prevalent in the convertible market. Nonetheless, the ICE BofA Merrill Lynch U.S. Convertible Index return for the year of 32.95% was impressive on an absolute basis and near the historical averages as a ratio of the S&P 500 Index.

Global convertibles also had double-digit index returns, though not to the level of the ICE BofA Merrill Lynch U.S. Convertible Index. Compared to the MSCI World Index, the global convertible universe is more heavily weighted to Asia, particularly outside of Japan, and less heavily weighted to the United States. China and other Asian equity markets advanced but less so than the U.S. equity markets due to vaccine distribution being slower and leaving Asian economies more vulnerable to variant proliferation.

In the high-yield corporate bond market, the Fund’s other major asset allocation, U.S. corporate profits raced higher as the economy reopened and the Fed continued its accommodative monetary policies. Although risk-free Treasury rates moved broadly higher during the year, high-yield bond prices gained from compression of spreads, or the yield difference that investors demand for high-yield bonds over that of comparable-maturity Treasuries. The index spread started the year at 525 basis points and ended the year at 315 basis points. One basis point is equal to 0.01%. This effect more than offset higher Treasury yields to lead to price gains, and, with the coupon income, the high-yield index returned over 10% for the year.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 7


 
 

 

MANAGEMENT DISCUSSION OF FUND  
PERFORMANCE (Unaudited) continued October 31, 2021

 

Please discuss the Fund’s distributions.

The Fund paid a distribution each month of the period. The most recent monthly distribution of $0.1172, paid on October 29, 2021, represents an annualized distribution rate of 7.31% based upon the last closing market price of $19.23 on October 31, 2021.

   
Payable Date Amount
November 30, 2020 $0.1172
December 31, 2020 $0.1172
January 29, 2021 $0.1172
February 26, 2021 $0.1172
March 31, 2021 $0.1172
April 30, 2021 $0.1172
May 28, 2021 $0.1172
June 30, 2021 $0.1172
July 30, 2021 $0.1172
August 31, 2021 $0.1172
September 30, 2021 $0.1172
October 29, 2021 $0.1172
Total $1.4064

 

Distributions are not guaranteed and are subject to change. Distributions may be paid from sources of income other than ordinary income, such as short-term capital gains, long term capital gains or return of capital. The final determination of the source and tax characteristics of all distributions in a particular year will be reported to shareholders in January 2022 on form 1099-DIV.

During fiscal 2021, the Fund gained in net asset value in spite of the distribution rate due to market appreciation. In addition, based on the Fund’s income and realized capital gains, distributions were not sourced from return of capital.

There is no guarantee of any future distribution or that the current returns and distribution rate will be maintained. The Fund’s distribution rate is not constant and the amount of distributions, when and if declared by the Fund’s Board of Trustees, is subject to change based on the performance of the Fund.

While the Fund generally seeks to pay distributions that will consist primarily of investment company taxable income and net capital gain, because of the nature of the Fund’s investments and changes in market conditions from time to time, or in order to maintain a more stable distribution level over time, the distributions paid by the Fund for any particular period may be more or less than the amount of net investment income from that period. If the Fund’s total distributions in any year exceed the amount of its investment company taxable income and net capital gain for the year, any such excess would generally be characterized as a return of capital for U.S. federal income tax purposes.

A return of capital distribution is in effect a partial return of the amount a shareholder invested in the Fund. A return of capital does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income.” A return of capital distribution decreases the Fund’s total

 

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MANAGEMENT DISCUSSION OF FUND  
PERFORMANCE (Unaudited) continued October 31, 2021

 

assets and, therefore, could have the effect of increasing the Fund’s expense ratio. Please see Note 2(h) on page 48 for more information on distributions for the period.

How has the Fund’s leverage strategy affected performance?

As part of its investment strategy, the Fund utilizes leverage to finance the purchase of additional securities that provide increased income and potentially greater appreciation potential to common shareholders than could be achieved from a portfolio that is not leveraged.

The Fund had $324 million (approximately 32% of the Fund’s total managed assets) in leverage outstanding as of October 31, 2021, with a related average interest rate of the combined lines of 2.80%. $168 million was in the form of a margin loan with Société Générale and $156 million was in reverse repurchase agreements with Société Générale. Both forms of leverage have tranches that expire at various times from December 2022 to December 2025, and both have a floating tranche that varies with 3-month London Interbank Offered Rates (“LIBOR”). The interest rate formula for the floating tranches will automatically switch to an alternative benchmark if LIBOR becomes unavailable or the parties elect to opt-in to an alternative benchmark early.

The average interest rate of the combined lines at October 31, 2021 of 2.80% represented a decline from the 3.14% at October 31, 2020. The decline was due to the maturity of a fixed-rate swap in December 2020 most of which was renewed into new fixed-rate swaps at lower rates.

There is no guarantee that the Fund’s leverage strategy will be successful, and the Fund’s use of leverage may cause the Fund’s NAV and market price of common shares to be more volatile. The NAV return for the Fund was positive and above the cost of leverage for the fiscal year. Although Advent looks at funds deployed from borrowings differently than funds which use the shareholder equity base, on this simple metric, the Fund’s leverage was beneficial to shareholders for the fiscal period given the strong security returns in the portfolio. The Fund’s leverage has dropped from 37% at October 2020 to 32% at October 2021 due to the Fund’s NAV gains while leverage in dollars stayed unchanged.

What was the impact of the Fund’s covered call strategy?

The income generated from writing covered call equity options depends on the volatility perceived in the markets at the time of writing the contracts. The CBOE VIX Volatility Index (“VIX”), which averaged 27.5 during the 2020 fiscal year, drifted lower during the 2021 fiscal year and closed in April at 16.3, averaging 20.3. Volatility fell as market sentiment drifted away from the crisis attitude that defined fiscal 2020 with the world in a virus mitigation situation. With the passing of the U.S. elections and proliferation of vaccine approvals and distribution, the Fund was reticent to cap returns on its equity holdings by writing covered calls. However, late in the fiscal year during a period of higher volatility as the Delta variant brought more uncertainty on the smoothness of the economic recovery, the Fund found more opportunities and began to write more options against equity positions. This has continued into the 2022 fiscal year as the possibility of choppier markets rises as the Fed looks to reduce monetary support, and possibly raise interest rates, and corporate profits

 

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MANAGEMENT DISCUSSION OF FUND  
PERFORMANCE (Unaudited) continued October 31, 2021

 

slow from enormous growth rates coming out of the pandemic. The Fund writes options on individual equity positions as opposed to index options and will continue to use the Adviser’s research team to judge individual equity positions and the income possible from writing options based on stock-specific volatility in coming to an optimal solution. The Fund’s use of options detracted from performance during the period, as gains in the underlying shares continued and led to options being covered at a loss or the shares being sold at contract prices below market.

How were the Fund’s total investments allocated among asset classes during the 12 months ended October 31, 2021, and what did this mean for performance?

On October 31, 2021, the Fund’s total investments were invested approximately 56.5% in convertible bonds, convertible preferred securities, and mandatory convertibles; 28.5% in corporate bonds; 10.6% in equities; 3.8% in cash and cash equivalents; and 0.6% in senior floating rate interests.

On October 31, 2020, the Fund’s total investments were invested approximately 60.3% in convertible bonds, convertible preferred securities, and mandatory convertibles; 30.3% in corporate bonds; 4.7% in equities; 4.4% in cash and cash equivalents; and 0.3% in senior floating rate interests.

The main change in asset allocation for the year was an increase in equity holdings and a decline in convertible securities. The increase in equities occurred in the first half of the fiscal year as the Fund sought to position for a global economic rebound as vaccinations accelerated. Some cyclical sectors are not large convertible issuers and were best expressed through equity positions. Late in the fiscal year, the Fund slightly reduced its convertible securities holdings in favor of cash in positioning for an expected stronger new issuance environment for convertibles after growth-oriented sectors began outperforming again. The convertible securities asset class went through a mild period of digestion during the fiscal year as the recent quarters of record issuance weighed on supply and the decline in equity volatility also hurt valuations of the options embedded in convertibles. This period may have passed which leaves the Fund optimistic exiting the year on using cash on new issuances which tend to have greater asymmetry characteristics than secondary market bonds which may be in-the-money.

International investments went from 18.0% at October 31, 2020 to 17.6% at October 31, 2021. Allocation decisions tilted slightly more toward international opportunities given lower equity valuations in the year and a greater proportion of new issuance volume overseas versus 2020. However, appreciation of domestic convertibles was higher than that of foreign convertibles which largely offset the first effect. The Fund entered into forward foreign currency exchange contracts to hedge exchange rate risk for non-U.S. dollar denominated investments. The Fund’s use of forward foreign currency exchange contracts contributed to performance during the period, as declines in foreign-currency denominated holdings due to the rising U.S. dollar were offset by the forward contracts.

Which investments had the greatest effect on the Fund’s performance?

In a year with strong equity markets, mandatory convertibles were among the strongest contributors given their characteristics closer to equities than bonds. Private equity investment manager KKR & Company, Inc. and its mandatories (1.2% of long-term investments at period end) surged given

 

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MANAGEMENT DISCUSSION OF FUND  
PERFORMANCE (Unaudited) continued October 31, 2021

 

rising income from new funds raised and realization of investment gains. The market environment has remained ripe for the private equity model with strong inflows, rising corporate earnings, and low borrowing rates. Convertibles in security software maker Palo Alto Networks, Inc. (1.1% of long-term investments at period end) advanced throughout the year as a series of earnings beats signaled the success of the company’s security acquisitions and a new product cycle in the more mature firewall business. Mandatory convertibles of auto components maker Aptiv plc (1.0% of long-term investments at period end) rose as the company consistently grew sales and backlog at rates greater than that of the automotive market’s units thanks to increasing content in both traditional and electric vehicles. Mandatory convertibles in semiconductor and enterprise software provider Broadcom, Inc. (1.1% of long-term investments at period end) benefitted from greater demand for data center and mobile phone components as these end markets enjoyed secular growth and the 5G telecommunications cycle.

Among detractors, convertible bonds in solar power hardware maker Enphase Energy, Inc. (not held at period end) fell after the company lowered forward estimates citing difficulties sourcing components. Solar sector equities also fell with the growth sector correction with rising interest rates and with a lull in news after the change of administration spurred more optimism about government support for solar. Chinese electric vehicle maker NIO, Inc. (0.1% of long-term investments at period end) and its convertibles declined as the company fell victim to similar component shortages as well as raw material price increases and disruptions from rising COVID-19 cases in China in the summer. In these two cases, the Fund was cushioned from some of the equity declines by the convertibles’ bond floor, but the Fund reduced positions as the convertibles’ delta had fallen to low levels to limit upside participation in the near future. Consumer borrowing finance company LendingTree, Inc. (0.2% of long-term investments at period end) and its convertibles depreciated as earnings failed to rebound with demand for consumer borrowing suppressed by excess savings, some from government stimulus programs. Finally, convertibles in health care test company Exact Sciences Corp. (0.5% of long-term investments at period end) fell as rising COVID-19 cases limited elective procedures at health care providers and the company’s promising liquid biopsy initiative had a relative lack of new news. We remained positive on Exact Sciences Corp. and the continued uptake of its colorectal tests and have added positions.

This material is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

 

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MANAGEMENT DISCUSSION OF FUND  
PERFORMANCE (Unaudited) continued October 31, 2021

 

Index Definitions

The following indices are referenced throughout this report. It is not possible to invest directly in an index. These indices are intended as measures of broad market returns. The Fund’s mandate differs materially from each of the individual indices. The Fund also maintains leverage and incurs transaction costs, advisory fees, and other expenses, while these indices do not.

Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including U.S. Treasuries, government-related and corporate securities, mortgage-backed securities or “MBS” (agency fixed-rate and hybrid adjustable-rate mortgage, or “ARM”, pass-throughs), asset-backed securities (“ABS”), and commercial mortgage-backed securities (“CMBS”) (agency and non-agency).

VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 Index options. It is a weighted blend of prices for a range of options on the S&P 500 Index.

ICE BofA Merrill Lynch U.S. Convertible Index consists of convertible bonds traded in the U.S. dollar denominated investment grade and noninvestment grade convertible securities sold into the U.S. market and publicly traded in the United States. The Index constituents are market-value weighted based on the convertible securities prices and outstanding shares, and the underlying index is rebalanced daily.

ICE BofA Merrill Lynch U.S High Yield Index includes USD-denominated, high yield, fixed-rate corporate securities. Securities are classified as high yield if the rating of Moody’s, Fitch, or S&P is Ba1/BB +/BB + or below.

Refinitiv Global Focus Convertible U.S. Dollar Hedged Index (formerly Thomson Reuters Convertible Global Focus USD Hedged Index) is a market-weighted index with a minimum size for inclusion of $500 million (US), €375 million (Europe), ¥22 billion (Japan), and $275 million (Other) of Convertible Bonds with an Equity Link. A rebranding earlier in 2020 resulted in a change to the name of the benchmark.

MSCI World Index (Net) is calculated with net dividends reinvested. It is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

MSCI World 100% Hedged to USD Index represents a close estimation of the performance that can be achieved by hedging the currency exposures of its parent index, the MSCI World Index, to the USD, the “home” currency for the hedged index. The index is 100% hedged to the USD by selling each foreign currency forward at the one-month Forward weight.

S&P 500® Index is a broad-based index, the performance of which is based on the performance of 500 widely held common stocks chosen for market size, liquidity, and industry group representation.

 

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FUND SUMMARY (Unaudited) October 31, 2021

 

Fund Statistics  
Share Price $19.23
Net Asset Value $20.14
Discount to NAV -4.52%
Net Assets ($000) $695,323

 

Cumulative Fund Performance*

 

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* The performance data above represents past performance that is not predictive of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost. Returns are historical and include changes in principal and reinvested dividends and capital gains and do not reflect the effect of taxes. The Bloomberg U.S. Aggregate Bond Index is an unmanaged index and, unlike the Fund, has no management fees or operating expenses to reduce its reported return. The Fund does not seek to achieve performance that is comparative to an index.

         
AVERAGE ANNUAL TOTAL RETURNS        
FOR THE PERIOD ENDED OCTOBER 31, 2021        
  One Three Five Ten
  Year Year Year Year
Advent Convertible & Income Fund        
NAV 34.59% 16.79% 13.09% 9.07%
Market 52.60% 22.14% 16.49% 10.54%
Bloomberg U.S. Aggregate Bond Index -0.48% 5.63% 3.10% 3.00%

 

Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. All NAV returns include the deduction of management fees, operating expenses and all other Fund expenses. The deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares is not reflected in the total returns. For the most recent month-end performance figures, please visit guggenheiminvestments.com/avk. The investment return and principal value of an investment will fluctuate with changes in market conditions and other factors so that an investor’s shares, when sold, may be worth more or less than their original cost.

 

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FUND SUMMARY (Unaudited) continued October 31, 2021

 

   
Portfolio Breakdown % of Net Assets
Convertible Bonds 64.4%
Corporate Bonds 41.1%
Convertible Preferred Stocks 17.3%
Common Stocks 15.4%
Money Market Fund 5.5%
Senior Floating Rate Interests 0.8%
Total Investments 144.5%
Options Written (0.1%)
Other Assets & Liabilities, net (44.4%)
Net Assets 100.0%

 

 

14 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

 

   
FUND SUMMARY (Unaudited) continued October 31, 2021

 

     
Country Diversification
 
Country   % of Long-Term Investments
United States   82.6%
Canada   2.3%
Netherlands   1.8%
Cayman Islands   1.5%
Liberia   1.2%
France   1.1%
Jersey   1.1%
Japan   1.0%
Bermuda   1.0%
Germany   0.8%
Luxembourg   0.7%
Spain   0.5%
Panama   0.5%
Virgin Islands (UK)   0.4%
Australia   0.4%
Israel   0.4%
Mauritius   0.4%
Vietnam   0.4%
China   0.3%
United Kingdom   0.2%
Hong Kong   0.2%
Italy   0.2%
Marshall Islands   0.2%
Ireland   0.2%
India   0.1%
Taiwan, Province of China   0.1%
Republic of Korea   0.1%
Switzerland   0.1%
Singapore   0.1%
New Zealand   0.1%
Total Long-Term Investments   100.0%

 

The above summaries are provided for informational purposes only and should not be viewed as recommendations.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 15


 
 

 

FUND SUMMARY (Unaudited) continued October 31, 2021

 

Share Price & NAV History

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Distributions to Shareholders & Annualized Distribution Rate

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16 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

PORTFOLIO OF INVESTMENTS October 31, 2021

 

     
  Shares Value
COMMON STOCKS– 15.4%    
Consumer, Cyclical – 2.8%    
Caesars Entertainment, Inc.*,7 40,000 $ 4,378,400
Marriott International, Inc. — Class A*,7 25,000 4,000,500
International Game Technology plc* 125,000 3,686,250
Hanesbrands, Inc. 150,000 2,556,000
Penn National Gaming, Inc.* 35,000 2,506,000
Cummins, Inc.7 10,000 2,398,400
Total Consumer, Cyclical   19,525,550
 
Technology – 2.8%    
DocuSign, Inc.* 28,000 7,792,120
Advanced Micro Devices, Inc.*,7 30,000 3,606,900
ON Semiconductor Corp.* 60,000 2,884,200
Microchip Technology, Inc.7 34,000 2,519,060
Zynga, Inc. — Class A* 310,100 2,288,538
Total Technology   19,090,818
 
Financial – 2.6%    
Gaming and Leisure Properties, Inc. REIT 76,735 3,720,880
Fifth Third Bancorp7 75,000 3,264,750
PNC Financial Services Group, Inc. 15,000 3,165,450
KeyCorp 125,000 2,908,750
Ventas, Inc. REIT 45,000 2,401,650
EJF Acquisition Corp*,1 150,000 1,498,500
Visa, Inc. — Class A7 5,000 1,058,850
Total Financial   18,018,830
 
Communications – 2.0%    
Amazon.com, Inc.* 1,000 3,372,430
Expedia Group, Inc.* 18,000 2,959,380
Cisco Systems, Inc. 50,000 2,798,500
Airbnb, Inc. — Class A*,7 15,000 2,559,900
Snap, Inc. — Class A* 40,000 2,103,200
Total Communications   13,793,410
 
Energy – 1.5%    
ConocoPhillips7 90,000 6,704,100
Valero Energy Corp. 50,000 3,866,500
Total Energy   10,570,600
 
Basic Materials – 1.5%    
United States Steel Corp.7 150,000 3,958,500
LyondellBasell Industries N.V. 35,000 3,248,700
Alcoa Corp.7 70,000 3,216,500
Total Basic Materials   10,423,700

 

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 17


 
 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

     
  Shares Value
COMMON STOCKS– 15.4% (continued)    
Consumer, Non-cyclical – 1.5%    
AbbVie, Inc.7 40,000 $ 4,586,800
Humana, Inc. 7,000 3,242,120
Eli Lilly & Co.2 10,000 2,547,600
Total Consumer, Non-cyclical   10,376,520
 
Industrial – 0.7%    
Union Pacific Corp.7 12,000 2,896,800
Honeywell International, Inc. 10,000 2,186,200
Total Industrial   5,083,000
Total Common Stocks    
(Cost $89,755,121)   106,882,428
 
CONVERTIBLE PREFERRED STOCKS– 17.3%    
Industrial – 3.1%    
Fluor Corp., 6.50%2,3 5,790 6,593,794
Colfax Corp., 5.75% due 01/15/222 30,000 6,261,000
RBC Bearings, Inc., 5.00% due 10/15/24*,2 47,268 5,652,780
Stanley Black & Decker, Inc., 5.25% due 11/15/222 29,424 3,175,438
Total Industrial   21,683,012
 
Financial – 3.0%    
KKR & Company, Inc., 6.00% due 09/15/232 111,164 11,120,846
Bank of America Corp., 7.25%2 3,430 4,912,515
Wells Fargo & Co., 7.50%2 3,000 4,565,148
Total Financial   20,598,509
 
Consumer, Non-cyclical – 2.8%    
Boston Scientific Corp., 5.50% due 06/01/232 53,470 6,258,129
Elanco Animal Health, Inc., 5.00% due 02/01/232 118,687 6,015,057
Danaher Corp., 5.00% due 04/15/232 2,421 4,020,676
Avantor, Inc., 6.25% due 05/15/222 13,170 1,630,182
Becton Dickinson and Co., 6.00% due 06/01/232 25,521 1,342,405
Total Consumer, Non-cyclical   19,266,449
 
Technology – 2.5%    
Broadcom, Inc., 8.00% due 09/30/222 6,530 10,953,030
Change Healthcare, Inc., 6.00% due 06/30/222 73,037 5,219,224
Clarivate plc, 5.25% due 06/01/242 16,346 1,499,582
Total Technology   17,671,836
 
Utilities – 2.0%    
NextEra Energy, Inc.    
5.28% due 03/01/232 105,823 5,764,179
6.22% due 09/01/232 62,220 3,409,656
PG&E Corp., 5.50% due 08/16/232 16,514 1,866,907

 

See notes to financial statements.

 

18 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

     
  Shares Value
CONVERTIBLE PREFERRED STOCKS– 17.3% (continued)    
Utilities – 2.0% (continued)    
AES Corp., 6.88% due 02/15/242 15,109 $ 1,526,160
American Electric Power Company, Inc., 6.13% due 08/15/232 29,153 1,505,461
Total Utilities   14,072,363
 
Communications – 1.7%    
2020 Cash Mandatory Exchangeable Trust, 5.25% due 06/01/23*,2,3 7,601 7,973,503
ViacomCBS, Inc., 5.75% due 04/01/242 61,787 3,746,146
Total Communications   11,719,649
 
Consumer, Cyclical – 1.3%    
Aptiv plc, 5.50% due 06/15/232 47,995 9,284,633
 
Basic Materials – 0.9%    
ArcelorMittal S.A., 5.50% due 05/18/232 76,209 6,153,115
Total Convertible Preferred Stocks    
(Cost $89,962,243)   120,449,566
 
MONEY MARKET FUND– 5.5%    
Morgan Stanley Institutional Liquidity Government Portfolio –    
Institutional Class, 0.03%2,4 38,115,821 38,115,821
Total Money Market Fund    
(Cost $38,115,821)   38,115,821
  Face  
  Amount~  
CONVERTIBLE BONDS†† – 64.4%    
Technology – 16.0%    
Splunk, Inc.    
1.13% due 09/15/252 5,204,000 6,809,446
1.13% due 06/15/272 3,000,000 3,148,125
RingCentral, Inc.    
due 03/15/262,5 5,500,000 5,378,393
due 03/01/252,5 1,311,000 1,351,149
Coupa Software, Inc.    
0.38% due 06/15/262 5,690,000 6,255,739
Datadog, Inc.    
0.13% due 06/15/252 3,000,000 5,696,337
Avalara, Inc.    
0.25% due 08/01/262,3 5,272,000 5,531,821
Jamf Holding Corp.    
0.13% due 09/01/262,3 4,606,000 5,388,540
Workday, Inc.    
0.25% due 10/01/222 2,249,000 4,444,699
Zscaler, Inc.    
0.13% due 07/01/252 2,000,000 4,324,334

 

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 19


 
 

 

 

   
PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

  Face  
  Amount~ Value
CONVERTIBLE BONDS†† – 64.4% (continued)    
Technology – 16.0% (continued)    
Pegasystems, Inc.    
0.75% due 03/01/252 3,445,000 $ 3,776,753
Akamai Technologies, Inc.    
0.38% due 09/01/272 2,831,000 3,119,408
Zynga, Inc.    
due 12/15/262,3,5 2,880,000 2,781,368
0.25% due 06/01/242 268,000 305,033
ON Semiconductor Corp.    
due 05/01/272,3,5 2,420,000 2,920,698
Bill.com Holdings, Inc.    
due 04/01/272,3,5 2,696,000 2,895,446
STMicroelectronics N.V.    
due 08/04/275 1,600,000 2,077,424
due 08/04/255 600,000 778,509
CyberArk Software Ltd.    
due 11/15/242,5 2,193,000 2,846,733
Blackline, Inc.    
due 03/15/262,3,5 2,745,000 2,812,312
Rapid7, Inc.    
0.25% due 03/15/272,3 2,000,000 2,756,200
Five9, Inc.    
0.50% due 06/01/252 1,968,000 2,642,469
PagerDuty, Inc.    
1.25% due 07/01/252 2,000,000 2,567,326
Microchip Technology, Inc.    
0.13% due 11/15/242 1,528,000 1,715,180
1.63% due 02/15/27 373,000 820,158
LivePerson, Inc.    
due 12/15/262,3,5 2,476,000 2,430,767
Bentley Systems, Inc.    
0.13% due 01/15/262,3 2,098,000 2,391,720
Lumentum Holdings, Inc.    
0.50% due 12/15/262 2,134,000 2,331,395
KBR, Inc.    
2.50% due 11/01/232 1,358,000 2,322,854
MongoDB, Inc.    
0.25% due 01/15/262 920,000 2,315,155
Atos SE    
due 11/06/242,5 EUR 1,700,000 2,113,339
Dropbox, Inc.    
due 03/01/282,3,5 1,769,000 1,934,652
Tyler Technologies, Inc.    
0.25% due 03/15/262,3 1,534,000 1,876,773
PAR Technology Corp.    
1.50% due 10/15/272 1,620,000 1,780,409

 

See notes to financial statements.

 

20 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

  Face  
  Amount~ Value
CONVERTIBLE BONDS†† – 64.4% (continued)    
Technology – 16.0% (continued)    
Silicon Laboratories, Inc.    
0.63% due 06/15/252 1,000,000 $ 1,614,400
Pure Storage, Inc.    
0.13% due 04/15/232 1,349,000 1,613,943
BigCommerce Holdings, Inc.    
0.25% due 10/01/262,3 1,187,000 1,180,024
Kingsoft Corporation Ltd.    
0.63% due 04/29/25 HKD 6,000,000 915,883
Rohm Company Ltd.    
due 12/05/242,5 JPY 90,000,000 855,404
Globalwafers Company Ltd.    
due 06/01/262,5 800,000 829,920
Xero Investments Ltd.    
due 12/02/252,5 609,000 628,640
Lenovo Group Ltd.    
3.38% due 01/24/24 425,000 593,300
United Microelectronics Corp.    
due 07/07/262,5 400,000 399,220
Total Technology   111,271,398
 
Communications – 14.5%    
Liberty Media Corp.    
1.38% due 10/15/23 3,071,000 4,454,943
2.75% due 12/01/493 3,500,000 3,626,700
0.50% due 12/01/502,3 2,038,000 2,601,757
Palo Alto Networks, Inc.    
0.38% due 06/01/252 5,958,000 10,444,970
Etsy, Inc.    
0.25% due 06/15/282,3 5,272,000 6,760,672
Viavi Solutions, Inc.    
1.75% due 06/01/232 3,000,000 3,697,595
1.00% due 03/01/242 2,116,000 2,721,356
DISH Network Corp.    
3.38% due 08/15/262 2,588,000 2,643,218
2.38% due 03/15/242 1,998,000 1,945,553
due 12/15/252,3,5 934,000 1,076,463
Okta, Inc.    
0.38% due 06/15/262 4,360,000 5,474,031
Booking Holdings, Inc.    
0.75% due 05/01/252 3,561,000 5,300,523
Zillow Group, Inc.    
0.75% due 09/01/242 1,100,000 2,635,188
2.75% due 05/15/252 1,500,000 2,619,450

 

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 21


 
 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

     
  Face  
  Amount~ Value
 
CONVERTIBLE BONDS†† – 64.4% (continued)    
Communications – 14.5% (continued)    
Snap, Inc.    
0.75% due 08/01/262 1,187,000 $ 2,841,952
due 05/01/272,3,5 2,109,000 2,146,136
Wayfair, Inc.    
0.63% due 10/01/252 3,254,000 3,221,753
1.00% due 08/15/262 934,000 1,700,168
Uber Technologies, Inc.    
due 12/15/252,3,5 4,408,000 4,262,650
Sea Ltd.    
0.25% due 09/15/262 3,017,000 3,183,614
Shopify, Inc.    
0.13% due 11/01/252 2,487,000 3,167,816
Upwork, Inc.    
0.25% due 08/15/262,3 2,363,000 2,541,187
Twitter, Inc.    
0.25% due 06/15/242 1,964,000 2,322,430
Delivery Hero SE    
0.88% due 07/15/25 EUR 1,300,000 1,525,185
1.00% due 04/30/26 EUR 600,000 644,738
Expedia Group, Inc.    
due 02/15/262,3,5 1,892,000 2,052,041
Zendesk, Inc.    
0.63% due 06/15/252 1,493,000 1,764,547
Match Group Financeco 2, Inc.    
0.88% due 06/15/263 959,000 1,746,898
Meituan    
due 04/27/272,5 1,500,000 1,510,500
Lyft, Inc.    
1.50% due 05/15/252 1,017,000 1,418,011
Just Eat Takeaway.com N.V.    
2.25% due 01/25/242 EUR 1,000,000 1,344,643
Yandex N.V.    
0.75% due 03/03/25 800,000 1,141,960
Q2 Holdings, Inc.    
0.75% due 06/01/262 1,022,000 1,134,718
RealReal, Inc.    
3.00% due 06/15/252 952,000 1,046,010
Xiaomi Best Time International Ltd.    
due 12/17/272,5 900,000 901,350
Bharti Airtel Ltd.    
1.50% due 02/17/25 650,000 854,750
MakeMyTrip Ltd.    
due 02/15/283,5 782,000 828,753
Kakao Corp.    
due 04/28/235 600,000 801,000

 

See notes to financial statements.

 

22 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

  

PORTFOLIO OF INVESTMENTS continued October 31, 2021

     
  Face  
  Amount~ Value
CONVERTIBLE BONDS†† – 64.4% (continued)    
Communications – 14.5% (continued)    
Nice Ltd.    
due 09/15/252,5 589,000 $ 694,286
Total Communications   100,799,515
 
Consumer, Cyclical – 10.6%    
Ford Motor Co.    
due 03/15/262,3,5 11,308,000 13,432,625
Royal Caribbean Cruises Ltd.    
4.25% due 06/15/232 6,260,000 8,474,960
2.88% due 11/15/232,3 2,722,000 3,414,514
Southwest Airlines Co.    
1.25% due 05/01/252 7,029,000 9,893,317
Dufry One BV    
0.75% due 03/30/26 CHF 4,200,000 4,481,946
Tesla, Inc.    
2.00% due 05/15/242 154,000 2,763,530
Live Nation Entertainment, Inc.    
2.00% due 02/15/252 2,000,000 2,446,016
NCL Corporation Ltd.    
5.38% due 08/01/252 1,450,000 2,422,482
Copa Holdings S.A.    
4.50% due 04/15/25 1,500,000 2,409,450
JetBlue Airways Corp.    
0.50% due 04/01/262,3 2,478,000 2,391,806
Spirit Airlines, Inc.    
1.00% due 05/15/262 2,600,000 2,351,440
Marriott Vacations Worldwide Corp.    
due 01/15/262,3,5 1,108,000 1,248,216
1.50% due 09/15/222 920,000 1,094,800
Zhongsheng Group Holdings Ltd.    
due 05/21/255 HKD 11,000,000 2,272,032
LCI Industries    
1.13% due 05/15/262,3 1,182,000 1,248,562
WH Smith plc    
1.63% due 05/07/262 GBP 900,000 1,208,108
Vinpearl JSC    
3.25% due 09/21/26 1,200,000 1,195,728
Zalando SE    
0.05% due 08/06/252 EUR 700,000 953,053
RH    
due 09/15/242,5 287,000 895,339
NIO, Inc.    
due 02/01/262,3,5 1,000,000 890,788
Cheesecake Factory, Inc.    
0.38% due 06/15/262 923,000 841,210

 

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 23


 
 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

     
  Face  
  Amount~ Value
CONVERTIBLE BONDS†† – 64.4% (continued)    
Consumer, Cyclical – 10.6% (continued)    
JET2 plc    
1.63% due 06/10/262 GBP 600,000 $ 834,793
Singapore Airlines Ltd.    
1.63% due 12/03/25 SGD 1,000,000 831,665
Cracker Barrel Old Country Store, Inc.    
0.63% due 06/15/262,3 834,000 818,744
Harvest International Co.    
due 11/21/225 HKD 4,000,000 804,211
Sony Corp.    
due 09/30/225 JPY 34,000,000 790,029
DraftKings, Inc.    
due 03/15/282,3,5 848,000 743,646
International Consolidated Airlines Group S.A.    
1.13% due 05/18/282 EUR 600,000 672,151
American Eagle Outfitters, Inc.    
3.75% due 04/15/252 224,000 639,020
Penn National Gaming, Inc.    
2.75% due 05/15/262 159,000 502,190
Winnebago Industries, Inc.    
1.50% due 04/01/252 356,000 457,739
Total Consumer, Cyclical   73,424,110
 
Consumer, Non-cyclical – 10.4%    
Square, Inc.    
0.25% due 11/01/272,3 6,359,000 7,714,427
0.13% due 03/01/252 1,344,000 2,884,574
due 05/01/262,3,5 490,000 576,145
Dexcom, Inc.    
0.25% due 11/15/252 5,084,000 6,515,409
0.75% due 12/01/232 145,000 550,003
Jazz Investments I Ltd.    
2.00% due 06/15/262 5,182,000 6,058,047
Exact Sciences Corp.    
0.38% due 03/15/272 2,336,000 2,652,820
0.38% due 03/01/282 2,273,000 2,443,475
Insulet Corp.    
0.38% due 09/01/262 3,312,000 4,929,288
Shift4 Payments, Inc.    
due 12/15/252,3,5 3,327,000 3,624,434
0.50% due 08/01/272,3 1,099,000 1,017,234
Guardant Health, Inc.    
due 11/15/272,3,5 3,284,000 3,633,056
Herbalife Nutrition Ltd.    
2.63% due 03/15/242 3,096,000 3,212,071

 

See notes to financial statements.

 

24 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

     
  Face  
  Amount~ Value
CONVERTIBLE BONDS†† – 64.4% (continued)    
Consumer, Non-cyclical – 10.4% (continued)    
Chegg, Inc.    
due 09/01/262,5 1,623,000 $ 1,523,613
0.13% due 03/15/252 660,000 869,059
Supernus Pharmaceuticals, Inc.    
0.63% due 04/01/232 2,000,000 1,988,750
Amadeus IT Group S.A.    
1.50% due 04/09/252 EUR 1,200,000 1,837,326
Nexi SpA    
1.75% due 04/24/272 EUR 800,000 1,059,348
due 02/24/282,5 EUR 700,000 777,319
Fine Perfection Investment Ltd.    
due 04/17/222,5 1,550,000 1,587,588
Sabre GLBL, Inc.    
4.00% due 04/15/252 840,000 1,324,165
QIAGEN N.V.    
1.00% due 11/13/242 1,000,000 1,304,182
Omnicell, Inc.    
0.25% due 09/15/252 681,000 1,268,522
Insmed, Inc.    
0.75% due 06/01/282 1,081,000 1,264,338
China Conch Venture    
due 09/05/235 HKD 8,000,000 1,212,744
Sarepta Therapeutics, Inc.    
1.50% due 11/15/242 858,000 1,162,202
Livongo Health, Inc.    
0.88% due 06/01/252 779,000 1,135,841
NeoGenomics, Inc.    
0.25% due 01/15/282 1,077,000 1,093,157
Shanghai Port Group BVI Holding Company Ltd.    
due 08/09/222,5 928,000 1,059,544
ADM Ag Holding Ltd.    
due 08/26/232,5 1,000,000 1,055,250
Orpea S.A.    
0.38% due 05/17/27 6,356** 1,037,347
Teladoc Health, Inc.    
1.25% due 06/01/272 905,000 930,430
Bridgebio Pharma, Inc.    
2.50% due 03/15/272 601,000 857,708
Afterpay Ltd.    
due 03/12/265 AUD 1,100,000 830,585
Pharmaron Beijing Company Ltd.    
due 06/18/262,5 800,000 827,400
Nipro Corp.    
due 09/25/262,5 JPY 90,000,000 814,953
Total Consumer, Non-cyclical   72,632,354

 

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 25


 
 

  

   
PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

  Face  
  Amount~ Value
CONVERTIBLE BONDS†† – 64.4% (continued)    
Financial – 3.9%    
Pebblebrook Hotel Trust    
1.75% due 12/15/262 6,004,000 $ 6,713,083
SoFi Technologies, Inc.    
due 10/15/262,3,5 3,025,000 3,551,349
Kite Realty Group, LP    
0.75% due 04/01/273 3,000,000 2,977,641
SBI Holdings, Inc.    
due 07/25/252,5 JPY 200,000,000 2,025,871
LendingTree, Inc.    
0.50% due 07/15/252 1,992,000 1,714,315
Vingroup JSC    
3.00% due 04/20/26 1,600,000 1,707,264
Summit Hotel Properties, Inc.    
1.50% due 02/15/262 1,518,000 1,630,679
JPMorgan Chase Bank North America    
due 09/18/225 EUR 700,000 1,289,076
Realogy Group LLC / Realogy Company-Issuer Corp.    
0.25% due 06/15/262,3 1,150,000 1,174,712
Citigroup Global Markets Funding Luxembourg SCA    
due 05/28/245 HKD 8,000,000 1,121,731
Redfin Corp.    
due 10/15/252,5 1,068,000 1,092,489
LEG Immobilien AG    
0.88% due 09/01/252 EUR 600,000 865,566
No. Va Land Investment Group Corp.    
5.25% due 07/16/26 800,000 785,622
Relo Group, Inc.    
due 12/17/272,5 JPY 40,000,000 358,693
Total Financial   27,008,091
 
Industrial – 3.7%    
Middleby Corp.    
1.00% due 09/01/252 2,223,000 3,352,920
Greenbrier Companies, Inc.    
2.88% due 04/15/282,3 3,127,000 3,261,916
Kaman Corp.    
3.25% due 05/01/24 2,500,000 2,540,750
Cellnex Telecom S.A.    
0.50% due 07/05/282 EUR 1,400,000 2,197,947
Scorpio Tankers, Inc.    
3.00% due 05/15/253 2,146,000 2,195,494
Vertex Energy, Inc.    
6.25% due 10/01/273 1,900,000 1,922,644
Deutsche Post AG    
0.05% due 06/30/252 EUR 1,400,000 1,910,220

 

See notes to financial statements.

 

26 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

   
PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

     
  Face  
  Amount~ Value
CONVERTIBLE BONDS†† – 64.4% (continued)    
Industrial – 3.7% (continued)    
Safran S.A.    
0.88% due 05/15/272 10,870** $ 1,770,587
Itron, Inc.    
due 03/15/262,3,5 1,701,000 1,605,379
Vinci S.A.    
0.38% due 02/16/222 1,000,000 1,112,910
MINEBEA MITSUMI, Inc.    
due 08/03/222,5 JPY 90,000,000 1,106,008
Sika A.G.    
0.15% due 06/05/25 CHF 480,000 863,338
DMG Mori Company Ltd.    
due 07/16/242,5 JPY 90,000,000 839,382
Chart Industries, Inc.    
1.00% due 11/15/242,3 212,000 644,113
Prysmian SpA    
due 02/02/262,5 EUR 400,000 487,160
Total Industrial   25,810,768
 
Energy – 2.2%    
Pioneer Natural Resources Co.    
0.25% due 05/15/252 4,352,000 7,712,911
CNX Resources Corp.    
2.25% due 05/01/262 2,000,000 2,718,164
SolarEdge Technologies, Inc.    
due 09/15/252,5 855,000 1,268,202
RAG-Stiftung    
due 06/17/262,5 EUR 800,000 1,047,139
NextEra Energy Partners, LP    
due 11/15/252,3,5 887,000 1,031,052
MBT Systems GmbH    
3.50% due 07/08/27 EUR 700,000 813,113
Equities Corp.    
1.75% due 05/01/262 350,000 548,735
Total Energy   15,139,316
 
Basic Materials – 1.6%    
Allegheny Technologies, Inc.    
3.50% due 06/15/252 3,000,000 3,919,023
Nippon Steel Corp.    
due 10/04/242,5 JPY 150,000,000 1,362,201
due 10/05/262,5 JPY 90,000,000 828,766
Ivanhoe Mines Ltd.    
2.50% due 04/15/262,3 1,437,000 1,873,561
Osisko Gold Royalties Ltd.    
4.00% due 12/31/22 CAD 1,300,000 1,123,597

 

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 27


 
 

 

 

   
PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

     
  Face  
  Amount~ Value
CONVERTIBLE BONDS†† – 64.4% (continued)    
Basic Materials – 1.6% (continued)    
Mitsubishi Chemical Holdings Corp.    
due 03/29/242,5 JPY 120,000,000 $ 1,112,914
Brenntag Finance BV    
1.88% due 12/02/222 750,000 900,802
Total Basic Materials   11,120,864
 
Utilities – 1.5%    
Electricite de France S.A.    
due 09/14/242,5 237,000** 4,161,333
NRG Energy, Inc.    
2.75% due 06/01/482 3,558,000 4,145,282
CenterPoint Energy, Inc.    
4.57% due 09/15/29 23,210** 1,405,598
Iberdrola International BV    
due 11/11/222,5 EUR 700,000 1,000,077
Total Utilities   10,712,290
Total Convertible Bonds    
(Cost $392,496,681)   447,918,706
 
CORPORATE BONDS†† – 41.1%    
Consumer, Non-cyclical – 9.2%    
Kraft Heinz Foods Co.    
7.13% due 08/01/393 2,617,000 3,970,718
Land O’Lakes Capital Trust I    
7.45% due 03/15/282,3 3,151,000 3,643,028
Tenet Healthcare Corp.    
4.25% due 06/01/292,3 3,396,000 3,441,948
Bausch Health Companies, Inc.    
4.88% due 06/01/282,3 3,316,000 3,407,190
Emergent BioSolutions, Inc.    
3.88% due 08/15/282,3 3,116,000 2,995,255
MPH Acquisition Holdings LLC    
5.50% due 09/01/282,3 2,300,000 2,286,850
5.75% due 11/01/282,3 657,000 598,235
Nielsen Finance LLC / Nielsen Finance Co.    
5.63% due 10/01/282,3 2,750,000 2,862,709
United Rentals North America, Inc.    
4.00% due 07/15/302 2,716,000 2,774,503
Brink’s Co.    
4.63% due 10/15/272,3 2,665,000 2,753,078
Organon & Company / Organon Foreign Debt Co-Issuer BV    
5.13% due 04/30/312,3 1,336,000 1,379,661
4.13% due 04/30/282,3 1,341,000 1,361,115
HLF Financing SARL LLC / Herbalife International, Inc.    
4.88% due 06/01/292,3 2,683,000 2,705,752

 

See notes to financial statements.

 

28 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

     
  Face  
  Amount~ Value
CORPORATE BONDS†† – 41.1% (continued)    
Consumer, Non-cyclical – 9.2% (continued)    
MEDNAX, Inc.    
6.25% due 01/15/272,3 2,573,000 $ 2,701,187
ASGN, Inc.    
4.63% due 05/15/282,3 2,608,000 2,696,020
Primo Water Holdings, Inc.    
4.38% due 04/30/292,3 2,682,000 2,661,407
Teva Pharmaceutical Finance Netherlands III BV    
2.80% due 07/21/23 2,628,000 2,650,469
Edgewell Personal Care Co.    
4.13% due 04/01/292,3 2,650,000 2,607,136
HCA, Inc.    
5.88% due 02/01/292 2,036,000 2,425,813
ModivCare Escrow Issuer, Inc.    
5.00% due 10/01/292,3 2,351,000 2,394,305
Horizon Therapeutics USA, Inc.    
5.50% due 08/01/272,3 2,223,000 2,345,265
Korn Ferry    
4.63% due 12/15/272,3 2,109,000 2,177,542
Jazz Securities DAC    
4.38% due 01/15/292,3 2,011,000 2,068,816
Varex Imaging Corp.    
7.88% due 10/15/272,3 1,774,000 1,976,147
APi Group DE, Inc.    
4.13% due 07/15/292,3 1,432,000 1,426,630
TriNet Group, Inc.    
3.50% due 03/01/292,3 1,354,000 1,359,240
Option Care Health, Inc.    
4.38% due 10/31/292,3 658,000 662,113
Total Consumer, Non-cyclical   64,332,132
 
Communications – 7.0%    
Twitter, Inc.    
3.88% due 12/15/272,3 4,000,000 4,211,780
Sirius XM Radio, Inc.    
5.50% due 07/01/292,3 2,783,000 3,005,640
4.00% due 07/15/282,3 682,000 687,081
CSC Holdings LLC    
6.50% due 02/01/292,3 3,367,000 3,615,316
CommScope, Inc.    
8.25% due 03/01/272,3 3,277,000 3,343,687
DIRECTV Holdings LLC / DIRECTV Financing Company, Inc.    
5.88% due 08/15/272,3 2,708,000 2,810,633
Midas OpCo Holdings LLC    
5.63% due 08/15/292,3 2,686,000 2,743,373

 

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 29


 
 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

     
  Face  
  Amount~ Value
CORPORATE BONDS†† – 41.1% (continued)    
Communications – 7.0% (continued)    
News Corp.    
3.88% due 05/15/292,3 2,668,000 $ 2,711,355
Audacy Capital Corp.    
6.75% due 03/31/292,3 2,700,000 2,680,466
Lumen Technologies, Inc.    
4.00% due 02/15/272,3 2,634,000 2,650,607
Nexstar Media, Inc.    
4.75% due 11/01/282,3 2,586,000 2,645,219
Beasley Mezzanine Holdings LLC    
8.63% due 02/01/262,3 2,608,000 2,627,404
Avaya, Inc.    
6.13% due 09/15/282,3 2,516,000 2,620,540
Sprint Capital Corp.    
6.88% due 11/15/282 1,955,000 2,477,748
Match Group Holdings II LLC    
4.63% due 06/01/282,3 2,249,000 2,339,702
Urban One, Inc.    
7.38% due 02/01/282,3 1,956,000 2,055,834
Scripps Escrow, Inc.    
5.88% due 07/15/272,3 1,984,000 2,016,240
Mav Acquisition Corp.    
5.75% due 08/01/282,3 2,031,000 1,999,215
Hughes Satellite Systems Corp.    
6.63% due 08/01/262 652,000 739,987
Viavi Solutions, Inc.    
3.75% due 10/01/292,3 656,000 652,097
Total Communications   48,633,924
 
Energy – 6.2%    
Genesis Energy Limited Partnership / Genesis Energy Finance Corp.    
8.00% due 01/15/272 3,497,000 3,518,926
Parkland Corp.    
5.88% due 07/15/272,3 3,040,000 3,214,800
New Fortress Energy, Inc.    
6.50% due 09/30/262,3 3,200,000 3,114,944
DCP Midstream Operating, LP    
5.63% due 07/15/272 2,615,000 2,986,883
Endeavor Energy Resources Limited Partnership / EER Finance, Inc.    
6.63% due 07/15/252,3 2,672,000 2,821,063
Tallgrass Energy Partners Limited Partnership / Tallgrass Energy Finance Corp.    
6.00% due 03/01/272,3 2,672,000 2,772,200
Occidental Petroleum Corp.    
3.40% due 04/15/262 2,636,000 2,692,911
Harvest Midstream I, LP    
7.50% due 09/01/282,3 2,202,000 2,315,689

 

See notes to financial statements.

 

30 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

 

  Face  
  Amount~ Value
CORPORATE BONDS†† – 41.1% (continued)    
Energy – 6.2% (continued)    
Aethon United BR Limited Partnership / Aethon United Finance Corp.    
8.25% due 02/15/262,3 1,956,000 $ 2,103,600
Apache Corp.    
4.88% due 11/15/272 1,931,000 2,097,587
Southwestern Energy Co.    
5.38% due 02/01/292,3 1,963,000 2,073,419
Hilcorp Energy I Limited Partnership / Hilcorp Finance Co.    
6.00% due 02/01/312,3 1,990,000 2,045,448
Bonanza Creek Energy, Inc.    
5.00% due 10/15/262,3 1,967,000 1,989,522
PBF Holding Company LLC / PBF Finance Corp.    
9.25% due 05/15/252,3 2,015,000 1,969,028
Alliance Resource Operating Partners Limited Partnership / Alliance Resource Finance Corp.    
7.50% due 05/01/253 1,757,000 1,786,351
Comstock Resources, Inc.    
6.75% due 03/01/292,3 1,511,000 1,626,214
Calumet Specialty Products Partners Limited Partnership / Calumet Finance Corp.    
11.00% due 04/15/253 1,315,000 1,430,497
Nabors Industries Ltd.    
7.25% due 01/15/262,3 1,344,000 1,305,958
Laredo Petroleum, Inc.    
9.50% due 01/15/252 987,000 1,016,284
Total Energy   42,881,324
 
Consumer, Cyclical – 5.9%    
American Airlines Incorporated/AAdvantage Loyalty IP Ltd.    
5.75% due 04/20/292,3 3,306,000 3,562,215
QVC, Inc.    
4.38% due 09/01/282 3,033,000 3,105,094
LSF9 Atlantis Holdings LLC / Victra Finance Corp.    
7.75% due 02/15/262,3 2,943,000 2,987,660
Churchill Downs, Inc.    
4.75% due 01/15/282,3 1,479,000 1,530,765
5.50% due 04/01/272,3 1,376,000 1,424,160
Hilton Domestic Operating Company, Inc.    
4.88% due 01/15/302 2,761,000 2,950,763
Everi Holdings, Inc.    
5.00% due 07/15/292,3 2,859,000 2,930,475
Boyd Gaming Corp.    
4.75% due 06/15/312,3 2,704,000 2,785,167
Hilton Grand Vacations Borrower Escrow LLC / Hilton Grand Vacations Borrower Esc    
5.00% due 06/01/292,3 2,696,000 2,752,616
Staples, Inc.    
7.50% due 04/15/262,3 2,708,000 2,739,088

 

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 31


 
 

 

 

   
PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

     
  Face  
  Amount~ Value
CORPORATE BONDS†† – 41.1% (continued)    
Consumer, Cyclical – 5.9% (continued)    
Downstream Development Authority of the Quapaw Tribe of Oklahoma    
10.50% due 02/15/232,3 2,546,000 $ 2,638,293
Ford Motor Co.    
7.45% due 07/16/312 1,926,000 2,551,950
Carnival Corp.    
4.00% due 08/01/282,3 2,356,000 2,358,945
Tenneco, Inc.    
5.13% due 04/15/292,3 2,359,000 2,341,308
FirstCash, Inc.    
4.63% due 09/01/282,3 1,968,000 2,031,960
American Greetings Corp.    
8.75% due 04/15/252,3 1,931,000 2,009,128
Wolverine World Wide, Inc.    
4.00% due 08/15/292,3 672,000 664,312
Total Consumer, Cyclical   41,363,899
 
Basic Materials – 3.5%    
First Quantum Minerals Ltd.    
6.88% due 10/15/273 2,831,000 3,025,631
Valvoline, Inc.    
4.25% due 02/15/303 2,818,000 2,880,940
FMG Resources August 2006 Pty Ltd.    
4.38% due 04/01/312,3 2,705,000 2,742,194
Compass Minerals International, Inc.    
6.75% due 12/01/272,3 2,141,000 2,269,460
Ingevity Corp.    
3.88% due 11/01/282,3 2,223,000 2,186,765
Alcoa Nederland Holding BV    
5.50% due 12/15/272,3 1,976,000 2,126,670
New Gold, Inc.    
7.50% due 07/15/272,3 1,963,000 2,122,494
Commercial Metals Co.    
4.88% due 05/15/232 2,000,000 2,078,000
Century Aluminum Co.    
7.50% due 04/01/282,3 1,674,000 1,774,055
Chemours Co.    
4.63% due 11/15/292,3 1,639,000 1,579,586
Novelis Corp.    
3.88% due 08/15/312,3 1,354,000 1,323,603
Total Basic Materials   24,109,398
 
Technology – 3.4%    
Amkor Technology, Inc.    
6.63% due 09/15/272,3 3,000,000 3,194,250

 

See notes to financial statements.

 

32 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

  

PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

     
  Face  
  Amount~ Value
CORPORATE BONDS†† – 41.1% (continued)    
Technology – 3.4% (continued)    
Unisys Corp.    
6.88% due 11/01/272,3 2,625,000 $ 2,864,531
Seagate HDD Cayman    
5.75% due 12/01/342 2,378,000 2,741,204
Ahead DB Holdings LLC    
6.63% due 05/01/282,3 2,680,000 2,737,245
Consensus Cloud Solutions, Inc.    
6.50% due 10/15/282,3 2,622,000 2,733,435
CA Magnum Holdings    
5.38% due 10/31/263 2,502,000 2,569,021
NCR Corp.    
5.13% due 04/15/292,3 1,983,000 2,030,255
Synaptics, Inc.    
4.00% due 06/15/292,3 1,993,000 2,015,611
Booz Allen Hamilton, Inc.    
4.00% due 07/01/292,3 1,364,000 1,382,755
Alteryx, Inc.    
1.00% due 08/01/262 1,316,000 1,235,650
Total Technology   23,503,957
 
Industrial – 3.3%    
EnerSys    
4.38% due 12/15/272,3 2,913,000 3,062,335
Western Global Airlines LLC    
10.38% due 08/15/252,3 2,725,000 3,033,593
VM Consolidated, Inc.    
5.50% due 04/15/292,3 2,988,000 3,032,820
IEA Energy Services LLC    
6.63% due 08/15/292,3 2,685,000 2,649,034
GFL Environmental, Inc.    
3.50% due 09/01/282,3 2,598,000 2,588,257
Dycom Industries, Inc.    
4.50% due 04/15/292,3 2,328,000 2,365,830
MasTec, Inc.    
4.50% due 08/15/282,3 2,291,000 2,351,139
Intertape Polymer Group, Inc.    
4.38% due 06/15/292,3 2,022,000 2,029,764
Vertiv Group Corp.    
4.13% due 11/15/282,3 1,974,000 1,971,533
Total Industrial   23,084,305
 
Financial – 1.8%    
NMI Holdings, Inc.    
7.38% due 06/01/252,3 2,972,000 3,418,454

 

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 33


 
 

 

 

   
PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

     
  Face  
  Amount~ Value
CORPORATE BONDS†† – 41.1% (continued)    
Financial – 1.8% (continued)    
Iron Mountain, Inc.    
4.88% due 09/15/272,3 2,970,000 $ 3,068,396
PRA Group, Inc.    
5.00% due 10/01/292,3 2,957,000 2,925,774
Radian Group, Inc.    
4.88% due 03/15/272 1,647,000 1,799,422
Advisor Group Holdings, Inc.    
10.75% due 08/01/272,3 1,417,000 1,578,644
Total Financial   12,790,690
 
Utilities – 0.8%    
NRG Energy, Inc.    
5.25% due 06/15/292,3 2,598,000 2,770,118
AmeriGas Partners Limited Partnership / AmeriGas Finance Corp.    
5.75% due 05/20/272 2,230,000 2,497,488
Total Utilities   5,267,606
Total Corporate Bonds    
(Cost $279,656,995)   285,967,235
 
SENIOR FLOATING RATE INTERESTS††,6 – 0.8%    
Industrial – 0.5%    
TransDigm, Inc.    
due 12/09/25 3,285,000 3,242,913
 
Consumer Cyclical – 0.3%    
Alterra Mountain Co.    
4.00% (1 Month USD LIBOR + 3.50%, Rate Floor: 4.00%) due 07/30/28 2,357,636 2,349,285
Total Senior Floating Rate Interests    
(Cost $5,604,090)   5,592,198
Total Investments – 144.5%    
(Cost $895,590,951)   $1,004,925,954
 
  Contracts  
 
LISTED OPTIONS WRITTEN– (0.1)%    
Call Options on:    
Equity Options    
Visa, Inc.    
Expiring November 2021 with strike price of $242.50 (Notional Value $1,212,500) 50 (1,000)
AbbVie, Inc.    
Expiring November 2021 with strike price of $125.00 (Notional Value $3,750,000) 300 (4,500)
Microchip Technology, Inc.    
Expiring November 2021 with strike price of $85.00 (Notional Value $2,890,000) 340 (10,200)
Fifth Third Bancorp    
Expiring November 2021 with strike price of $46.00 (Notional Value $3,450,000) 750 (18,750)

 

See notes to financial statements.

 

34 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

     
  Contracts Value
LISTED OPTIONS WRITTEN– (0.1)% (continued)    
United States Steel Corp.    
Expiring November 2021 with strike price of $33.00 (Notional Value $4,950,000) 1,500 $ (30,000)
Cummins, Inc.    
Expiring December 2021 with strike price of $250.00 (Notional Value $2,500,000) 100 (37,000)
Union Pacific Corp.    
Expiring November 2021 with strike price of $240.00 (Notional Value $2,880,000) 120 (55,320)
Marriott International, Inc.    
Expiring November 2021 with strike price of $165.00 (Notional Value $4,125,000) 250 (62,500)
Airbnb, Inc.    
Expiring November 2021 with strike price of $180.00 (Notional Value $2,700,000) 150 (63,450)
Caesars Entertainment, Inc.    
Expiring December 2021 with strike price of $125.00 (Notional Value $5,000,000) 400 (83,200)
ConocoPhillips    
Expiring November 2021 with strike price of $77.50 (Notional Value $6,975,000) 900 (103,500)
Advanced Micro Devices, Inc.    
Expiring November 2021 with strike price of $120.00 (Notional Value $3,600,000) 300 (127,500)
Alcoa Corp.    
Expiring November 2021 with strike price of $39.00 (Notional Value $2,730,000) 700 (507,500)
Total Listed Options Written    
(Premiums received $1,955,933)   (1,104,420)
Other Assets & Liabilities, net – (44.4)%   (308,498,958)
Total Net Assets – 100.0%   $ 695,322,576

 

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS††      
            Unrealized
        Contract   Appreciation
Counterparty Currency Type Quantity Amount Settlement Date (Depreciation)
Bank of New York Mellon EUR Sell 26,064,773 30,872,754 USD 12/13/21 $677,153
Bank of New York Mellon JPY Sell 1,148,250,100 10,423,240 USD 12/13/21 348,025
Bank of New York Mellon GBP Sell 1,457,881 2,014,204 USD 12/13/21 15,489
Bank of New York Mellon CHF Buy 362,000 393,414 USD 12/13/21 3,276
Bank of New York Mellon SGD Sell 1,112,523 828,006 USD 12/13/21 3,163
Bank of New York Mellon HKD Sell 55,975,981 7,198,602 USD 12/13/21 2,005
Bank of New York Mellon HKD Buy 8,874,000 1,140,840 USD 12/13/21 53
Bank of New York Mellon AUD Sell 1,119,525 825,879 USD 12/13/21 (15,140)
Bank of New York Mellon EUR Buy 2,253,000 2,634,525 USD 12/13/21 (24,461)
Bank of New York Mellon CAD Sell 1,382,467 1,089,626 USD 12/13/21 (25,754)
Bank of New York Mellon CHF Sell 5,158,554 5,622,758 USD 12/13/21 (30,136)
            $953,673

 

~The face amount is denominated in U.S. dollars unless otherwise indicated.
*Non-income producing security.
**Represents shares.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 35


 
 

 

 

   
PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

 

Value determined based on Level 1 inputs — See Note 6.

††

 

Value determined based on Level 2 inputs — See Note 6.

1Special Purpose Acquisition Company (SPAC).
2All or a portion of these securities have been physically segregated in connection with the borrowings and reverse repurchase agreements. As of October 31, 2021, the total value of securities segregated was $813,421,672.
3Security is a 144A or Section 4(a)(2) security. These securities have been determined to be liquid under guidelines established by the Board of Trustees. The total market value of 144A or Section 4(a)(2) securities is $381,729,486 (cost $367,005,080), or 54.9% of total net assets.
4Rate indicated is the 7-day yield as of October 31, 2021.
5Zero coupon rate security.
6Variable rate security. Rate indicated is the rate effective at October 31, 2021. In some instances, the effective rate is limited by a minimum rate floor or a maximum rate cap established by the issuer. The settlement status of a position may also impact the effective rate indicated. In some cases, a position may be unsettled at period end and may not have a stated effective rate. In instances where multiple underlying reference rates and spread amounts are shown, the effective rate is based on a weighted average.
7Security represents cover for outstanding options written.
AUD— Australian Dollar
CAD— Canadian Dollar
CHF— Swiss Franc
EUR— Euro
GBP— British Pound
HKD— Hong Kong Dollar
JPY— Japanese Yen
LIBOR— London Interbank Offered Rate
LLC— Limited Liability Company
plc— Public Limited Company
REIT— Real Estate Investment Trust
SARL— Société à Responsabilité Limitée
SGD— Singapore Dollar

See Sector Classification in Other Information section.

 

36 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

 

PORTFOLIO OF INVESTMENTS continued October 31, 2021

 

The following table summarizes the inputs used to value the Fund’s investments at October 31, 2021 (See Note 6 in the Notes to Financial Statements):

         
    Level 2 Level 3  
  Level 1 Significant Significant  
  Quoted Observable Unobservable  
Investments in Securities (Assets) Prices Inputs Inputs Total
Common Stocks $ 106,882,428 $ — $ — $ 106,882,428
Convertible Preferred Stocks 120,449,566 120,449,566
Money Market Fund 38,115,821 38,115,821
Convertible Bonds 447,918,706 447,918,706
Corporate Bonds 285,967,235 285,967,235
Senior Floating Rate Interests 5,592,198 5,592,198
Forward Foreign Currency        
Exchange Contracts** 1,049,164 1,049,164
Total Assets $ 265,447,815 $ 740,527,303 $ — $ 1,005,975,118
 
    Level 2 Level 3  
  Level 1 Significant Significant  
  Quoted Observable Unobservable  
Investments in Securities (Liabilities) Prices Inputs Inputs Total
Options Written $ 1,104,420 $ — $ — $ 1,104,420
Forward Foreign Currency        
Exchange Contracts** 95,491 95,491
Total Liabilities $ 1,104,420 $ 95,491 $ — $ 1,199,911

 

** This derivative is reported as unrealized appreciation/depreciation at period end.

Please refer to the detailed portfolio for the breakdown of investment type by industry category.

The Fund may hold assets and/or liabilities in which the fair value approximates the carrying amount for financial statement purposes. As of the period end, reverse repurchase agreements of $156,029,874 are categorized as Level 2 within the disclosure hierarchy — See Note 7.

The Fund did not hold any Level 3 securities during the year ended October 31, 2021.

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 37


 
 

  

STATEMENT OF ASSETS AND LIABILITIES October 31, 2021

 

ASSETS:  
Investments, at value (cost $895,590,951) $ 1,004,925,954
Cash 661,425
Unrealized appreciation on forward foreign currency exchange contracts 1,049,164
Receivables:  
Investments sold 31,388,328
Interest 4,785,146
Dividends 413,258
Tax reclaims 30,261
Other assets 158,724
Total assets 1,043,412,260
LIABILITIES:  
Borrowings (Note 8) 168,000,000
Reverse repurchase agreements (Note 7) 156,029,874
Options written, at value (premiums received $1,955,933) 1,104,420
Unrealized depreciation on forward foreign currency exchange contracts 95,491
Interest due on borrowings 46,329
Payable for:  
Investments purchased 21,670,455
Investment advisory fees 468,229
Professional fees 372,198
Servicing fees 182,170
Trustees’ fees and expenses* 2
Other liabilities 120,516
Total liabilities 348,089,684
NET ASSETS $ 695,322,576
NET ASSETS CONSIST OF:  
Common stock, $0.001 par value per share; unlimited number of shares authorized,  
34,525,222 shares issued and outstanding $ 34,525
Additional paid-in capital 538,183,971
Total distributable earnings (loss) 157,104,080
NET ASSETS $ 695,322,576
Shares outstanding ($0.001 par value with unlimited amount authorized) 34,525,222
Net asset value $ 20.14

 

* Relates to Trustees not deemed “interested persons” within the meaning of Section 2(a)(19) of the 1940 Act.

See notes to financial statements.

 

38 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

 

STATEMENT OF OPERATIONS October 31, 2021

 

Year Ended October 31, 2021  
INVESTMENT INCOME:  
Interest (net of foreign withholdings tax $7,894) $ 20,723,603
Dividends 7,069,650
Total investment income 27,793,253
EXPENSES:  
Interest expense 9,307,782
Investment advisory fees 5,434,775
Servicing fees 2,113,524
Professional fees 688,696
Trustees’ fees and expenses* 567,356
Administration fees 190,185
Fund accounting fees 185,158
Insurance 143,661
Printing fees 109,021
Custodian fees 67,142
Registration and filing fees 33,580
Transfer agent fees 21,891
Other expenses 18,954
Total expenses 18,881,725
Net investment income 8,911,528
NET REALIZED AND UNREALIZED GAIN (LOSS):  
Net realized gain (loss) on:  
Investments 120,083,205
Options written (1,176,861)
Forward foreign currency exchange contracts 546,001
Foreign currency transactions (86,633)
Net realized gain 119,365,712
Net change in unrealized appreciation (depreciation) on:  
Investments 59,665,077
Options written 851,513
Forward foreign currency exchange contracts 768,911
Foreign currency translations (6,248)
Net change in unrealized appreciation (depreciation) 61,279,253
Net realized and unrealized gain 180,644,965
Net increase in net assets resulting from operations $ 189,556,493

 

* Relates to Trustees not deemed “interested persons” within the meaning of Section 2(a)(19) of the 1940 Act.

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 39


 
 

 

 

   
STATEMENTS OF CHANGES IN NET ASSETS October 31, 2021

 

  Year Ended Year Ended
  October 31, 2021 October 31, 2020
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:    
Net investment income $ 8,911,528 $ 11,510,050
Net realized gain on investments 119,365,712 2,827,805
Net change in unrealized appreciation (depreciation)    
on investments 61,279,253 24,392,512
Net increase in net assets resulting from operations 189,556,493 38,730,367
DISTRIBUTIONS:    
Distributions to shareholders (48,556,272) (11,875,142)
Return of capital (36,681,130)
Total distributions to shareholders (48,556,272) (48,556,272)
Net increase (decrease) in net assets 141,000,221 (9,825,905)
NET ASSETS:    
Beginning of period 554,322,355 564,148,260
End of period $ 695,322,576 $ 554,322,355

 

See notes to financial statements.

 

40 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

 

   
STATEMENT OF CASH FLOWS October 31, 2021

 

Year Ended October 31, 2021  
Cash Flows from Operating Activities:  
Net increase in net assets resulting from operations $ 189,556,493
Adjustments to Reconcile Net Increase in Net Assets Resulting from Operations to  
Net Cash Provided by Operating and Investing Activities:  
Net change in unrealized (appreciation) depreciation on investments (59,665,077)
Net change in unrealized (appreciation) depreciation on options written (851,513)
Net change in unrealized (appreciation) depreciation on forward  
foreign currency exchange contracts (768,911)
Net realized gain on investments (120,083,205)
Net realized loss on options written 1,176,861
Purchase of long-term investments (1,186,319,577)
Proceeds from sale of long-term investments 1,234,614,302
Net proceeds from sale of short-term investments 18,164,140
Net accretion of discount and amortization of premium (221,631)
Corporate actions and other payments (48,898)
Premiums received on options written 3,283,145
Cost of closing options written (2,504,073)
Decrease in interest receivable 1,199,842
Increase in dividends receivable (262,473)
Increase investments sold receivable (21,992,781)
Decrease in tax reclaims receivable 1,983
Decrease in other assets 16,470
Decrease in investments purchased payable (6,505,648)
Increase in interest due on borrowings 10,973
Increase in professional fees payable 10,022
Increase in servicing fees payable 21,417
Increase in investment advisory fees payable 55,071
 Increase in trustees’ fees and expenses payable* 2
 Decrease in other liabilities (39,080)
Net Cash Provided by Operating and Investing Activities $ 48,847,854
Cash Flows From Financing Activities:  
 Distributions to common shareholders (48,556,272)
 Proceeds from borrowings 37,000,000
 Payments made on borrowings (37,000,000)
 Proceeds from reverse repurchase agreements 87,000,000
 Payments made on reverse repurchase agreements (86,998,587)
Net Cash Used in Financing Activities (48,554,859)
Net increase in cash 292,995
Cash at Beginning of Year (including foreign cash) 368,430
Cash at End of Year $ 661,425
Supplemental Disclosure: Cash paid during the year for interest  
(including interest on reverse repurchase agreements) $ 9,295,396

 

* Relates to Trustees not deemed “interested persons” within the meaning of Section 2(a)(19) of the 1940 Act.

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 41


 
 

 

 

FINANCIAL HIGHLIGHTS October 31, 2021

 

  Year Ended Year Ended Year Ended Year Ended Year Ended
  October 31, October 31, October 31, October 31, October 31,
  2021 2020 2019 2018 2017
Per Share Data:          
Net asset value, beginning of period $ 16.06 $ 16.34 $ 16.20 $ 17.63 $ 16.26
Income from investment operations:          
Net investment income(a) 0.26 0.33 0.47 0.51 0.69
Net gain (loss) on investments (realized and unrealized) 5.23 0.80 1.08 (0.54) 1.86
Total from investment operations 5.49 1.13 1.55 (0.03) 2.55
Less distributions from:          
Net investment income (1.41) (0.34) (0.56) (0.58) (0.75)
Return of capital (1.07) (0.85) (0.82) (0.49)
Total distributions to shareholders (1.41) (1.41) (1.41) (1.40) (1.24)
Increase resulting from tender offer and repurchase of Common Shares 0.06
Net asset value, end of period $ 20.14 $ 16.06 $ 16.34 $ 16.20 $ 17.63
Market value, end of period $ 19.23 $ 13.62 $ 14.79 $ 13.93 $ 16.09
Total Return(b)          
Net asset value 34.59% 7.66% 9.94% (0.34%) 16.55%
Market value 52.60% 2.05% 17.01% (5.22%) 24.20%
Ratios/Supplemental Data:          
Net assets, end of period (in thousands) $ 695,323 $ 554,322 $ 564,148 $ 559,440 $353,389

 

See notes to financial statements.

42 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

 

   
FINANCIAL HIGHLIGHTS continued October 31, 2021

 

           
  Year Ended Year Ended Year Ended Year Ended Year Ended
  October 31, October 31, October 31, October 31, October 31,
  2021 2020 2019 2018 2017
Ratio to average net assets of:          
Net investment income, including interest expense 1.31% 2.14% 2.90% 2.93% 4.04%
Total expenses, including interest expense(c) 2.77% 3.98% 4.11% 3.87% 2.72%
Portfolio turnover rate 126% 242% 123% 121% 110%
Senior Indebtedness          
Total Borrowings outstanding (in thousands)(d) $ 168,000 $ 168,000 $ 210,000 $ 235,000 $ 227,000
Asset Coverage per $1,000 of indebtedness(e) $ 5,139 $ 4,300 $ 3,686 $ 3,381 $ 2,557

 

(a)Based on average shares outstanding.
(b)Total return is calculated assuming a purchase of a common share at the beginning of the period and a sale on the last day of the period reported either at the net asset value (“NAV”) or market price per share. Dividends and distributions are assumed to be reinvested at NAV for NAV returns or the prices obtained under the Fund’s Dividend Reinvestment Plan for market value returns. Total return does not reflect brokerage commissions.
(c)Excluding interest expense, the operating expense ratios for the years ended October 31 would be:

 

2021 2020 2019 2018 2017
1.40% 1.55%* 1.57% 1.62% 1.49%

   * Excludes borrowings breakage fees.

(d)Commencing on October 31, 2018, as a result of the Fund having earmarked or segregated cash to collateralize the reverse repurchase agreement transactions or otherwise having covered the transactions, in accordance with releases and interpretive letters issued by the Securities and Exchange Commission (the “SEC”), the Fund does not treat its obligations under such transactions as senior securities representing indebtedness for purposes of the 1940 Act.
(e)Calculated by subtracting the Fund’s total liabilities (not including the borrowings) from the Fund’s total assets and dividing by the borrowings.

See notes to financial statements.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 43


 
 

 

 

   
NOTES TO FINANCIAL STATEMENTS October 31, 2021

 

Note 1 – Organization

Advent Convertible and Income Fund (the “Fund”) was organized as a Delaware statutory trust on February 19, 2003. The Fund is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”).

The Fund’s investment objective is to provide total return through a combination of capital appreciation and current income. The Fund pursues its investment objective by investing at least 80% of its managed assets in a diversified portfolio of convertible securities and non-convertible income producing securities.

Note 2 – Significant Accounting Policies

The Fund operates as an investment company and, accordingly, follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.

The following significant accounting policies are in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and are consistently followed by the Fund. This requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. All time references are based on Eastern Time.

(a) Valuation of Investments

The Board of Trustees of the Fund (the “Board”) has adopted policies and procedures for the valuation of the Fund’s investments (the “Valuation Procedures”). Pursuant to the Valuation Procedures, the Board has delegated to a valuation committee, consisting of representatives from Guggenheim’s investment management, fund administration, legal and compliance departments (the “Valuation Committee”), the day-to-day responsibility for implementing the Valuation Procedures, including, under most circumstances, the responsibility for determining the fair value of the Fund’s securities and/or other assets.

Valuations of the Fund’s securities and other assets are supplied primarily by pricing services appointed pursuant to the processes set forth in the Valuation Procedures. The Valuation Committee convenes monthly, or more frequently as needed, to review the valuation of all assets which have been fair valued for reasonableness. The Fund’s officers, through the Valuation Committee and consistent with the monitoring and review responsibilities set forth in the Valuation Procedures, regularly review procedures used and valuations provided by the pricing services.

If the pricing service cannot or does not provide a valuation for a particular investment or such valuation is deemed unreliable, such investment is fair valued by the Valuation Committee.

Securities listed on an exchange or on an over-the-counter market will be valued at the last reported sale price on the primary exchange or market on which they are traded; provided, however, that securities listed on the National Association of Securities Dealers Automated Quotations (“NASDAQ”) National Market system will be valued at the NASDAQ Official Closing Price, which may not necessarily represent the last sale price.

 

44 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

NOTES TO FINANCIAL STATEMENTS continued October 31, 2021

 

Equity securities that are traded on an exchange or on the over-the-counter (“OTC”) market and for which there are no transactions on a given day are valued at the mean of the closing bid and asked prices.

Open-end investment companies are valued at their net asset value (“NAV”) as of the close of business, on the valuation date.

Generally, trading in foreign securities markets is substantially completed each day at various times prior to the close of the New York Stock Exchange (“NYSE”). The values of foreign securities are determined as of the close of such foreign markets or the close of the NYSE, if earlier. All investments quoted in foreign currencies are valued in U.S. dollars on the basis of the foreign currency exchange rates prevailing at the close of U.S. business at 4:00 p.m. Investments in foreign securities may involve risks not present in domestic investments. The Valuation Committee will determine the current value of such foreign securities by taking into consideration certain factors which may include those discussed above, as well as the following factors, among others: the value of the securities traded on other foreign markets, ADR trading, closed-end fund trading, foreign currency exchange activity, and the trading prices of financial products that are tied to foreign securities. In addition, under the Valuation Procedures, the Valuation Committee is authorized to use prices and other information supplied by a third party pricing vendor in valuing foreign securities.

Debt securities are valued based on prices provided by independent pricing services or, if not available or if Advent Capital Management, LLC (“Advent” or the “Investment Adviser”) considers that price to not represent fair value, by dealers using the mean of the closing bid and asked prices for such securities or, if such prices are not available, at prices for securities of comparable maturity, quality and type. If sufficient market activity is limited or does not exist, the pricing services or dealers may utilize proprietary valuation models which may, for example, consider market characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, or other unique security features in order to estimate relevant cash flows, which are then discounted to calculate a security’s fair value. Short-term debt securities with remaining maturities of 60 days or less at the time of valuation are valued at amortized cost, which approximates market value. Shortterm debt securities which have a term-to-maturity greater than 60 days from the date of purchase are valued at their current market quotations until maturity or disposition. Convertible securities are valued in the same manner as debt securities. Repurchase agreements are valued at amortized cost, provided such amounts approximate market value.

Typically, loans are valued using information provided by an independent third party pricing service which uses broker quotes, among other inputs. If the pricing service cannot or does not provide a valuation for a particular loan, or such valuation is deemed unreliable, such investment is valued based on a quote from a broker-dealer or is fair valued by the Valuation Committee.

Exchange-traded options are valued at the mean of the bid and ask prices on the principal exchange on which they are traded. OTC options are valued using a price provided by an independent pricing service.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 45


 
 

 

NOTES TO FINANCIAL STATEMENTS continued October 31, 2021

 

Forward foreign currency exchange contracts are valued by pricing services or, if not available or if Advent considers that price to not represent fair value, by dealers using the mid price. Forward foreign currency exchange contracts are valued daily based on the applicable exchange rate of the underlying currency. Futures contracts are valued using the settlement price established each day on the exchange on which they are traded.

Investments for which market quotations are not readily available are fair-valued as determined in good faith by Advent, subject to review and approval by the Valuation Committee, pursuant to methods established or ratified by the Board. Valuations in accordance with these methods are intended to reflect each security’s (or asset’s or liability’s) “fair value”. Each such determination is based on a consideration of all relevant factors, which are likely to vary from one pricing context to another. Examples of such factors may include, but are not limited to market prices; sale prices; broker quotes; and models which derive prices based on inputs such as prices of securities with comparable maturities and characteristics, or based on inputs such as anticipated cash flows or collateral, spread over U.S. Treasury securities, and other information analysis.

(b) Investment Transactions and Investment Income

Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on the identified cost basis. Dividend income is recorded net of applicable withholding taxes on the ex-dividend date and interest income is recorded on an accrual basis. Discounts or premiums on debt securities purchased are accreted or amortized to interest income over the lives of the respective securities using the effective interest method.

(c) Convertible Securities

The Fund invests in convertible securities, preferred stocks and fixed-income securities which are convertible into common stock. Convertible securities may be converted either at a stated price or rate within a specified period of time into a specified number of shares of common stock. Most commonly, convertible securities have paid dividends or interest greater than on the related common stocks, but less than fixed income non-convertible securities. By investing in a convertible security, the Fund may participate in any capital appreciation or depreciation of a company’s stock, but to a lesser degree than if it had invested in that company’s common stock. Convertible securities rank senior to common stock in a corporation’s capital structure and, therefore, entail less risk than the corporation’s common stock.

(d) Senior Floating Rate Interests and Loan Investments

Senior floating rate interests in which the Fund invests generally pay interest rates which are periodically adjusted by reference to a base short-term floating rate, plus a premium. These base lending rates are generally (i) the lending rate offered by one or more major European banks, such as the one-month or three-month London Inter-Bank Offered Rate (“LIBOR”), (ii) the prime rate offered by one or more major United States banks, or (iii) the bank’s certificate of deposit rate. Senior floating rate interests often require repayments from excess cash flows or permit the borrower to repay at its election. The rate at which the borrower repays cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturities disclosed in the Fund’s Schedule of Investments. The interest rate indicated is the rate in effect at October 31, 2021.

 

46 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

NOTES TO FINANCIAL STATEMENTS continued October 31, 2021

 

The Fund invests in loans and other similar debt obligations (“obligations”). A portion of the Fund’s investments in these obligations is sometimes referred to as “covenant lite” loans or obligations (“covenant lite obligations”), which are obligations that lack covenants or possess fewer or less restrictive covenants or constraints on borrowers than certain other types of obligations. The Fund may also obtain exposure to covenant lite obligations through investment in securitization vehicles and other structured products. In recent market conditions, many new or reissued obligations have not featured traditional covenants, which are intended to protect lenders and investors by (i) imposing certain restrictions or other limitations on a borrower’s operations or assets or (ii) providing certain rights to lenders. The Fund may have fewer rights with respect to covenant lite obligations, including fewer protections against the possibility of default and fewer remedies in the event of default. As a result, investments in (or exposure to) covenant lite obligations are subject to more risk than investments in (or exposure to) certain other types of obligations. The Fund is subject to other risks associated with investments in (or exposure to) obligations, including that obligations may not be considered “securities” and, as a result, the Fund may not be entitled to rely on the antifraud protections under the federal securities laws and instead may have to resort to state law and direct claims.

(e) Currency Translations

The accounting records of the Fund are maintained in U.S. dollars. All assets and liabilities initially expressed in foreign currencies are converted into U.S. dollars at prevailing exchange rates. Purchases and sales of investment securities, dividend and interest income, and certain expenses are translated at the rates of exchange prevailing on the respective dates of such transactions. Changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation, or other political, social or economic developments, all of which could affect the market and/or credit risk of the investments.

The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized gain or loss and unrealized appreciation or depreciation on investments.

Reported net realized foreign exchange gains and losses arise from sales of foreign currencies and currency gains or losses realized between the trade and settlement dates on investment transactions. Net unrealized appreciation and depreciation arise from changes in the fair values of assets and liabilities other than investments in securities at the fiscal period end, resulting from changes in exchange rates.

(f) Forward Foreign Currency Exchange Contracts

Forward foreign currency exchange contracts are agreements between two parties to buy and sell currencies at a set price on a future date. Fluctuations in the value of open forward foreign currency exchange contracts are recorded for financial reporting purposes as unrealized appreciation and depreciation by the Fund until the contracts are closed. When the contracts are closed, realized gains and losses are recorded, and included on the Statement of Operations in forward foreign currency exchange contracts.

 

AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT l 47


 
 

 

NOTES TO FINANCIAL STATEMENTS continued October 31, 2021

 

(g) Foreign Taxes

The Fund may be subject to foreign taxes (a portion of which may be reclaimable) on income, stock dividends, capital gains on investments or certain foreign currency transactions. All foreign taxes are recorded in accordance with the applicable foreign tax regulations and rates that exist in the foreign jurisdictions in which the Fund invests. These foreign taxes, if any, are paid by the Fund and reflected in its Statement of Operations as follows: foreign taxes withheld at source are presented as a reduction of income and foreign taxes on capital gains from sales of investments are included with the net realized gain (loss) on investments. Foreign taxes payable or deferred as of October 31, 2021, if any, are disclosed in the Fund’s Statement of Assets and Liabilities.

(h) Distributions to Shareholders

The Fund declares and pays monthly distributions to common shareholders. These distributions consist of investment company taxable income, which generally includes qualified dividend income, ordinary income and short-term capital gains. Any net realized long-term capital gains are distributed annually to common shareholders. To the extent distributions exceed taxable income, the excess will be deemed a return of capital.

Distributions to shareholders are recorded on the ex-dividend date. The amount and timing of distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP.

(i) Covered Call Options and Put Options

When an option is written, the premium received is recorded as an asset with an equal liability and is subsequently marked to market to reflect the current market value of the option written. These liabilities are reflected as options written on the Statement of Assets and Liabilities. Premiums received from writing options which expire unexercised are recorded on the expiration date as a realized gain. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transactions, as a realized loss. If an option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether there has been a realized gain or loss.

When a call option is purchased, the Fund obtains the right (but not the obligation) to buy the underlying instrument at the strike price at anytime during the option period. When a put option is purchased, the Fund obtains the right (but not the obligation) to sell the option’s underlying instrument at the strike price at anytime during the option period. When the Fund purchases an option, an amount equal to the premium paid by the Fund is reflected as an asset and subsequently marked-to-market to reflect the current market value of the option purchased. Purchased options are included with Investments on the Statement of Assets and Liabilities.

(j) Indemnifications

Under the Fund’s organizational documents, its Trustees and Officers are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, throughout the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties which provide general indemnifications. The Fund’s maximum

 

48 l AVK l ADVENT CONVERTIBLE AND INCOME FUND ANNUAL REPORT


 
 

 

NOTES TO FINANCIAL STATEMENTS continued October 31, 2021

 

exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund and/or its affiliates that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote.

(k) Special Purpose Acquisition Companies

The Fund may acquire an interest in a special purpose acquisition company (“SPAC”) in an initial public offering or a secondary market transaction. SPAC investments carry many of the same risks as investments in initial public offering securities, such as erratic price movements, greater risk of loss, lack of information about the issuer, limited operating and little public or no trading history, and higher transaction costs. An investment in a SPAC is typically subject to a higher risk of dilution by additional later offerings of interests in the SPAC or by other investors exercising existing rights to purchase shares of the SPAC and interests in SPACs may be illiquid and/or be subject to restrictions on resale. A SPAC is a publicly traded company that raises investment capital for the purpose of acquiring the equity securities of one or more existing companies (or interests therein) via merger, combination, acquisition or other similar transactions. Unless and until an acquisition is completed, a SPAC generally invests its assets (less a portion retained to cover expenses) in U.S. government securities, money market securities and cash and does not typically pay dividends in respect of its common stock. SPAC investments are also subject to the risk that a significant portion of the funds raised by the SPAC may be expended during the search for a target acquisition or merger and that the SPAC may have limited time in which to conduct due diligence on potential business combination targets. Because SPACs are in essence blank check companies without operating history or ongoing business other than seeking acquisitions, the value of their securities is particularly dependent on the ability of the entity’s management to identify and complete a profitable acquisition. Among other conflicts of interest, the economic interests of the management, directors, officers and related parties of a SPAC can differ from the economic interests of public shareholders, which may lead to conflicts as they evaluate, negotiate and recommend business combination transactions to shareholders. This risk may become more acute as the deadline for the completion of a business combination nears. There is no guarantee that the SPACs in which the Fund invests will complete an acquisition or that any acquisitions that are completed will be profitable.

Note 3 – Derivatives

As part of its investment strategy, the Fund utilizes a variety of derivative instruments. These investments involve, to varying degrees, elements of market risk and risks in excess of amounts recognized on the Statement of Assets and Liabilities. Valuation and accounting treatment of these instruments can be found under Significant Accounting Policies in Note 2 of these Notes to Financial Statements.

Derivatives are instruments whose values depend on, or are derived from, in whole or in part, the value of one or more other assets, such as securities, currencies, commodities or indices. Derivative instruments may be used to increase investment flexibility (including to maintain cash reserves while maintaining exposure to certain other assets), for risk management (hedging) purposes, to facilitate trading, to reduce transaction costs and to pursue higher investment returns. Derivative instruments may also be used to mitigate certain investment risks, such as foreign currency

 

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NOTES TO FINANCIAL STATEMENTS continued October 31, 2021

 

exchange rate risk, interest rate risk and credit risk. U.S. GAAP requires disclosures to enable investors to better understand how and why a Fund uses derivative instruments, how these derivative instruments are accounted for and their effects on the Fund’s financial position and results of operations.

The Fund utilized derivatives for the following purposes:

Hedge: an investment made in order to reduce the risk of adverse price movements in a security, by taking an offsetting position to protect against broad market moves.

Income: the use of any instrument that distributes cash flows typically based upon some rate of interest.

Options Purchased and Written

A call option on a security gives the purchaser of the option the right to buy, and the writer of a call option the obligation to sell, the underlying security. The purchaser of a put option has the right to sell, and the writer of the put option the obligation to buy, the underlying security at any time during the option period. The risk associated with purchasing options is limited to the premium originally paid.

The risk in writing a call option is that a Fund may incur a loss if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that a Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. In addition, there may be an imperfect correlation between the movement in prices of options and the underlying securities where a Fund may not be able to enter into a closing transaction because of an illiquid secondary market; or, for OTC options, a Fund may be at risk because of the counterparty’s inability to perform.

The following table represents the Fund’s use and volume of call/put options written on a monthly basis:

     
  Average Notional Amount
Use Call Put
Income $ 10,782,708 $ —

 

Forward Foreign Currency Exchange Contracts

A forward foreign currency exchange contract is an agreement between two parties to exchange two designated currencies at a specific time in the future. Certain types of contracts may be cash settled, in an amount equal to the change in exchange rates during the term of the contract. The contracts can be used to hedge or manage exposure to foreign currency risks with portfolio investments or to gain exposure to foreign currencies.

The market value of a forward foreign currency exchange contract changes with fluctuations in foreign currency exchange rates. Furthermore, the Fund may be exposed to risk if the counterparties cannot meet the contract terms or if the currency value changes unfavorably as compared to the U.S. dollar.

 

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NOTES TO FINANCIAL STATEMENTS continued October 31, 2021

 

The following table represents the Fund’s use and volume of forward foreign currency exchange contracts on a monthly basis:

  Average Value
Use Purchased   Sold
Hedge $ 4,837,476 $ 54,107,869

 

Derivative Investment Holdings Categorized by Risk Exposure

The following is a summary of the location of derivative investments on the Fund’s Statement of Assets and Liabilities as of October 31, 2021:

     
Derivative Investment Type Asset Derivatives Liability Derivatives
Equity options contracts Options written,
    at value
 
Currency forward contracts Unrealized Unrealized
  appreciation depreciation
  on forward on forward
  foreign currency foreign currency
  exchange contracts exchange contracts

 

The following tables set forth the fair value of the Fund’s derivative investments categorized by primary risk exposure at October 31, 2021:

     
  Asset Derivative Investments Value  
  Forward Foreign Currency Exchange Risk  
  $ 1,049,164  
 
  Liability Derivative Investments Value  
Options Forward  
Written Foreign Currency Total Value at
Equity Risk Exchange Risk October 31, 2021
$ 1,104,420 $ 95,491 $ 1,199,911

 

The following is a summary of the location of derivative investments on the Fund’s Statement of Operations for the year ended October 31, 2021:

   
Derivative Investment Type Location of Gain (Loss) on Derivatives
Equity options contracts Net realized gain (loss) on options written
  Net change in unrealized appreciation (depreciation) on options written
Currency forward contracts Net realized gain (loss) on forward foreign currency exchange contracts
  Net change in unrealized appreciation (depreciation) on
  forward foreign currency exchange contracts

 

 

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NOTES TO FINANCIAL STATEMENTS continued October 31, 2021

 

The following is a summary of the Fund’s realized gain (loss) and change in unrealized appreciation (depreciation) on derivative investments recognized on the Statement of Operations categorized by primary risk exposure for the year ended October 31, 2021:

Realized Gain (Loss) on Derivative Investments Recognized on the Statement of Operations:
  Forward  
Options Foreign  
Written Currency  
Equity Exchange  
Risk Risk Total
$(1,176,861) $ 546,001 $ (630,860)

 

Change in Unrealized Appreciation (Depreciation) on Derivative Investments Recognized on the Statement of Operations
  Forward  
Options Foreign  
Written Currency  
Equity Exchange  
Risk Risk Total
$ 851,513 $ 768,911 $1,620,424

 

In conjunction with the use of derivative instruments, the Fund is required to maintain collateral in various forms. Depending on the financial instrument utilized and the broker involved, the Fund uses margin deposits at the broker, cash and/or securities segregated at the custodian bank, discount notes or repurchase agreements allocated to the Fund as collateral.

The Fund has established counterparty credit guidelines and enters into transactions only with financial institutions of investment grade or better. The Fund monitors the counterparty credit risk.

Note 4 – Offsetting

In the normal course of business, the Fund enters into transactions subject to enforceable master netting arrangements or other similar arrangements. Generally, the right to offset in those agreements allows the Fund to counteract the exposure to a specific counterparty with collateral received from or delivered to that counterparty based on the terms of the arrangements. These arrangements provide for the right to liquidate upon the occurrence of an event of default, credit event upon merger or additional termination event.

In order to better define its contractual rights and to secure rights that will help the Fund mitigate its counterparty risk, the Fund may enter into an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement with its derivative contract counterparties. An ISDA Master Agreement is a bilateral agreement between a fund and a counterparty that governs OTC derivatives, including foreign exchange contracts, and typically contains, among other things, collateral posting terms and netting provisions in the event of a default and/or termination event. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of a default (close-out netting) or similar event, including the bankruptcy or insolvency of the counterparty.

 

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NOTES TO FINANCIAL STATEMENTS continued October 31, 2021

 

For derivatives traded under an ISDA Master Agreement, the collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of any collateral currently pledged by the Fund and the counterparty. For financial reporting purposes, cash collateral that has been pledged to cover obligations of the Fund and cash collateral received from the counterparty, if any, are reported separately on the Statement of Assets and Liabilities as segregated cash with broker/receivable for variation margin, or payable for swap settlement/variation margin. Cash and/or securities pledged or received as collateral by the Fund in connection with an OTC derivative subject to an ISDA Master Agreement generally may not be invested, sold or rehypothecated by the counterparty or the Fund, as applicable, absent an event of default under such agreement, in which case such collateral generally may be applied towards obligations due to and payable by such counterparty or the Fund, as applicable. Generally, the amount of collateral due from or to a counterparty must exceed a minimum transfer amount threshold (e.g., $300,000) before a transfer is required to be made. To the extent amounts due to the Fund from its counterparties are not fully collateralized, contractually or otherwise, the Fund bears the risk of loss from counterparty nonperformance. The Fund attempts to mitigate counterparty risk by only entering into agreements with counterparties that it believes to be of good standing and by monitoring the financial stability of those counterparties.

For financial reporting purposes, the Fund does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the Statement of Assets and Liabilities.

The following tables present derivative financial instruments and secured financing transactions that are subject to enforceable netting arrangements:

               
      Gross Net Amounts Gross Amounts Not Offset