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: 811-04980
TCW Strategic Income Fund, Inc.
(Exact name of registrant as specified in charter)
865 South Figueroa Street, Suite 1800, Los Angeles, CA 90017
(Address of principal executive offices)
Patrick W. Dennis, Esq.
Vice President and Assistant Secretary
865 South Figueroa Street, Suite 1800
Los Angeles, CA 90017
(Name and address of agent for service)
Registrant’s telephone number, including area code: (213) 244-0000
Date of fiscal year end: December 31
Date of reporting period: June 30, 2018
| Item 1. | Report to Shareholders. |
JUNE 30
SEMI-ANNUAL
R E P O R T
TCW Strategic Income Fund, Inc.
|
|
|
|
David S. DeVito President, Chief Executive Officer and Director |
Dear Valued Shareholder:
TCW is pleased to present the 2018 semi-annual report for the TCW Strategic Income Fund (“TSI” or the “Fund”). TSI is a multi-asset class closed-end fund managed by TCW Investment Management Company and is listed on the New York Stock Exchange under the ticker TSI. For the first half of 2018, the shareholders of the Fund realized a negative 4.14% return while the Fund’s net asset value (i.e., returns of the underlying assets) increased by 0.96% versus the TSI Custom Index gain of 0.70%. Although the underlying assets outperformed the index, the Fund’s year-to-date price based return was lower than the NAV based return due to an increase in the discount between NAV and share price from 0.68% at the beginning of the year to 5.83% by June 30, 2018. Annualized price based performance over most longer periods remained well ahead of the Fund’s benchmark.
In the first two quarters of 2018, the Fund paid quarterly dividends of 6.65 cents per share in the first quarter and 6.98 cents per share in the second quarter, i.e., an annualized rate of approximately 27 cents per share, contributing to a realized 12-month trailing yield of 6.21%. Of course, since yield is a function of a number of parameters, the go-forward yield of TSI will likely differ from the trailing figure.
Fund Performance
| Annualized Total Return as of June 30, 2018 | ||||||||||||||||||||||||||||
| YTD | 1 Year | 3 Year | 5 Year | 10 Year | Since 3/1/06(2) |
Since 3/5/87(3) |
||||||||||||||||||||||
| Price Based Return |
-4.14% | +3.36% | +7.42% | +5.03% | +13.66% | +10.31% | +8.18% | |||||||||||||||||||||
| NAV Based Return |
+0.96% | +3.94% | +4.25% | +5.30% | +12.31% | +9.19% | +8.53% | |||||||||||||||||||||
| Custom Benchmark(1) |
+0.70% | +4.37% | +5.06% | +5.84% | +6.61% | +6.18% | N/A | |||||||||||||||||||||
| (1) | Custom Benchmark Index: 15% S&P 500 with Income, 15% Merrill Lynch Convertible Index, 45% Barclays Capital Aggregate Bond Index, 25% Citi High Yield Cash Pay Index. Past performance is no guarantee of future results. Current performance may be lower or higher than that quoted. The market value and net asset value of the Fund’s shares will fluctuate with market conditions. Returns shown do not reflect the deduction of taxes that a shareholder would pay on the Fund’s distributions. You should not draw any conclusions about the Fund’s performance from the amount of the quarterly distribution or from the terms of the Fund’s distribution policy. |
| (2) | The date on which the Fund’s investment objective changed to a multi-asset class fund. Prior to this date, the Fund primarily invested in convertible securities. |
| (3) | Inception date of the Fund. |
Management Commentary
At over nine years, this span of recovery and expansion is the second longest in history, extending well beyond the typical timeframe. Notwithstanding its considerable length, this cycle shares many characteristics (namely high debt levels and limited excess capacity) with those of the past, suggesting that we are much closer to the end than the beginning. While the specific catalyst that will bring on the end of the cycle is always difficult to predict, there is no shortage of candidates that alone or, more likely, in combination, will be the culprit. Looking forward to the second half of 2018, the risks, in combination with relatively full valuations, make many markets vulnerable to downside repricing.
TCW manages the portfolio of securities according to a full cycle discipline. Effectively, this means that our management style opportunistically increases the level of risk taking with respect to the assets in the early years of an asset price/credit cycle. In the latter stages of the cycle, our proclivity is to reduce risk, which naturally also has the tendency to pull down the overall yield of the portfolio. TCW does judge the cycle to be in its later stages and hence the portfolio has been actively de-risked across a number of different dimensions. Of course, price volatility can never be eliminated nor can the future be judged with any certainty. That said, management’s efforts to de-risk the portfolio, while causing portfolio yield to remain modest, also have the effect of somewhat mitigating the impact of market de-leveraging events.
Our belief that the cycle has entered a late stage is predicated on a number of observations that indicate tighter financial conditions:
| 1. | High and rising leverage within the corporate debt sector |
| 2. | Worsening loss and delinquency trends within consumer credit, especially in the auto and credit card lending arenas |
| 3. | A flattening trend in terms of bank commercial & industrial lending |
| 4. | An active Fed that has been increasing rates and decreasing stimulus, with other central banks likely to follow |
| 5. | Cycle tightening in terms of the “flatness” of the yield curve, i.e., a narrowing of the yield between longer dated and shorter dated debt securities |
1
The Fund remains committed to a disciplined, value-based approach, reflected in a focus on higher quality, better-collateralized areas of the market. Securitized products remain an emphasis and positioning favors higher quality, more senior issues. Non-agency Mortgage-Backed Securities (MBS) remains one of the more attractive opportunities in fixed income given the defensive nature of an asset that continues to de-lever. However, improved pricing within the sector has also informed a decline in weighting, even while the sector is still relatively attractive. We believe agency MBS offers many positive attributes including high quality, liquidity, and some yield premium versus Treasuries, but also faces the significant potential headwind of slackening demand as the Fed reduces its holdings of the bonds. Among Commercial MBS (CMBS), exposure is skewed towards agency-backed as well as seasoned non-agency issues at the top of the capital structure and single asset single borrower deals to avoid the underwriting challenges faced by current vintage non-agency CMBS. Consistent with this defensive posture, the Fund’s Asset-Backed Securities (ABS) allocation favors more robust structures such as federally guaranteed student loans and AAA-rated Collateralized Loan Obligations (CLO) that offer value. With wariness of embedded risks in the corporate credit market, the Fund emphasizes more defensive sectors better equipped to withstand volatility, while building ample liquidity to take advantage of opportunities that arise in such environments, including high yield and emerging market debt.
Portfolio Positioning
| MM - | Money Market Investments |
| CB - | Corporate Bonds |
| ST - | Short Term Investments |
| MUNI - | Municipal Bonds |
Modest leverage can be utilized by the TSI Fund through a Line of Credit facility, though the Fund does not currently use any of the available $70 million commitment. Leverage may return to the Fund when market opportunity is more abundant and management deems the use of leverage is accretive to returns.
We greatly appreciate your investment in the Fund and your continuing support of TCW. If you have any additional questions or comments, we invite you to visit our web site at www.tcw.com or contact our shareholder services department at 1-866-227-8179, or contact@tcw.com.
Sincerely,
David S. DeVito
President, Chief Executive Officer and Director
The views expressed in this report reflect those of the Fund’s Advisor as of the date this is written and may not reflect its views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding the Fund’s investment methodology and do not constitute investment advice. This report may contain discussions about investments that may or may not be held by the Fund as of the date of this report. All current and future holdings are subject to risk and to change. To the extent this report contains forward looking statements, unforeseen circumstances may cause actual results to differ materially from the views expressed as of the date this is written.
2
TCW Strategic Income Fund, Inc.
| Schedule of Investments (Unaudited) |
June 30, 2018 |
See accompanying notes to financial statements.
3
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying notes to financial statements.
4
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
See accompanying notes to financial statements.
5
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying notes to financial statements.
6
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
See accompanying notes to financial statements.
7
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying notes to financial statements.
8
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
See accompanying notes to financial statements.
9
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying notes to financial statements.
10
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
See accompanying notes to financial statements.
11
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying notes to financial statements.
12
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
See accompanying notes to financial statements.
13
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
See accompanying notes to financial statements.
14
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
See accompanying notes to financial statements.
15
TCW Strategic Income Fund, Inc.
Schedule of Investments (Unaudited) (Continued)
| Futures | ||||||||||||||||||
| Number of Contracts |
Type | Expiration Date |
Notional Contract Value |
Market Value |
Net Unrealized Appreciation (Depreciation) |
|||||||||||||
| BUY |
||||||||||||||||||
| 32 | S&P 500 E-Mini Index Futures | 09/21/18 | $ | 4,446,702 | $ | 4,354,560 | $ | (92,142 | ) | |||||||||
| 32 | 5-Year U.S. Treasury Note Futures | 09/28/18 | 3,621,783 | 3,635,750 | 13,967 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||||
| $ | 8,068,485 | $ | 7,990,310 | $ | (78,175 | ) | ||||||||||||
|
|
|
|
|
|
|
|||||||||||||
| SELL |
||||||||||||||||||
| 39 | 10-Year U.S. Treasury Note Futures | 09/19/18 | $ | (4,941,890 | ) | $ | (5,001,141 | ) | $ | (59,251 | ) | |||||||
| 30 | 2-Year U.S. Treasury Note Futures | 09/28/18 | (6,348,722 | ) | (6,354,844 | ) | (6,122 | ) | ||||||||||
| 25 | U.S. Ultra Long Bond Futures | 09/19/18 | (3,999,163 | ) | (3,989,062 | ) | 10,101 | |||||||||||
|
|
|
|
|
|
|
|||||||||||||
| $ | (15,289,775 | ) | $ | (15,345,047 | ) | $ | (55,272 | ) | ||||||||||
|
|
|
|
|
|
|
|||||||||||||
Notes to Schedule of Investments:
| (1) | Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold, normally only to qualified institutional buyers. At June 30, 2018, the value of these securities amounted to $66,962,771 or 24.1% of net assets. These securities are determined to be liquid by the Advisor, unless otherwise noted, under procedures established by and under the general supervision of the Fund’s Board of Directors. |
| (2) | Floating or variable rate security. The interest shown reflects the rate in effect at June 30, 2018. |
| (3) | For fair value measurement disclosure purposes, security is categorized as Level 3. |
| (4) | Variable rate security. Interest rate disclosed is as of the most recent information available. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above. |
| (5) | Security is not accruing interest. |
| (6) | This security is purchased on a when-issued, delayed delivery or forward commitment basis. |
| (7) | Restricted security (Note 9). |
| (8) | A portion of the principal balance has been written-off during the period due to defaults in the underlying loans. Cost basis has been adjusted. |
| (9) | Rate disclosed is the 7-day net yield as of June 30, 2018. |
| (10) | Rate shown represents yield-to-maturity. |
| (11) | All or a portion of this security is held as collateral for open futures contracts. |
| ABS - | Asset-Backed Securities. |
| ACES - | Alternative Credit Enhancement Securities. |
| CLO - | Collateralized Loan Obligation. |
| EETC - | Enhanced Equipment Trust Certificate. |
| I/F - | Inverse Floating rate security whose interest rate moves in the opposite direction of prevailing interest rates. |
| I/O - | Interest Only Security. |
| PAC - | Planned Amortization Class. |
| TAC - | Target Amortization Class. |
See accompanying notes to financial statements.
16
TCW Strategic Income Fund, Inc.
| Investment by Sector or Industry (Unaudited) |
June 30, 2018 |
| Industry | Percentage of Net Assets |
|||
| Residential Mortgage-Backed Securities — Non-Agency |
43.9 | % | ||
| Asset-Backed Securities |
11.3 | |||
| Banks |
8.8 | |||
| Commercial Mortgage-Backed Securities — Agency |
4.7 | |||
| Commercial Mortgage-Backed Securities — Non-Agency |
3.7 | |||
| REIT |
3.3 | |||
| Municipal Bonds |
2.4 | |||
| Healthcare-Services |
1.9 | |||
| Telecommunications |
1.9 | |||
| Pipelines |
1.7 | |||
| Pharmaceuticals |
1.6 | |||
| Food |
1.2 | |||
| Residential Mortgage-Backed Securities — Agency |
0.9 | |||
| Media |
0.8 | |||
| Packaging & Containers |
0.7 | |||
| Retail |
0.7 | |||
| Airlines |
0.6 | |||
| Auto Manufacturers |
0.6 | |||
| Diversified Financial Services |
0.6 | |||
| Insurance |
0.6 | |||
| Miscellaneous Manufacturers |
0.6 | |||
| Aerospace/Defense |
0.5 | |||
| Biotechnology |
0.5 | |||
| Electric |
0.5 | |||
| Beverages |
0.3 | |||
| Engineering & Construction |
0.3 | |||
| Forest Products & Paper |
0.3 | |||
| Oil & Gas |
0.3 | |||
| Semiconductors |
0.3 | |||
| Chemicals |
0.2 | |||
| Commercial Services |
0.2 | |||
| Healthcare-Products |
0.2 | |||
| Software |
0.2 | |||
| Computers |
0.1 | |||
| Cosmetics/Personal Care |
0.1 | |||
| Entertainment |
0.1 | |||
| Environmental Control |
0.1 | |||
| Household Products/Wares |
0.1 | |||
| Internet |
0.1 | |||
| Machinery-Diversified |
0.1 | |||
| Oil & Gas Services |
0.1 | |||
| Transportation |
0.1 | |||
| Money Market Investment |
1.0 | |||
| Short-Term Investments |
3.5 | |||
|
|
|
|||
| Total |
101.7 | % | ||
|
|
|
|||
See accompanying notes to financial statements.
17
TCW Strategic Income Fund, Inc.
| Fair Valuation Summary (Unaudited) |
June 30, 2018 |
The following is a summary of the fair valuations according to the inputs used as of June 30, 2018 in valuing the Fund’s investments:
| Description |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Other Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
| Fixed Income Securities |
||||||||||||||||
| Asset-Backed Securities |
$ | — | $ | 30,939,033 | $ | 449,821 | $ | 31,388,854 | ||||||||
| Mortgage-Backed Securities |
||||||||||||||||
| Commercial Mortgage-Backed Securities — Agency |
— | 13,248,284 | — | 13,248,284 | ||||||||||||
| Commercial Mortgage-Backed Securities — Non-Agency |
— | 5,085,616 | 5,163,876 | 10,249,492 | ||||||||||||
| Residential Mortgage-Backed Securities — Agency |
— | 2,446,486 | — | 2,446,486 | ||||||||||||
| Residential Mortgage-Backed Securities — Non-Agency |
— | 118,216,605 | 3,985,909 | 122,202,514 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Mortgage-Backed Securities |
— | 138,996,991 | 9,149,785 | 148,146,776 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Corporate Bonds* |
— | 84,449,497 | — | 84,449,497 | ||||||||||||
| Municipal Bonds |
— | 6,744,325 | — | 6,744,325 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Fixed Income Securities |
— | 261,129,846 | 9,599,606 | 270,729,452 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Money Market Investments |
2,670,693 | — | — | 2,670,693 | ||||||||||||
| Short-Term Investments* |
5,441,334 | 4,124,611 | — | 9,565,945 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments |
8,112,027 | 265,254,457 | 9,599,606 | 282,966,090 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Asset Derivatives |
||||||||||||||||
| Futures |
||||||||||||||||
| Interest Rate Risk |
24,068 | — | — | 24,068 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 8,136,095 | $ | 265,254,457 | $ | 9,599,606 | $ | 282,990,158 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liability Derivatives |
||||||||||||||||
| Futures |
||||||||||||||||
| Equity Risk |
$ | (92,142 | ) | $ | — | $ | — | $ | (92,142 | ) | ||||||
| Interest Rate Risk |
(65,373 | ) | — | — | (65,373 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | (157,515 | ) | $ | — | $ | — | $ | (157,515 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | See Schedule of Investments for corresponding industries. |
See accompanying notes to financial statements.
18
TCW Strategic Income Fund, Inc.
| Statement of Assets and Liabilities (Unaudited) |
June 30, 2018 |
| ASSETS: |
||||
| Investments, at Value (Cost: $271,464,255) |
$ | 282,966,090 | ||
| Cash |
3,655 | |||
| Interest Receivable |
1,815,453 | |||
| Receivable for Securities Sold |
806,918 | |||
| Cash Collateral on Deposit at Broker |
138,233 | |||
|
|
|
|||
| Total Assets |
285,730,349 | |||
|
|
|
|||
| LIABILITIES: |
||||
| Distributions Payable |
3,328,550 | |||
| Payables for Securities Purchased |
2,267,959 | |||
| Payable for When-Issued Securities |
1,495,347 | |||
| Payable for Daily Variation Margin on Open Financial Futures Contracts |
133,123 | |||
| Accrued Investment Advisory Fees |
131,615 | |||
| Accrued Other Expenses |
87,988 | |||
| Accrued Directors’ Fees and Expenses |
35,134 | |||
| Commitment Fee Payable on Open Line of Credit |
1,303 | |||
|
|
|
|||
| Total Liabilities |
7,481,019 | |||
|
|
|
|||
| NET ASSETS |
$ | 278,249,330 | ||
|
|
|
|||
| NET ASSETS CONSIST OF: |
||||
| Common Stock, par value $0.01 per share (75,000,000 shares authorized, 47,686,957 shares issued and outstanding) |
$ | 476,870 | ||
| Paid-in Capital |
268,963,511 | |||
| Accumulated Net Realized Loss on Investments, Futures Contracts and Foreign Currency |
(2,419,595 | ) | ||
| Distributions in Excess of Net Investment Income |
(139,844 | ) | ||
| Net Unrealized Appreciation on Investments and Futures Contracts |
11,368,388 | |||
|
|
|
|||
| NET ASSETS |
$ | 278,249,330 | ||
|
|
|
|||
| NET ASSET VALUE PER SHARE |
$ | 5.83 | ||
|
|
|
|||
| MARKET PRICE PER SHARE |
$ | 5.49 | ||
|
|
|
See accompanying notes to financial statements.
19
TCW Strategic Income Fund, Inc.
| Statement of Operations (Unaudited) |
Six Months Ended June 30, 2018 |
| INVESTMENT INCOME: |
||||
| Income |
||||
| Interest |
$ | 7,850,883 | ||
|
|
|
|||
| Total Investment Income |
7,850,883 | |||
|
|
|
|||
| Expenses |
||||
| Investment Advisory Fees |
816,648 | |||
| Audit and Tax Service Fees |
69,041 | |||
| Directors’ Fees and Expenses |
66,542 | |||
| Legal Fees |
29,116 | |||
| Transfer Agent Fees |
26,307 | |||
| Listing Fees |
24,105 | |||
| Commitment Fee on Open Line of Credit |
23,850 | |||
| Insurance Expense |
23,218 | |||
| Printing and Distribution Costs |
16,364 | |||
| Accounting Fees |
13,370 | |||
| Custodian Fees |
10,328 | |||
| Proxy Expense |
9,857 | |||
| Administration Fees |
8,173 | |||
| Miscellaneous Expense |
4,691 | |||
|
|
|
|||
| Total Expenses |
1,141,610 | |||
|
|
|
|||
| Net Investment Income |
6,709,273 | |||
|
|
|
|||
| NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED DEPRECIATION ON INVESTMENTS, FUTURES CONTRACTS AND FOREIGN CURRENCY: |
||||
| Net Realized Gain (Loss) on: |
||||
| Investments |
844,327 | |||
| Foreign Currency |
(5,834 | ) | ||
| Foreign Currency Forward Contracts |
(101,401 | ) | ||
| Futures Contracts |
508,859 | |||
| Change in Unrealized Depreciation on: |
||||
| Investments |
(5,012,997 | ) | ||
| Foreign Currency Forward Contracts |
(26,770 | ) | ||
| Futures Contracts |
(200,085 | ) | ||
|
|
|
|||
| Net Realized Gain (Loss) and Change in Unrealized Depreciation on Investments, Futures Contracts and Foreign Currency |
(3,993,901 | ) | ||
|
|
|
|||
| INCREASE IN NET ASSETS FROM OPERATIONS |
$ | 2,715,372 | ||
|
|
|
See accompanying notes to financial statements.
20
TCW Strategic Income Fund, Inc.
Statements of Changes in Net Assets
| Six Months Ended June 30, 2018 (Unaudited) |
Year Ended December 31, 2017 |
|||||||
| OPERATIONS: |
||||||||
| Net Investment Income |
$ | 6,709,273 | $ | 12,677,890 | ||||
| Net Realized Gain on Investments, Futures Contracts and Foreign Currency |
1,245,951 | 1,921,313 | ||||||
| Change in Unrealized Appreciation (Depreciation) on Investments and Futures Contracts |
(5,239,852 | ) | 5,300,255 | |||||
|
|
|
|
|
|||||
| Increase in Net Assets Resulting from Operations |
2,715,372 | 19,899,458 | ||||||
|
|
|
|
|
|||||
| DISTRIBUTIONS TO SHAREHOLDERS: |
||||||||
| From Net Investment Income |
(6,499,732 | ) | (13,423,879 | ) | ||||
| From Realized Gains |
— | (1,573,670 | ) | |||||
|
|
|
|
|
|||||
| Total Distributions |
(6,499,732 | ) | (14,997,549 | ) | ||||
|
|
|
|
|
|||||
| Total Increase (Decrease) in Net Assets |
(3,784,360 | ) | 4,901,909 | |||||
|
|
|
|
|
|||||
| NET ASSETS: |
||||||||
| Beginning of Period |
282,033,690 | 277,131,781 | ||||||
|
|
|
|
|
|||||
| End of Period |
$ | 278,249,330 | $ | 282,033,690 | ||||
|
|
|
|
|
|||||
| Distributions in Excess of Net Investment Income |
$ | (139,844 | ) | $ | (349,385 | ) | ||
|
|
|
|
|
|||||
See accompanying notes to financial statements.
21
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited)
Note 1 — Organization
TCW Strategic Income Fund, Inc. (the “Fund”) was incorporated in Maryland on January 13, 1987 as a diversified, closed-end investment management company and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”). Its shares are traded on the New York Stock Exchange under the symbol TSI. The Fund commenced operations on March 5, 1987. The Fund’s investment objective is to seek a total return comprised of current income and capital appreciation by investing in a wide range of securities including convertible securities, marketable equity securities, investment-grade debt securities, high-yield debt securities, securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities (“U.S. Government Securities”), repurchase agreements, mortgage related securities, asset-backed securities, money market securities, other securities and derivative instruments without limit believed by the Fund’s investment advisor to be consistent with the Fund’s investment objective. TCW Investment Management Company LLC (the “Advisor”) is the investment advisor to the Fund and is registered under the Investment Advisers Act of 1940, as amended.
Note 2 — Significant Accounting Policies
The following is a summary of significant accounting policies, which are in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and which are consistently followed by the Fund in the preparation of its financial statements. The Fund is considered an investment company under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 946, Financial Services — Investment Companies.
Principles of Accounting: The Fund uses the accrual method of accounting for financial reporting purposes.
Security Valuation: Securities traded on national exchanges are valued at the last reported sales price. Securities traded on the NASDAQ Stock Market (“NASDAQ”) are valued using the NASDAQ Official Closing Price, which may not be the last reported sales price. Other securities, including short-term investments and forward currency contracts, which are traded over-the-counter (“OTC”), are valued at the mean of the current bid and asked prices as furnished by independent pricing services or by dealer quotations. Futures contracts are valued at the official settlement price of the exchange on which they are traded.
Securities for which market quotations are not readily available, including circumstances under which it is determined by the Advisor that prices received are not reflective of their market values, are valued by the Advisor’s Pricing Committee in accordance with the guidelines established by the Board’s Valuation Committee and under the general oversight of the Board.
Fair value is defined as the price that the Fund would receive upon selling an investment in a timely transaction to an independent buyer in the principal or most advantageous market for the investment. In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the Fund discloses investments in a three-tier hierarchy. This hierarchy is utilized to establish classification of fair value measurement broadly based on inputs that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
22
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
Note 2 — Significant Accounting Policies (Continued)
The three-tier hierarchy of inputs is summarized in the three broad levels listed below.
| Level 1 — | quoted prices in active markets for identical investments. | |
| Level 2 — | other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.). | |
| Level 3 — | significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments). |
Changes in valuation techniques may result in transfers in or out of an investment’s assigned level within the hierarchy. The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to each security.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition, as well as changes related to liquidity of investments, could cause a security to be reclassified between Level 1, Level 2, or Level 3.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Fair Value Measurements: Descriptions of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis are as follows:
Asset-backed securities (“ABS”) and mortgage-backed securities (“MBS”). The fair value of ABS and MBS is estimated based on pricing models that consider the estimated cash flows of each debt tranche of the issuer, establish a benchmark yield, and develop an estimated tranche specific spread to the benchmark yield based on the unique attributes of the tranche including, but not limited to, the prepayment speed assumptions and attributes of the collateral. To the extent the inputs are observable and timely, the values would be categorized in Level 2 of the fair value hierarchy; otherwise, they would be categorized in Level 3.
Corporate bonds. The fair value of corporate bonds is estimated using recently executed transactions, market price quotations (where observable), bond spreads, or credit default swap spreads adjusted for any basis difference between cash and derivative instruments. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy.
Futures contracts. Futures contracts are generally valued at the settlement price established at the close of business each day by the exchange on which they are traded. As such, they are categorized in Level 1.
Government and agency securities. Government and agency securities are normally valued using a model that incorporates market observable data such as reported sales of similar securities, broker quotes, yields,
23
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 2 — Significant Accounting Policies (Continued)
bids, offers, quoted market prices, and reference data. Accordingly, government and agency securities are normally categorized in Level 1 or 2 of the fair value hierarchy depending on the liquidity and transparency of the market.
Money market funds. Money market funds are open-end mutual funds that invest in short-term debt securities. To the extent that these funds are valued based upon the reported net asset value (“NAV”), they are categorized in Level 1 of the fair value hierarchy.
Municipal bonds. Municipal bonds are fair valued based on pricing models that take into account, among other factors, information received from market makers and broker-dealers, current trades, bid want lists, offerings, market movements, the callability of the bond, state of issuance, benchmark yield curves, and bond insurance. To the extent that these inputs are observable and timely, the fair values of municipal bonds would be categorized in Level 2; otherwise, the fair values would be categorized in Level 3.
Restricted securities. Restricted securities, including illiquid Rule 144A securities, issued by non-public entities are included in Level 3 of the fair value hierarchy because they trade infrequently, and therefore, the inputs are unobservable. Any other restricted securities valued similar to publicly traded securities may be categorized in Level 2 or 3 of the fair value hierarchy depending on whether a discount is applied and significant to the fair value.
Short-term investments. Short-term investments are valued using market price quotations, and are reflected in Level 2 of the fair value hierarchy.
The summary of the inputs used as of June 30, 2018 is listed after the Investments by Sector or Industry table.
The Fund did not have any transfers in and out of Level 1 and Level 2 of the fair value hierarchy during the period ended June 30, 2018.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
| Asset- Backed Securities |
Commercial Mortgage-Backed Securities — Non-Agency |
Residential Mortgage-Backed Securities — Non-Agency |
Total | |||||||||||||
| Balance as of December 31, 2017 |
$ | 473,172 | $ | 4,070,594 | $ | 3,906,290 | 8,450,056 | |||||||||
| Accrued Discounts (Premiums) |
— | (86,164 | ) | — | (86,164 | ) | ||||||||||
| Realized Gain (Loss) |
— | — | (412,994 | ) | (412,994 | ) | ||||||||||
| Change in Unrealized Appreciation (Depreciation) |
(23,351 | ) | (636,573 | ) | (315,103 | ) | (975,027 | ) | ||||||||
| Purchases |
— | 1,816,019 | 807,716 | 2,623,735 | ||||||||||||
| Sales |
— | — | — | — | ||||||||||||
| Transfers in to Level 3 (1) |
— | — | — | — | ||||||||||||
| Transfers out of Level 3 (1) |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance as of June 30, 2018 |
$ | 449,821 | $ | 5,163,876 | $ | 3,985,909 | $ | 9,599,606 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Change in Unrealized Appreciation (Depreciation) from Investments Still Held at June 30, 2018 |
$ | 23,351 | $ | (636,573 | ) | $ | (315,103 | ) | $ | (928,325 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | The Fund recognizes transfers in and out at the beginning of the period. |
24
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
Note 2 — Significant Accounting Policies (Continued)
Significant unobservable valuation inputs of Level 3 investments as of June 30, 2018 are as follows:
| Description |
Fair Value at June 30, 2018 |
Valuation |
Unobservable |
Price or Price Range |
Weighted Average Price | |||||||
| Asset-Backed Securities |
$ 449,821 | Third-party Broker | Broker Quotes | $34.00 to $35.00 | $34.404 | |||||||
| Commercial Mortgage-Backed Securities — Non-Agency |
5,163,876 | Third-party Vendor | Vendor Prices | $0.56 to $6.64 | $2.203 | |||||||
| Residential Mortgage-Backed Securities — Non-Agency (Interest Only Collateral Strip Rate Securities) |
2,371,390 | Third-party Vendor | Vendor Prices | $0.47 to $15.38 | $2.353 | |||||||
| Residential Mortgage-Backed Securities — Non-Agency (Interest Only Securities) |
1,614,519 | Third-party Vendor | Vendor Prices | $0.63 to $12.29 | $4.366 | |||||||
| * | The valuation technique employed on the Level 3 securities involves the use of third-party broker quotes and vendor prices. The Advisor monitors the effectiveness of third-party brokers and vendor prices using the Advisor’s own model and inputs. |
Security Transactions and Related Investment Income: Security transactions are recorded as of the trade date. Dividend income is recorded on the ex-dividend date. Interest income is recognized on an accrual basis. Realized gains and losses on investments are recorded on the basis of specific identification.
Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency denominated securities and other assets and liabilities stated in foreign currencies are translated using the daily spot rate; and (2) purchases, sales, income and expenses are translated at the rate of exchange prevailing on the respective dates of such transactions. The resultant exchange gains and losses are included in net realized or net unrealized gain (loss) in the Statement of Operations. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains and losses included in realized and unrealized gains and losses are included in, or are a reduction of, ordinary income for federal income tax purposes.
Distributions: Distributions to shareholders are recorded on each ex-dividend date. The Fund declared and paid or reinvested dividends quarterly under an income-based distribution policy. The income-based distribution policy has a stated goal of providing quarterly distributions out of the Fund’s accumulated undistributed net investment income and/or other sources subject to the requirements of the 1940 Act and Sub-chapter M of the Internal Revenue Code (the “Code”). The source for the dividend can come from net investment income and net realized capital gains measured on a fiscal year basis. Any portion of the distribution that exceeds income and capital gains will be treated as a return of capital. Under certain conditions, federal tax regulations cause some or all of the return of capital to be taxed as ordinary income. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from GAAP. These differences may be primarily due to differing treatments for market discount and premium, losses recognized on structured debt, losses deferred due to wash sales, foreign currency gains and losses, and spillover distributions. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid-in capital and may affect net investment income per share.
Derivative Instruments: Derivatives are financial instruments whose values are based on the values of one or more indicators, such as a security, asset, currency, interest rate, or index. Derivative transactions can create investment leverage and may be highly volatile. It is possible that a derivative transaction will result in a loss greater than the principal amount invested. The Fund may not be able to close out a derivative transaction at a favorable time or price.
25
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 2 — Significant Accounting Policies (Continued)
For the period ended June 30, 2018, the Fund had derivatives and transactions in derivatives, grouped in the following risk categories:
| Equity Risk | Foreign Currency Risk |
Interest Rate Risk |
Total | |||||||||||||
| Asset Derivatives |
| |||||||||||||||
| Futures Contracts (1) |
$ | — | $ | — | $ | 24,068 | $ | 24,068 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Value |
$ | — | $ | — | $ | 24,068 | $ | 24,068 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liability Derivatives |
||||||||||||||||
| Futures Contracts (1) |
$ | (92,142 | ) | $ | — | $ | (65,373 | ) | $ | (157,515 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Value |
$ | (92,142 | ) | $ | — | $ | (65,373 | ) | $ | (157,515 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Statement of Operations: |
||||||||||||||||
| Realized Gain (Loss) |
||||||||||||||||
| Forward Contracts |
$ | — | $ | (101,401 | ) | $ | — | $ | (101,401 | ) | ||||||
| Futures Contracts |
163,355 | — | 345,504 | 508,859 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Realized Gain (Loss) |
$ | 163,355 | $ | (101,401 | ) | $ | 345,504 | $ | 407,458 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Change in Appreciation (Depreciation) |
||||||||||||||||
| Forward Contracts |
$ | — | $ | (26,770 | ) | $ | — | $ | (26,770 | ) | ||||||
| Futures Contracts |
(105,281 | ) | — | (94,804 | ) | (200,085 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Change in Appreciation (Depreciation) |
$ | (105,281 | ) | $ | (26,770 | ) | $ | (94,804 | ) | $ | (226,855 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Number of Contracts (2) |
||||||||||||||||
| Forward Contracts (Notional Amount) |
$— | $ | 5,579,261 | $— | $ | 5,579,261 | ||||||||||
| Futures Contracts |
32 | — | 84 | 116 | ||||||||||||
| (1) | Represents appreciation (depreciation) of futures contracts as reported in the Schedule of Investments as of June 30, 2018. Only the variation margin is reported within the Statement of Assets and Liabilities. |
| (2) | Amount disclosed represents average number of contracts or notional amounts, which are representative of the volume traded for the period ended June 30, 2018. |
Counterparty Credit Risk: Derivative contracts may be exposed to counterparty risk. Losses can occur if the counterparty does not perform under the contract.
The Fund’s risk of loss from counterparty credit risk on OTC derivatives is generally limited to the aggregate unrealized gain netted against any collateral held by the Fund.
With exchange traded futures and centrally cleared swaps, there is less counterparty credit risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or insolvency) of the clearing broker or clearinghouse. Additionally, credit risk exists in exchange traded futures and centrally cleared swaps with respect to initial and variation margin that is held in a clearing broker’s customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata basis across all the clearing broker’s customers, potentially resulting in losses to the Fund.
26
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
Note 2 — Significant Accounting Policies (Continued)
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 the Fund and a counterparty that governs OTC derivatives and typically contains, among other things, collateral posting terms and netting provisions in the event of a default and/or termination event. Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to OTC derivatives to terminate derivative contracts prior to maturity in the event the Fund’s net assets decline by a stated percentage or the Fund fails to meet the terms of its ISDA Master Agreements, which would cause the Fund to accelerate payment of any net liability owed to the counterparty.
Collateral Requirements: 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 pledged or received by the Fund.
Cash collateral that has been pledged to cover obligations of the Fund is reported separately on the Statement of Assets and Liabilities. Non-cash collateral pledged by the Fund, if any, is noted in the Schedule of Investments. Generally, the amount of collateral due from or to a party has to exceed a minimum transfer amount threshold, typically $250,000 or $500,000, before a transfer is required, which is determined at the close of each business day and the collateral is transferred on the next business day. 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 non-performance. The Fund attempts to mitigate counterparty risk by entering into agreements only with counterparties that the Advisor believes have the financial resources to honor their obligations 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 Fund has implemented the disclosure requirements pursuant to FASB ASU No. 2013-01, Disclosures about Offsetting Assets and Liabilities that requires disclosures to make financial statements that are prepared under GAAP more comparable to those prepared under International Financial Reporting Standards.
The Fund had no OTC derivatives for offset under an ISDA Master Agreement as of June 30, 2018.
Note 3 — Portfolio Investments
Forward Foreign Currency Contracts: The Fund enters into forward foreign currency contracts as a hedge against fluctuations in foreign exchange rates. Forward foreign currency contracts are marked to market daily and the change in market value is recorded by the Fund as unrealized gains or losses in the Statement of Assets and Liabilities. When a contract is closed or delivery is taken, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of the foreign currency relative to the U.S. dollar. There were no foreign currency forward contracts outstanding as of June 30, 2018.
27
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 3 — Portfolio Investments (Continued)
Futures Contracts: The Fund seeks to manage a variety of different risks or obtain exposure through the use of futures contracts. The Fund may use index futures to hedge against broad market risks to its portfolio or to gain broad market exposure when it holds uninvested cash or as an inexpensive substitute for cash investments directly in securities or other assets. Securities index futures contracts are contracts to buy or sell units of a securities index at a specified future date at a price agreed upon when the contract is made and are settled in cash. Positions in futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Because futures contracts are exchange-traded, they typically have minimal exposure to counterparty risk. Parties to a futures contract are not required to post the entire notional amount of the contract, but rather a small percentage of that amount (by way of margin), both at the time they enter into futures transactions, and then on a daily basis if their positions decline in value; as a result, futures contracts are highly leveraged. Such payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. Because futures markets are highly leveraged, they can be extremely volatile, and there can be no assurance that the pricing of a futures contract will correlate precisely with the pricing of the asset or index underlying it or the asset or liability of the Fund that is the subject of the hedge. It may not always be possible for the Fund to enter into a closing transaction with respect to a futures contract it has entered into at a favorable time or price. When the Fund enters into a futures transaction, it is subject to the risk that the value of the futures contract will move in a direction unfavorable to it.
When the Fund uses futures contracts for hedging purposes, it is likely that the Fund will have an asset or liability that will offset any loss (or gain) on the transactions, at least in part. When a futures contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. During the period ended June 30, 2018, the Fund used S&P 500 Index futures to gain exposure to the equity market. The Fund also utilized treasury futures and other bond futures to help manage interest rate duration and credit market exposure. Futures contracts outstanding at June 30, 2018 are listed in the Fund’s Schedule of Investments.
Options: The Fund may purchase and sell put and call options on securities or indexes to enhance investment performance and/or to protect against changes in market prices.
A call option gives the holder the right to purchase, and obligates the writer to sell, a security at the strike price at any time before the expiration date. A put option gives the holder the right to sell, and obligates the writer to buy, a security at the exercise price at any time before the expiration date. The Fund may purchase put options to protect portfolio holdings against a decline in market value of a security or securities held by it. The Fund may also purchase a put option hoping to profit from an anticipated decline in the value of the underlying security. If the Fund holds the security underlying the option, the option premium and any transaction costs will reduce any profit the Fund might have realized had it sold the underlying security instead of buying the put option. The Fund may purchase call options to hedge against an increase in the price of securities that the Fund ultimately wants to buy. The Fund may also purchase a call option as a long directional investment hoping to profit from an anticipated increase in the value of the underlying security. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. These costs will reduce any profit the Fund might have realized had it bought the underlying security at the time it purchased the call option.
28
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
Note 3 — Portfolio Investments (Continued)
The Fund may execute transactions in both listed and OTC options. Listed options involve minimal counterparty risk since listed options are guaranteed against default by the exchange on which they trade. Transactions in certain OTC options may expose the Fund to the risk of default by the counterparty to the transaction. In the event of default by the counterparty to the OTC option transaction, the Fund’s maximum amount of loss as purchaser is the premium paid plus any unrealized gain. During the period ended June 30, 2018, the Fund did not purchase or write any option contracts.
Swap Agreements: The Fund may enter into swap agreements. Swap agreements are typically two-party contracts entered into primarily by institutional investors. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the parties are generally calculated with respect to a “notional amount” (i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a “basket” of securities representing a particular index).
The Fund may enter into credit default swap transactions as a “buyer” or “seller” of credit protection. In a credit default swap, one party provides what is in effect insurance against a default or other adverse credit event affecting an issuer of debt securities (typically referred to as a “reference entity”). In general, the buyer of credit protection is obligated to pay the protection seller an upfront amount or a periodic stream of payments over the term of the swap. If a “credit event” occurs, the buyer has the right to deliver to the seller bonds or other obligations of the reference entity (with a value up to the full notional value of the swap), and to receive a payment equal to the par value of the bonds or other obligations. Credit events that would trigger a request that the seller make payment are specific to each credit default swap agreement, but generally include bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default, or repudiation/moratorium. When the Fund buys protection, it may or may not own securities of the reference entity. When the Fund sells protection under a credit default swap, the position may have the effect of creating leverage in the Fund’s portfolio through the Fund’s indirect long exposure to the issuer or securities on which the swap is written. When the Fund sells protection, it may do so either to earn additional income or to create such a “synthetic” long position.
During the term of a swap transaction, changes in the value of the swap are recognized as unrealized gains or losses by marking to market to reflect the market value of the swap. When the swap is terminated, the Fund will record a realized gain or loss equal to the difference, if any, between the proceeds from (or cost of) the closing transaction and the Fund’s basis in the agreement. Upfront swap premium payments paid or received by the Fund, if any, are recorded within the value of the open swap agreement on the Fund’s Statement of Assets and Liabilities and represent payments paid or received upon entering into the swap agreement to compensate for differences between stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, and other relevant factors). These upfront payments are recorded as realized gain or loss on the Fund’s Statement of Operations upon termination or maturity of the swap agreement.
During the term of a swap transaction, the periodic net payments can be made for a set period of time or may be triggered by a predetermined credit event. The net periodic payments may be based on a fixed or variable interest rate, the change in market value of a specified security, basket of securities or index, or the return generated by a security. These periodic payments received or made by the Fund are recorded as realized gains and losses, respectively. During the period ended June 30, 2018, the Fund did not enter into such agreements.
29
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 3 — Portfolio Investments (Continued)
Mortgage-Backed Securities: The Fund may invest in mortgage pass-through securities which represent interests in pools of mortgages in which payments of both principal and interest on the securities are generally made monthly, in effect “passing through” monthly payments made by borrowers on the residential or commercial mortgage loans which underlie the securities (net of any fees paid to the issuer or guarantor of the securities). Mortgage pass-through securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. The Fund may also invest in Collateralized Mortgage Obligations (“CMOs”). CMOs are debt obligations collateralized by residential or commercial mortgage loans or residential or commercial mortgage pass-through securities. Interest and principal are generally paid monthly. CMOs may be collateralized by whole mortgage loans or private mortgage pass-through securities but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae. The issuer of a series of CMOs may elect to be treated for tax purposes as a Real Estate Mortgage Investment Conduit. CMOs are structured into multiple classes, each bearing a different stated maturity. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes usually receive principal only after shorter classes have been retired. An investor may be partially protected against a sooner than desired return of principal because of the sequential payments. The Fund may invest in stripped MBS. Stripped MBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. In certain cases, one class will receive all of the interest (the interest only or “IO” class), while the other class will receive all of the principal (the principal-only or “PO” class). The yield to maturity on IOs is sensitive to the rate of principal prepayments (including prepayments) on the related underlying mortgage assets, and principal payments may have a material effect on yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Fund may not fully recoup its initial investment in IOs.
Repurchase Agreements: The Fund may enter into repurchase agreements under the terms of a Master Repurchase Agreement (“MRA”). The MRA permits the Fund, under certain circumstances, including an event of default (such as bankruptcy or insolvency), to offset payables and/or receivables under the MRA with collateral held and/or posted to the counterparty and create one single net payment due to or from the Fund. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of the MRA counterparty’s bankruptcy or insolvency. Pursuant to the terms of the MRA, the Fund receives securities as collateral with a market value in excess of the repurchase price. Upon a bankruptcy or insolvency of the MRA counterparty, the Fund recognizes a liability with respect to such excess collateral to reflect the Fund’s obligation under bankruptcy law to return the excess to the counterparty. The Fund had no repurchase agreements outstanding at June 30, 2018.
When-Issued, Delayed-Delivery, and Forward Commitment Transactions: The Fund may enter into when issued, delayed-delivery or forward commitment transactions in order to lock in the purchase price of the underlying security or to adjust the interest rate exposure of the Fund’s existing portfolio. In when-issued, delayed-delivery, or forward commitment transactions, the Fund commits to purchase particular securities, with payment and delivery to take place at a future date. Although the Fund does not pay for the securities or start earning interest on them until they are delivered, it immediately assumes the risks of ownership, including the risk of price fluctuation. If the Fund’s counterparty fails to deliver a security purchased on a when issued, delayed-delivery or forward commitment basis, there may be a loss, and the Fund may have missed an opportunity to make an alternative investment.
30
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
Note 3 — Portfolio Investments (Continued)
Prior to settlement of these transactions, the value of the subject securities will fluctuate. In addition, because the Fund is not required to pay for when-issued, delayed-delivery or forward commitment securities until the delivery date, they may result in a form of leverage. To guard against this deemed leverage, the Fund monitors the obligations under these transactions and ensures that the Fund has sufficient liquid assets to cover them.
Security Lending: The Fund may lend its securities to qualified brokers. The loans must be collateralized at all times primarily with cash although the Fund can accept money market instruments or U.S. government securities with a market value at least equal to the market value of the securities on loan. As with any extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral if the borrowers of the securities fail financially. The Fund earns additional income for lending its securities by investing the cash collateral in short-term investments. The Fund did not lend any securities during the period ended June 30, 2018.
Use of Estimates: The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from these estimates.
Note 4 — Risk Considerations
Market Risk: The Fund’s investments will fluctuate with market conditions, and so will the value of your investment in the Fund. You could lose money on your investment in the Fund or the Fund could underperform other investments.
Liquidity Risk: The Fund’s investments in illiquid securities may reduce the returns of the Fund because it may not be able to sell the illiquid securities at an advantageous time or price. Investments in high yield securities, foreign securities, derivatives or other securities with substantial market and/or credit risk tend to have the greatest exposure to liquidity risk. Certain investments in private placements and Rule 144A securities may be considered illiquid investments. The Fund may invest in private placements and Rule 144A securities.
Interest Rate Risk: The values of the Fund’s investments fluctuate in response to movements in interest rates. If rates rise, the values of debt securities generally fall. The longer the average duration of a Fund’s investment portfolio, the greater the change in value.
Mortgage-Backed and Other Asset-Backed Securities Risk: The Fund may invest in MBS or other ABS. The values of some mortgage-backed or other asset backed securities may expose the Fund to a lower rate of return upon reinvestment of principal. When interest rates rise, the value of mortgage-related securities generally will decline; however, when interest rates are declining, the value of mortgage related-securities with prepayment features may not increase as much as other fixed-income securities. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage related security, and may shorten or extend the effective maturity of the security beyond what was anticipated at the time of purchase. If an unanticipated rate of prepayment on underlying mortgages increases the effective maturity of a mortgage-related security, the volatility of the security can be expected to increase. The value of these securities may fluctuate in response to the market’s perception of the creditworthiness of the issuers. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private guarantee and/or insurance, there is no assurance that private guarantors or insurers will meet their obligations.
31
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 4 — Risk Considerations (Continued)
Derivatives Risk: Use of derivatives, which at times is an important part of the Fund’s investment strategy, involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Investments in derivatives could cause the Fund to lose more than the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurance that the Fund will achieve its objective with these transactions to reduce exposure to other risks when that would be beneficial.
Credit Risk: The values of any of the Fund’s investments may also decline in response to events affecting the issuer or its credit rating. The lower rated debt securities in which the Fund may invest are considered speculative and are subject to greater volatility and risk of loss than investment-grade securities, particularly in deteriorating economic conditions. The value of some mortgage-related securities in which the Fund invests also may fall because of unanticipated levels of principal prepayments that can occur when interest rates decline. The Fund invests a material portion of its assets in securities of issuers that hold mortgage- and asset-backed securities and direct investments in securities backed by commercial and residential mortgage loans and other financial assets. The value and related income of these securities are sensitive to changes in economic conditions, including delinquencies and/or defaults. Continuing shifts in the market’s perception of credit quality on securities backed by commercial and residential mortgage loans and other financial assets may result in increased volatility of market prices and periods of illiquidity that can negatively impact the valuation of certain issuers held by the Fund.
MBS and ABS are characterized and classified in a variety of different ways. These classifications include a view of the securities’ cash flow structure (pass through, sequential pay, prepayment-protected, interest only, principal-only, etc.), the security of the claim on the underlying assets (senior, mezzanine and subordinated), as well as types of underlying collateral (prime conforming loans, prime non-conforming loans, Alt-A loans, subprime loans, commercial loans, etc.). In many cases, the classification incorporates a degree of subjectivity — a particular loan might be categorized as “prime” by the underwriting standards of one mortgage issuer while another might classify the loan as “subprime.” In addition to other functions, the risk associated with an investment in a mortgage loan must take into account the nature of the collateral, the form and the level of credit enhancement, the vintage of the loan, the geography of the loan, the purpose of the loan (refinance versus purchase versus equity take-out), the borrower’s credit quality (e.g., FICO score), and whether the loan is a first trust deed or a second lien.
Counterparty Risk: The Fund may be exposed to counterparty risk, or the risk that an entity with which the Fund has unsettled or open transactions may default. Financial assets, which potentially expose the Fund to credit and counterparty risks, consist principally of investments and cash due from counterparties. The exposure to credit and counterparty risks with respect to these financial assets is reflected in fair values recorded in the Fund’s Statement of Assets and Liabilities.
Note 5 — Federal Income Taxes
It is the policy of the Fund to comply with the requirements of the Code applicable to regulated investment companies and distribute all of its net taxable income, including any net realized gains on investments, to its shareholders. Therefore, no federal income tax provision is required.
32
TCW Strategic Income Fund, Inc.
| June 30, 2018 |
Note 5 — Federal Income Taxes (Continued)
At June 30, 2018, net unrealized appreciation for federal income tax purposes is comprised of the following components:
| Unrealized appreciation |
$ | 20,719,446 | ||
| Unrealized (depreciation) |
(13,075,306 | ) | ||
|
|
|
|||
| Net unrealized appreciation |
$ | 7,644,140 | ||
|
|
|
|||
| Cost of Investments for Federal Income Tax Purposes |
$ | 275,321,950 | ||
|
|
|
The Fund did not have any unrecognized tax benefits at June 30, 2018, nor were there any increases or decreases in unrecognized tax benefits for the period then ended; and therefore no interest or penalties were accrued. The Fund is subject to examination by U.S. federal and state tax authorities for returns filed for the prior three and four fiscal years, respectively.
The following table shows the character of distributed and undistributed amounts on a tax basis for the year ended December 31, 2017.
| Amount Distributed During Year Ended December 31, 2017 |
Undistributed Amount at Year Ended December 31, 2017 |
|||||||
| Ordinary Income |
$ | 13,423,879 | $ | — | ||||
| Capital Gain |
1,573,670 | 258,408 | ||||||
|
|
|
|
|
|||||
| $ | 14,997,549 | $ | 258,408 | |||||
|
|
|
|
|
|||||
Note 6 — Investment Advisory and Service Fees
As compensation for the investment advisory services rendered, facilities provided, and expenses borne, the Advisor is paid a monthly fee by the Fund computed at the annual rate of 0.75% of the first $100 million of the Fund’s average managed assets and 0.50% of the Fund’s average managed assets in excess of $100 million.
Note 7 — Purchases and Sales of Securities
For the period ended June 30, 2018, purchases and sales or maturities of investment securities (excluding short-term investments) aggregated to $38,991,888 and $39,557,159, respectively, for non-U.S. Government securities, and aggregated to $8,901,273 and $1,213,357, respectively, for U.S. Government securities.
Note 8 — Directors’ Fees
Directors who are not affiliated with the Advisor received, as a group, fees and expenses of $66,542 from the Fund for the period ended June 30, 2018. Directors may elect to defer receipt of their fees in accordance with the terms of a Non-Qualified Deferred Compensation Plan. Deferred compensation is included within Accrued Directors’ Fees and Expenses in the Statement of Assets and Liabilities. Certain Officers and/or Directors of the Fund are also Officers and/or Directors of the Advisor but do not receive any compensation from the Fund.
Note 9 — Restricted Securities
The Fund is permitted to invest in securities that have legal or contractual restrictions on resale. These securities may be sold privately, but are required to be registered before being sold to the public (exemption rules apply). Private placement securities are generally considered to be restricted except for those securities traded between qualified institutional investors under the provisions of Rule 144A of the
33
TCW Strategic Income Fund, Inc.
Notes to Financial Statements (Unaudited) (Continued)
Note 9 — Restricted Securities (Continued)
Securities Act of 1933, as amended (the “Securities Act”). However, the Fund considers 144A securities to be restricted if those securities have been deemed illiquid by the Advisor. Disposal of these securities may involve time consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. Restricted securities outstanding at June 30, 2018 are listed below:
| Issuer Description |
Acquisition Date |
Acquisition Cost |
Aggregate Value |
Percentage of Net Assets |
||||||||||
| Citigroup Commercial Mortgage Trust, (12-GC8-XA), 1.814%, due 09/10/45 |
2/13/2015-2/26/2015 | $ | 355,084 | $ | 207,992 | 0.1 | % | |||||||
| Four Times Square Trust Commercial Mortgage Pass-Through Certificates (06-4TS-X), 0.364%, due 12/13/28 |
3/22/2018-6/19/2018 | 301,162 | 298,028 | 0.1 | % | |||||||||
| GS Mortgage Securities Trust GSMS (12-SHOP-XA), 1.438%, due 06/05/31 |
6/19/2018 | 433,830 | 419,934 | 0.2 | % | |||||||||
| GS Mortgage Securities Trust GSMS (12-GC6-XB), 0.257%, due 01/10/45 |
2/1/2018 | 141,354 | 128,137 | 0.0 | % | |||||||||
| JPMorgan Chase Commercial Mortgage Securities Trust, (09-IWST-XA), 1.873%, due 12/05/27 |
3/23/2017 | 546,547 | 301,922 | 0.1 | % | |||||||||
| JPMorgan Chase Commercial Mortgage Securities Trust, (12-HSBC-XA), 1.431%, due 07/05/32 |
10/11/2017 | 276,845 | 232,834 | 0.1 | % | |||||||||
| Morgan Stanley Capital I Trust (12-C4-XA), 2.271%, due 03/15/45 |
5/16/2018 | 361,440 | 349,755 | 0.1 | % | |||||||||
| UBS Commercial Mortgage Trust (12-C1-XA) , 2.271%, due 05/10/45 |
6/27/2017 | 429,109 | 372,643 | 0.1 | % | |||||||||
| WFRBS Commercial Mortgage Trust (12-C8-XA) 1.8514%, due 08/15/45 |
12/22/2017 | 319,668 | 287,525 | 0.1 | % | |||||||||
|
|
|
|
|
|
|
|||||||||
| $ | 3,165,039 | $ | 2,598,770 | 0.9 | % | |||||||||
|
|
|
|
|
|
|
|||||||||
Note 10 — Loan Outstanding
The Fund is permitted to have borrowings for investment purposes. The Fund has entered into a line of credit agreement, renewed annually, with The Bank of New York Mellon which permits the Fund to borrow up to $70 million at a rate, per annum, equal to the Federal Funds Rate plus 1.00%. There is also an annual facility fee of $56,000 for the contract period. The Fund did not have any borrowings during the period ended June 30, 2018.
Note 11 — Indemnifications
Under the Fund’s organizational documents, its Officers and Directors may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Fund. In addition, the Fund entered into an agreement with each of the Directors which provides that the Fund will indemnify and hold harmless each Director against any expenses actually and reasonably incurred by the Director in any proceeding arising out of or in connection with the Director’s services to the Fund, to the fullest extent permitted by the Fund’s Articles of Incorporation and By-Laws, the Maryland General Corporation Law, the Securities Act, and the 1940 Act, each as now or hereinafter in force. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. The Fund has not accrued any liability in connection with such indemnification.
34
TCW Strategic Income Fund, Inc.
Financial Highlights
| Six Months Ended June 30, 2018 (Unaudited) |
Year Ended December 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||
| Net Asset Value Per Share, Beginning of Period |
$ | 5.91 | $ | 5.81 | $ | 5.83 | $ | 5.95 | $ | 5.82 | $ | 5.60 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income from Operations: |
||||||||||||||||||||||||
| Net Investment Income (1) |
0.14 | 0.27 | 0.26 | 0.22 | 0.24 | 0.31 | ||||||||||||||||||
| Net Realized and Unrealized Gain (Loss) on Investments |
(0.08 | ) | 0.14 | 0.00 | (2) | (0.13 | ) | 0.14 | 0.30 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total from Investment Operations |
0.06 | 0.41 | 0.26 | 0.09 | 0.38 | 0.61 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Less Distributions: |
||||||||||||||||||||||||
| Distributions from Net Investment Income |
(0.14 | ) | (0.28 | ) | (0.21 | ) | (0.21 | ) | (0.25 | ) | (0.39 | ) | ||||||||||||
| Distributions from Net Realized Gains |
— | (0.03 | ) | (0.07 | ) | — | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Distributions |
(0.14 | ) | (0.31 | ) | (0.28 | ) | (0.21 | ) | (0.25 | ) | (0.39 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net Asset Value Per Share, End of Period |
$ | 5.83 | $ | 5.91 | $ | 5.81 | $ | 5.83 | $ | 5.95 | $ | 5.82 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Market Value Per Share, End of Period |
$ | 5.49 | $ | 5.87 | $ | 5.33 | $ | 5.27 | $ | 5.39 | $ | 5.34 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net Asset Value Total Return (3) |
0.96 | % (4) | 7.22 | % | 4.49 | % | 1.60 | % | 6.66 | % | 11.19 | % | ||||||||||||
| Market Price Return (5) |
(4.14 | )% (4) | 16.36 | % | 6.56 | % | 1.83 | % | 5.66 | % | 6.92 | % | ||||||||||||
| Ratios/Supplemental Data: |
||||||||||||||||||||||||
| Net Assets, End of Period (in thousands) |
$ | 278,249 | $ | 282,034 | $ | 277,132 | $ | 277,932 | $ | 283,835 | $ | 277,337 | ||||||||||||
| Ratio of Expenses Before Interest Expense to Average Net Assets |
0.80 | % (6) | 0.81 | % | 0.84 | % | 0.87 | % | 0.85 | % | 0.91 | % | ||||||||||||
| Ratio of Interest Expense to Average Net Assets |
0.02 | % (6) | 0.01 | % | 0.01 | % | 0.01 | % | 0.02 | % | 0.11 | % | ||||||||||||
| Ratio of Total Expenses to Average Net Assets |
0.82 | % (6) | 0.82 | % | 0.85 | % | 0.88 | % | 0.87 | % | 1.02 | % | ||||||||||||
| Ratio of Net Investment Income to Average Net Assets |
4.81 | % (6) | 4.47 | % | 4.38 | % | 3.70 | % | 4.05 | % | 5.25 | % | ||||||||||||
| Portfolio Turnover Rate |
15.16 | % (4) | 32.46 | % | 29.20 | % | 24.81 | % | 12.09 | % | 34.97 | % | ||||||||||||
| (1) | Computed using average shares outstanding throughout the period. |
| (2) | Amount rounds to less than $0.01 per share. |
| (3) | Based on net asset value per share, adjusted for reinvestment of distributions. |
| (4) | For the six months ended June 30, 2018 and not indicative of a full year’s results. |
| (5) | Based on market price per share, adjusted for reinvestment of distributions. |
| (6) | Annualized. |
See accompanying notes to financial statements.
35
TCW Strategic Income Fund, Inc.
Supplemental Information
Proxy Voting Guidelines
The policies and procedures that the Fund uses to determine how to vote proxies are available without charge. The Board of the Fund has delegated the Fund’s proxy voting authority to the Advisor.
Disclosure of Proxy Voting Guidelines
The proxy voting guidelines of the Advisor are available:
| 1. | By calling 1-(877) 829-4768 to obtain a hard copy; or |
| 2. | By going to the Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. |
When the Fund receives a request for a description of the Advisor’s proxy voting guidelines, it will deliver the description that is disclosed in the Fund’s Statement of Additional Information. This information will be sent out via first class mail (or other means designed to ensure equally prompt delivery) within three business days of receiving the request.
The Advisor, on behalf of the Fund, must prepare and file Form N-PX with the SEC not later than August 31 of each year, which must include the Fund’s proxy voting record for the most recent twelve-month period ended June 30 of that year. The Fund’s proxy voting record for the most recent twelve-month period ended June 30, 2018 is available without charge:
| 1. | By calling 1-(877) 829-4768 to obtain a hard copy; or |
| 2. | By going to the SEC website at http://www.sec.gov. |
When the Fund receives a request for the Fund’s proxy voting record, it will send the information disclosed in the Fund’s most recently filed report on Form N-PX via first class mail (or other means designed to ensure equally prompt delivery) within three business days of receiving the request.
The Fund also discloses its proxy voting record on its website as soon as is reasonably practicable after its report on Form N-PX is filed with the SEC.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of its portfolio holdings with the SEC for the first and third quarters of its fiscal year on Form N-Q. The Form N-Q is available by calling 1-(877) 829-4768 to obtain a hard copy. You may also obtain the Fund’s Form N-Q:
| 1. | By going to the SEC website at http://www.sec.gov.; or |
| 2. | By visiting the SEC’s Public Reference Room in Washington, D.C. and photocopying it (Phone 1-800-SEC-0330 for information on the operation of the SEC’s Public Reference Room). |
Corporate Governance Listing Standards
In accordance with Section 303A.12 (a) of the New York Stock Exchange Listed Company Manual, the Fund’s Annual CEO Certification certifying compliance with NYSE’s Corporate Governance Listing Standards was submitted to the Exchange on October 19, 2017 as part of its Annual Written Affirmation. Also in accordance with Section 303A.12 of the New York Stock Exchange Listed Company Manual, the Fund submitted an Interim Written Affirmation on March 28, 2018.
36
TCW Strategic Income Fund, Inc.
Dividend Reinvestment Plan
Shareholders who wish to add to their investment may do so by making an election to participate in the Dividend Reinvestment Plan (the “Plan”). Under the Plan, your dividend is used to purchase shares on the open market whenever shares, including the related sales commission, are selling below the Fund’s per share. You will be charged a pro-rata portion of brokerage commissions on open-market purchases under the Plan. If the market price, including commission, is selling above the NAV, you will receive shares at a price equal to the higher of the NAV per share on the payment date or 95% of the closing market price on the payment date. Generally, for tax purposes, shareholders participating in the Plan will be treated as having received a distribution from the Fund in cash equal to the value of the shares purchased from them under the Plan.
To enroll in the Plan, if your shares are registered in your name, write to Computershare, P.O. Box #505000, Louisville, KY 40233, or call toll free at (866) 227-8179. If your shares are held by a brokerage firm, please call your broker. If you participate in the Plan through a broker, you may not be able to transfer your shares to another broker and continue to participate in the Plan if your new broker does not permit such participation. If you no longer want to participate in the Plan, please contact Computershare or your broker. You may elect to continue to hold shares previously purchased on your behalf or to sell your shares and receive the proceeds, net of any brokerage commissions. If you need additional information or assistance, please call our investor relations department at (877) 829-4768 or visit our website at www.tcw.com. As always, we would be pleased to accommodate your investment needs.
Distribution Policy
The Fund has a net investment income-based distribution policy. The policy is to pay quarterly distributions out of the Fund’s accumulated undistributed net investment income and/or other sources subject to the requirements of the 1940 Act and Sub-chapter M of the Code.
Distribution policies are a matter of Board discretion and may be modified or terminated at any time without prior notice. Any such change or termination may have an adverse effect on the market price for the Fund’s shares.
You should not draw any conclusions about the Fund’s investment performance from the amount of the quarterly distribution or from the terms of the Fund’s distribution policy.
37
TCW Strategic Income Fund, Inc.
TSIart9445 6/30/18
| Item 2. | Code of Ethics. |
Not required for this filing.
| Item 3. | Audit Committee Financial Expert. |
Not required for this filing.
| Item 4. | Principal Accountant Fees and Services. |
Not required for this filing.
| Item 5. | Audit Committee of Listed Registrants. |
Not required for this filing.
| Item 6. | Investments. |
| (a) | The Schedule of Investments is included as part of the Report to Shareholders filed under Item 1 of this Form N-CSR. |
| (b) | Not applicable. |
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
Not required for this filing.
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
Not required for this filing.
| Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
None.
| Item 10. | Submission of Matters to a Vote of Security Holders. |
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Directors.
| Item 11. | Controls and Procedures. |
| (a) | The Chief Executive Officer and Principal Financial and Accounting Officer have concluded that the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) provide reasonable assurances that material information relating to |
| the Registrant is made known to them by the appropriate persons as of a date within 90 days of the filing date of this report, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934, as amended. |
| (b) | There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
| Item 12. | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies. |
Not applicable.
| Item 13. | Exhibits. |
| (a)(1) | Not required for this filing. | |
| (a)(2) | EX-99.CERT – The certifications required by Rule 30a-2(a) of the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) are filed herewith. | |
| (a)(3) | Not applicable. | |
| (a)(4) | Not applicable. | |
| (b) | EX-99.906CERT – The certifications required by Rule 30a-2(b) of the 1940 Act and Section 906 of the Sarbanes-Oxley Act are filed herewith. | |
| (c) | Not required for this filing. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| (Registrant) | TCW Strategic Income Fund, Inc. | |
| By (Signature and Title) | /s/ David S. DeVito | |
| David S. DeVito | ||
| President and Chief Executive Officer | ||
| Date | August 10, 2018 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| By (Signature and Title) | /s/ David S. DeVito | |
| David S. DeVito | ||
| President and Chief Executive Officer | ||
| Date | August 10, 2018 | |
| By (Signature and Title) | /s/ Richard M. Villa | |
| Richard M. Villa | ||
| Treasurer and Principal Financial and Accounting Officer | ||
| Date | August 10, 2018 | |