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 811-21467
LMP Capital and Income Fund Inc.
(Exact name of registrant as specified in charter)
620 Eighth Avenue, 47th Floor, New York, NY 10018
(Address of principal executive offices) (Zip code)
George P. Hoyt
Franklin Templeton
100 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: 1-888-777-0102
Date of fiscal year end: November 30
Date of reporting period: May 31, 2022
| ITEM 1. | REPORT TO STOCKHOLDERS. |
The Semi-Annual Report to Stockholders is filed herewith.
| | |
| Semi-Annual Report | | May 31, 2022 |
LMP
CAPITAL AND INCOME
FUND INC. (SCD)
|
| INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE |
Managed Distribution Policy: The Fund’s Board of Directors (the “Board”) has authorized a managed distribution plan pursuant to which the Fund makes quarterly distributions to shareholders at a fixed rate of $0.2600 per common share, which rate may be adjusted from time to time by the Fund’s Board (the “Plan”). The Plan is intended to provide shareholders with a constant, but not guaranteed, fixed minimum rate of distribution each quarter. The Fund is managed with a goal of generating as much of the distribution as possible from net ordinary income and short-term capital gains, that is consistent with the Fund’s investment strategy and risk profile. To the extent that sufficient distributable income is not available on a quarterly basis, the Fund will distribute long-term capital gains and/or return of capital in order to maintain its managed distribution rate. A return of capital may occur, for example, when some or all of the money that was invested in the Fund is paid back to shareholders. A return of capital distribution does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income”. Even though the Fund may realize current year capital gains, such gains may be offset, in whole or in part, by the Fund’s capital loss carryovers from prior years.
The Board may amend the terms of the Plan or terminate the Plan at any time without prior notice to the Fund’s shareholders, however, at this time there are no reasonably foreseeable circumstances that might cause the termination of the Plan. The amendment or termination of the Plan could have an adverse effect on the market price of the Fund’s common shares. The Plan is subject to the periodic review by the Board to determine if an adjustment should be made.
Shareholders should not draw any conclusions about the Fund’s investment performance from the amount of the current distribution or from the terms of the Fund’s Plan. The Fund will send a Form 1099-DIV to shareholders for the calendar year that will describe how to report the Fund’s distributions for federal income tax purposes.
Fund objective
The Fund’s investment objective is total return with an emphasis on income.
The Fund may invest in a broad range of equity and fixed income securities of both U.S. and foreign issuers. The Fund will vary its allocation between equity and fixed income securities depending on the investment manager’s view of economic, market or political conditions, fiscal and monetary policy and security valuation.
| | |
| LMP Capital and Income Fund Inc. | | II |
Letter from the chairman
Dear Shareholder,
We are pleased to provide the semi-annual report of LMP Capital and Income Fund Inc. for the six-month reporting period ended May 31, 2022. Please read on for Fund performance information during the Fund’s reporting period.
Special shareholder notice
On July 26, 2022, the Fund announced that effective August 1, 2022, Patrick McElroy, CFA, will join the portfolio management team of the Fund. The Fund’s investment professionals at ClearBridge also include Peter Vanderlee, CFA, Mark McAllister, CFA and Tatiana Eades. It is anticipated that Mr. McAllister will retire and step down as a member of the Fund’s portfolio management team on or about December 31, 2022.
Mr. McElroy is a director and a portfolio manager at ClearBridge. Prior to joining ClearBridge in 2007, Mr. McElroy was a Convertible Securities Research Analyst for Palisade Capital Management, a Convertible Securities and Equities Research Analyst at Jefferies & Co. and a Research Associate for Fixed Income at Standard & Poor’s. Prior to that, he worked in Fixed Income Division Sales at Donaldson, Lufkin and Jenrette Securities. He has 29 years of investment industry experience.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.franklintempleton.com. Here you can gain immediate access to market and investment information, including:
| • | | Fund prices and performance, |
| • | | Market insights and commentaries from our portfolio managers, and |
| • | | A host of educational resources. |
| | |
III | | LMP Capital and Income Fund Inc. |
Letter from the chairman
We look forward to helping you meet your financial goals.
Sincerely,
Jane Trust, CFA
Chairman, President and Chief Executive Officer
June 30, 2022
| | |
| LMP Capital and Income Fund Inc. | | IV |
Performance review
For the six months ended May 31, 2022, LMP Capital and Income Fund Inc. returned 1.92% based on its net asset value (“NAV”)i and 0.17% based on its New York Stock Exchange (“NYSE”) market price per share. The Fund’s unmanaged benchmarks, the Bloomberg U.S. Aggregate Indexii and the S&P 500 Indexiii, returned -9.15% and -8.85%, respectively. The Lipper Income and Preferred Stock Closed-End Funds Category Averageiv returned -6.01% over the same time frame. Please note that Lipper performance returns are based on each fund’s NAV.
The Fund has adopted a managed distribution policy (the “Managed Distribution Policy”). Pursuant to this policy, the Fund intends to make regular quarterly distributions to common shareholders at a fixed rate per common share, which rate may be adjusted from time to time by the Fund’s Board of Directors. This policy has no impact on the Fund’s investment strategy and may reduce the Fund’s NAV. The Fund’s manager believes the policy helps maintain the Fund’s competitiveness and may benefit the Fund’s market price and premium/ discount to the Fund’s NAV.
During this six-month period, the Fund made distributions to shareholders totaling $0.52 per share. As of May 31, 2022, the Fund estimates that 20% of the distributions were sourced from net investment income and 80% constituted a return of capital.* The performance table shows the Fund’s six-month total return based on its NAV and market price as of May 31, 2022. Past performance is no guarantee of future results.
| | | | |
| Performance Snapshot as of May 31, 2022 (unaudited) | |
| Price Per Share | | 6-Month
Total Return** | |
| $ 15.72 (NAV) | | | 1.92 | %† |
| $ 13.81 (Market Price) | | | 0.17 | %‡ |
All figures represent past performance and are not a guarantee of future results. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.
** Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.
† Total return assumes the reinvestment of all distributions, including returns of capital, if any, at NAV.
‡ Total return assumes the reinvestment of all distributions, including returns of capital, if any, in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.
| * | This estimate is not for tax purposes. The Fund will issue a Form 1099 with final composition of the distributions for tax purposes after year-end. A return of capital is not taxable and results in a reduction in the tax basis of a shareholder’s investment. For more information about a distribution’s composition, please refer to the Fund’s distribution press release or, if applicable, the Section 19 notice located in the press release section of our website, www.franklintempleton.com. |
| | |
V | | LMP Capital and Income Fund Inc. |
Performance review (cont’d)
Looking for additional information?
The Fund is traded under the symbol “SCD” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available online under the symbol “XSCDX” on most financial websites. Barron’s and The Wall Street Journal’s Monday edition both carry closed-end fund tables that provide additional information.
In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.
Thank you for your investment in LMP Capital and Income Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.
Sincerely,
Jane Trust, CFA
Chairman, President and Chief Executive Officer
June 30, 2022
RISKS: The Fund is a non-diversified, closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objective. The Fund’s common stock is traded on the New York Stock Exchange. Similar to stocks, the Fund’s share price will fluctuate with market conditions and, at the time of sale, may be worth more or less than the original investment. Shares of closed-end funds often trade at a discount to their net asset value. Because the Fund is non-diversified, it may be more susceptible to economic, political or regulatory events than a diversified fund. The Fund’s investments are subject to a number of risks such as stock market and equity securities risk, MLP risk, fixed income securities risk, foreign investments risk, market events risk and portfolio management risk. Investments in MLP securities are subject to unique risks. The Fund’s concentration of investments in energy-related MLPs subjects it to the risks of MLPs and the energy sector, including the risks of declines in energy and commodity prices, decreases in energy demand, adverse weather conditions, natural or other disasters, changes in government regulation, and changes in tax laws. MLP distributions are not guaranteed and there is no assurance that all such distributions will be tax deferred. Stock and bond prices are subject to fluctuation. As interest rates rise, bond prices fall, reducing the value of the fixed income securities held by the Fund. Investing in foreign securities is subject to certain risks not associated with domestic investing, such as currency fluctuations and changes in political, social, and economic conditions. These risks are magnified in emerging or
| | |
| LMP Capital and Income Fund Inc. | | VI |
developing markets. Emerging market countries tend to have economic, political, and legal systems that are less developed and are less stable than those of more developed countries. The Fund may invest in lower-rated high-yield bonds or “junk bonds”, which are subject to greater liquidity and credit risk (risk of default) than higher-rated obligations. The repositioning of the Fund’s portfolio may increase a shareholder’s risk of loss associated with an investment in the Fund’s shares. Funds that invest in securities related to the real estate industry are subject to the risks of real estate markets, including fluctuating property values, changes in interest rates and other mortgage-related risks. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Leverage may result in greater volatility of NAV and the market price of common shares and increases a shareholder’s risk of loss. Dividends are not guaranteed, and a company may reduce or eliminate its dividend at any time. Distributions are not guaranteed and are subject to change. The Fund may also invest in money market funds, including funds affiliated with the Fund’s manager and subadviser.
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
| i | Net asset value (“NAV”) is calculated by subtracting total liabilities, including liabilities associated with financial leverage (if any), from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Fund’s market price as determined by supply of and demand for the Fund’s shares. |
| ii | The Bloomberg U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage-and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. |
| iii | The S&P 500 Index is an unmanaged index of the stocks of 500 leading companies, and is generally representative of the performance of larger companies in the U.S. |
| iv | Lipper, Inc., a wholly-owned subsidiary of Refinitiv, provides independent insight on global collective investments. Returns are based on the six-month period ended May 31, 2022, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 37 funds in the Fund’s Lipper category. |
| | |
VII | | LMP Capital and Income Fund Inc. |
Fund at a glance† (unaudited)
Investment breakdown (%) as a percent of total investments
| † | The bar graph above represents the composition of the Fund’s investments as of May 31, 2022 and November 30, 2021. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time. |
| | |
| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 1 |
Schedule of investments (unaudited)
May 31, 2022
LMP Capital and Income Fund Inc.
(Percentages shown based on Fund net assets)
| | | | | | | | |
| Security | | Shares | | | Value | |
| Common Stocks — 68.2% | | | | | | | | |
| Communication Services — 2.7% | | | | | | | | |
Diversified Telecommunication Services — 1.5% | | | | | | | | |
Verizon Communications Inc. | | | 78,590 | | | $ | 4,030,881 | |
Entertainment — 1.2% | | | | | | | | |
Activision Blizzard Inc. | | | 44,500 | | | | 3,465,660 | |
Total Communication Services | | | | | | | 7,496,541 | |
| Consumer Staples — 4.0% | | | | | | | | |
Beverages — 2.2% | | | | | | | | |
Coca-Cola Co. | | | 94,010 | | | | 5,958,354 | |
Household Products — 1.8% | | | | | | | | |
Kimberly-Clark Corp. | | | 16,030 | | | | 2,132,310 | (a) |
Procter & Gamble Co. | | | 19,860 | | | | 2,936,897 | (a) |
Total Household Products | | | | | | | 5,069,207 | |
Total Consumer Staples | | | | | | | 11,027,561 | |
| Energy — 3.1% | | | | | | | | |
Oil, Gas & Consumable Fuels — 3.1% | | | | | | | | |
DT Midstream Inc. | | | 51,700 | | | | 3,003,770 | |
Enbridge Inc. | | | 41,960 | | | | 1,936,454 | |
Williams Cos. Inc. | | | 96,740 | | | | 3,585,184 | (a) |
Total Energy | | | | | | | 8,525,408 | |
| Financials — 15.4% | | | | | | | | |
Banks — 3.0% | | | | | | | | |
Bank of America Corp. | | | 92,470 | | | | 3,439,884 | |
JPMorgan Chase & Co. | | | 36,280 | | | | 4,797,304 | |
Total Banks | | | | | | | 8,237,188 | |
Capital Markets — 8.9% | | | | | | | | |
Blackstone Inc. | | | 116,810 | | | | 13,759,050 | (a) |
Blue Owl Capital Inc. | | | 274,900 | | | | 3,447,246 | |
CME Group Inc. | | | 6,680 | | | | 1,328,184 | |
Intercontinental Exchange Inc. | | | 9,930 | | | | 1,016,733 | |
Trinity Capital Inc. | | | 292,600 | | | | 4,865,938 | |
Total Capital Markets | | | | | | | 24,417,151 | |
Diversified Financial Services — 0.5% | | | | | | | | |
Apollo Global Management Inc. | | | 22,810 | | | | 1,314,768 | (a) |
Insurance — 3.0% | | | | | | | | |
Assurant Inc. | | | 20,847 | | | | 3,683,457 | |
See Notes to Financial Statements.
| | |
| 2 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
LMP Capital and Income Fund Inc.
(Percentages shown based on Fund net assets)
| | | | | | | | |
| Security | | Shares | | | Value | |
Insurance — continued | | | | | | | | |
Chubb Ltd. | | | 11,990 | | | $ | 2,533,367 | |
Progressive Corp. | | | 17,800 | | | | 2,124,964 | (a) |
Total Insurance | | | | | | | 8,341,788 | |
Total Financials | | | | | | | 42,310,895 | |
| Health Care — 8.1% | | | | | | | | |
Biotechnology — 0.5% | | | | | | | | |
Amgen Inc. | | | 5,190 | | | | 1,332,481 | |
Life Sciences Tools & Services — 1.7% | | | | | | | | |
Danaher Corp. | | | 17,730 | | | | 4,677,528 | |
Pharmaceuticals — 5.9% | | | | | | | | |
Johnson & Johnson | | | 13,880 | | | | 2,491,877 | (a) |
Merck & Co. Inc. | | | 64,600 | | | | 5,945,138 | (a) |
Pfizer Inc. | | | 149,608 | | | | 7,935,208 | |
Total Pharmaceuticals | | | | | | | 16,372,223 | |
Total Health Care | | | | | | | 22,382,232 | |
| Industrials — 7.4% | | | | | | | | |
Aerospace & Defense — 3.2% | | | | | | | | |
Lockheed Martin Corp. | | | 9,878 | | | | 4,347,407 | (a) |
Raytheon Technologies Corp. | | | 47,010 | | | | 4,471,591 | (a) |
Total Aerospace & Defense | | | | | | | 8,818,998 | |
Air Freight & Logistics — 0.8% | | | | | | | | |
United Parcel Service Inc., Class B Shares | | | 12,060 | | | | 2,197,935 | (a) |
Electrical Equipment — 0.7% | | | | | | | | |
Emerson Electric Co. | | | 20,720 | | | | 1,837,035 | (a) |
Machinery — 2.7% | | | | | | | | |
Otis Worldwide Corp. | | | 54,610 | | | | 4,062,984 | |
Stanley Black & Decker Inc. | | | 27,830 | | | | 3,303,143 | (a) |
Total Machinery | | | | | | | 7,366,127 | |
Total Industrials | | | | | | | 20,220,095 | |
| Information Technology — 18.4% | | | | | | | | |
Communications Equipment — 1.6% | | | | | | | | |
Cisco Systems Inc. | | | 98,300 | | | | 4,428,415 | |
Electronic Equipment, Instruments & Components — 0.9% | | | | | | | | |
TE Connectivity Ltd. | | | 19,450 | | | | 2,516,635 | |
IT Services — 0.2% | | | | | | | | |
Paychex Inc. | | | 5,570 | | | | 689,733 | (a) |
Semiconductors & Semiconductor Equipment — 6.1% | | | | | | | | |
ASML Holding NV, Registered Shares | | | 2,660 | | | | 1,532,931 | |
Intel Corp. | | | 88,700 | | | | 3,940,054 | |
See Notes to Financial Statements.
| | |
| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 3 |
Schedule of investments (unaudited) (cont’d)
May 31, 2022
LMP Capital and Income Fund Inc.
(Percentages shown based on Fund net assets)
| | | | | | | | | | | | | | | | |
| Security | | | | | | | | Shares | | | Value | |
Semiconductors & Semiconductor Equipment — continued | | | | | | | | | | | | | | | | |
NXP Semiconductors NV | | | | | | | | | | | 12,940 | | | $ | 2,455,495 | |
QUALCOMM Inc. | | | | | | | | | | | 36,740 | | | | 5,261,903 | (a) |
Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | | | | | | | | | 16,420 | | | | 1,564,826 | |
Texas Instruments Inc. | | | | | | | | | | | 11,290 | | | | 1,995,620 | (a) |
Total Semiconductors & Semiconductor Equipment | | | | | | | | | | | | | | | 16,750,829 | |
Software — 6.0% | | | | | | | | | | | | | | | | |
Microsoft Corp. | | | | | | | | | | | 47,330 | | | | 12,867,607 | (a) |
NortonLifeLock Inc. | | | | | | | | | | | 49,520 | | | | 1,205,317 | (a) |
Oracle Corp. | | | | | | | | | | | 32,890 | | | | 2,365,449 | |
Total Software | | | | | | | | | | | | | | | 16,438,373 | |
Technology Hardware, Storage & Peripherals — 3.6% | | | | | | | | | | | | | | | | |
Apple Inc. | | | | | | | | | | | 65,530 | | | | 9,753,485 | (a) |
Total Information Technology | | | | | | | | | | | | | | | 50,577,470 | |
| Materials — 1.4% | | | | | | | | | | | | | | | | |
Chemicals — 1.4% | | | | | | | | | | | | | | | | |
Air Products & Chemicals Inc. | | | | | | | | | | | 5,960 | | | | 1,467,114 | |
Huntsman Corp. | | | | | | | | | | | 68,150 | | | | 2,470,437 | (a) |
Total Materials | | | | | | | | | | | | | | | 3,937,551 | |
| Real Estate — 5.7% | | | | | | | | | | | | | | | | |
Equity Real Estate Investment Trusts (REITs) — 5.7% | | | | | | | | | | | | | | | | |
Alexandria Real Estate Equities Inc. | | | | | | | | | | | 15,770 | | | | 2,617,031 | (a) |
American Tower Corp. | | | | | | | | | | | 7,190 | | | | 1,841,575 | (a) |
Crown Castle International Corp. | | | | | | | | | | | 4,880 | | | | 925,492 | |
Duke Realty Corp. | | | | | | | | | | | 17,500 | | | | 924,525 | |
Equinix Inc. | | | | | | | | | | | 3,210 | | | | 2,205,559 | (a) |
Equity LifeStyle Properties Inc. | | | | | | | | | | | 13,630 | | | | 1,031,791 | |
Gaming and Leisure Properties Inc. | | | | | | | | | | | 58,177 | | | | 2,723,847 | |
Prologis Inc. | | | | | | | | | | | 9,500 | | | | 1,211,060 | (a) |
SBA Communications Corp. | | | | | | | | | | | 6,260 | | | | 2,107,179 | |
Total Real Estate | | | | | | | | | | | | | | | 15,588,059 | |
| Utilities — 2.0% | | | | | | | | | | | | | | | | |
Electric Utilities — 0.5% | | | | | | | | | | | | | | | | |
NextEra Energy Inc. | | | | | | | | | | | 15,480 | | | | 1,171,681 | |
Multi-Utilities — 1.5% | | | | | | | | | | | | | | | | |
CenterPoint Energy Inc. | | | | | | | | | | | 66,990 | | | | 2,147,030 | |
Sempra Energy | | | | | | | | | | | 12,480 | | | | 2,044,973 | (a) |
Total Multi-Utilities | | | | | | | | | | | | | | | 4,192,003 | |
Total Utilities | | | | | | | | | | | | | | | 5,363,684 | |
Total Common Stocks (Cost — $118,323,080) | | | | | | | | | | | | | | | 187,429,496 | |
See Notes to Financial Statements.
| | |
| 4 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
LMP Capital and Income Fund Inc.
(Percentages shown based on Fund net assets)
| | | | | | | | | | | | | | |
| Security | | | | | | | Shares/Units | | | Value | |
| Master Limited Partnerships — 31.2% | | | | | | | | | | | | | | |
Diversified Energy Infrastructure — 12.7% | | | | | | | | | | | | | | |
Energy Transfer LP | | | | | | | | | 1,323,480 | | | $ | 15,431,777 | (a) |
Enterprise Products Partners LP | | | | | | | | | 503,280 | | | | 13,799,938 | (a) |
Plains GP Holdings LP, Class A Shares | | | | | | | | | 463,340 | | | | 5,541,546 | * |
Total Diversified Energy Infrastructure | | | | | | | | | | | | | 34,773,261 | |
Gathering/Processing — 1.3% | | | | | | | | | | | | | | |
Rattler Midstream LP | | | | | | | | | 214,190 | | | | 3,660,507 | (a) |
Global Infrastructure — 1.5% | | | | | | | | | | | | | | |
Brookfield Renewable Partners LP | | | | | | | | | 113,805 | | | | 4,047,980 | |
Liquids Transportation & Storage — 5.4% | | | | | | | | | | | | | | |
Magellan Midstream Partners LP | | | | | | | | | 202,280 | | | | 10,457,876 | (a) |
PBF Logistics LP | | | | | | | | | 267,730 | | | | 4,358,644 | (a) |
Total Liquids Transportation & Storage | | | | | | | | | | | | | 14,816,520 | |
Oil/Refined Products — 6.0% | | | | | | | | | | | | | | |
CrossAmerica Partners LP | | | | | | | | | 151,970 | | | | 3,413,246 | (a) |
MPLX LP | | | | | | | | | 188,500 | | | | 6,211,075 | (a) |
Sunoco LP | | | | | | | | | 165,300 | | | | 6,816,972 | (a) |
Total Oil/Refined Products | | | | | | | | | | | | | 16,441,293 | |
Petrochemicals — 2.3% | | | | | | | | | | | | | | |
Westlake Chemical Partners LP | | | | | | | | | 239,536 | | | | 6,347,704 | (a) |
Power Generation — 0.8% | | | | | | | | | | | | | | |
NextEra Energy Partners LP | | | | | | | | | 32,120 | | | | 2,301,398 | |
Propane — 1.2% | | | | | | | | | | | | | | |
Suburban Propane Partners LP | | | | | | | | | 200,000 | | | | 3,410,000 | (a) |
Total Master Limited Partnerships (Cost — $50,806,162) | | | | | | | | 85,798,663 | |
| | | | |
| | | | | Rate | | | Shares | | | | |
| Convertible Preferred Stocks — 13.7% | | | | | | | | | | | | | | |
| Communication Services — 2.7% | | | | | | | | | | | | | | |
Media — 1.3% | | | | | | | | | | | | | | |
Paramount Global, Non Voting Shares | | | | | 5.750 | % | | | 67,964 | | | | 3,455,290 | |
Wireless Telecommunication Services — 1.4% | | | | | | | | | | | | | | |
2020 Cash Mandatory Exchangeable Trust | | | | | 5.250 | % | | | 3,336 | | | | 3,816,242 | |
Total Communication Services | | | | | | | | | | | | | 7,271,532 | |
| Consumer Discretionary — 1.2% | | | | | | | | | | | | | | |
Auto Components — 1.2% | | | | | | | | | | | | | | |
Aptiv PLC, Non Voting Shares | | | | | 5.500 | % | | | 26,340 | | | | 3,247,722 | |
| Financials — 2.0% | | | | | | | | | | | | | | |
Capital Markets — 2.0% | | | | | | | | | | | | | | |
KKR & Co. Inc., Non Voting Shares | | | | | 6.000 | % | | | 80,500 | | | | 5,557,720 | |
See Notes to Financial Statements.
| | |
| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 5 |
Schedule of investments (unaudited) (cont’d)
May 31, 2022
LMP Capital and Income Fund Inc.
(Percentages shown based on Fund net assets)
| | | | | | | | | | | | | | | | |
| Security | | | | | Rate | | | Shares | | | Value | |
| Health Care — 0.1% | | | | | | | | | | | | | | | | |
Health Care Equipment & Supplies — 0.1% | | | | | | | | | | | | | | | | |
Boston Scientific Corp., Non Voting Shares | | | | | | | 5.500 | % | | | 2,819 | | | $ | 309,667 | |
| Information Technology — 3.8% | | | | | | | | | | | | | | | | |
Semiconductors & Semiconductor Equipment — 3.8% | | | | | | | | | | | | | | | | |
Broadcom Inc., Non Voting Shares | | | | | | | 8.000 | % | | | 5,736 | | | | 10,466,652 | |
| Utilities — 3.9% | | | | | | | | | | | | | | | | |
Electric Utilities — 1.5% | | | | | | | | | | | | | | | | |
NextEra Energy Inc. | | | | | | | 6.219 | % | | | 84,050 | | | | 4,122,652 | |
Gas Utilities — 1.2% | | | | | | | | | | | | | | | | |
South Jersey Industries Inc. | | | | | | | 8.750 | % | | | 31,190 | | | | 2,183,300 | |
Spire Inc. | | | | | | | 7.500 | % | | | 23,100 | | | | 1,258,026 | |
Total Gas Utilities | | | | | | | | | | | | | | | 3,441,326 | |
Multi-Utilities — 1.2% | | | | | | | | | | | | | | | | |
DTE Energy Co. | | | | | | | 6.250 | % | | | 61,080 | | | | 3,226,246 | |
Total Utilities | | | | | | | | | | | | | | | 10,790,224 | |
Total Convertible Preferred Stocks (Cost — $31,074,714) | | | | | | | | | | | | 37,643,517 | |
| Investments in Underlying Funds — 3.1% | | | | | | | | | | | | | | | | |
Ares Capital Corp. | | | | | | | | | | | 43,290 | | | | 838,960 | (a)(b) |
Barings BDC Inc. | | | | | | | | | | | 349,050 | | | | 3,616,158 | (a)(b) |
TriplePoint Venture Growth BDC Corp. | | | | | | | | | | | 263,491 | | | | 3,923,381 | (a)(b) |
Total Investments in Underlying Funds (Cost — $7,324,426) | | | | | | | | 8,378,499 | |
| | | | |
| | | Rate | | | Maturity
Date | | | Face
Amount | | | | |
| Convertible Bonds & Notes — 1.9% | | | | | | | | | | | | | | | | |
| Consumer Discretionary — 0.5% | | | | | | | | | | | | | | | | |
Hotels, Restaurants & Leisure — 0.5% | | | | | | | | | | | | | | | | |
Royal Caribbean Cruises Ltd., Senior Notes | | | 4.250 | % | | | 6/15/23 | | | $ | 1,250,000 | | | | 1,337,789 | |
| Industrials — 1.4% | | | | | | | | | | | | | | | | |
Airlines — 1.4% | | | | | | | | | | | | | | | | |
American Airlines Group Inc., Senior Notes | | | 6.500 | % | | | 7/1/25 | | | | 2,859,000 | | | | 3,840,389 | |
Total Convertible Bonds & Notes (Cost — $4,286,558) | | | | | | | | | | | | 5,178,178 | |
Total Investments before Short-Term Investments (Cost — $211,814,940) | | | | 324,428,353 | |
See Notes to Financial Statements.
| | |
| 6 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
LMP Capital and Income Fund Inc.
(Percentages shown based on Fund net assets)
| | | | | | | | | | | | | | | | |
| Security | | Rate | | | | | | Shares | | | Value | |
| Short-Term Investments — 3.6% | | | | | | | | | | | | | | | | |
JPMorgan 100% U.S. Treasury Securities Money Market Fund, Institutional Class (Cost — $9,711,975) | | | 0.610 | % | | | | | | | 9,711,975 | | | $ | 9,711,975 | |
Total Investments — 121.7% (Cost — $221,526,915) | | | | | | | | | | | | 334,140,328 | |
Liabilities in Excess of Other Assets — (21.7)% | | | | | | | | | | | | | | | (59,504,157 | ) |
Total Net Assets — 100.0% | | | | | | | | | | | | | | $ | 274,636,171 | |
| * | Non-income producing security. |
| (a) | All or a portion of this security is pledged as collateral pursuant to the loan agreement (Note 5). |
| (b) | Security is a business development company (Note 1). |
| | |
Abbreviation(s) used in this schedule: |
| |
| ADR | | — American Depositary Receipts |
See Notes to Financial Statements.
| | |
| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 7 |
Statement of assets and liabilities (unaudited)
May 31, 2022
| | | | |
| |
| Assets: | | | | |
Investments, at value (Cost — $221,526,915) | | $ | 334,140,328 | |
Foreign currency, at value (Cost — $2) | | | 2 | |
Cash | | | 611,969 | |
Dividends and interest receivable | | | 700,428 | |
Receivable for securities sold | | | 576,504 | |
Prepaid expenses | | | 349 | |
Total Assets | | | 336,029,580 | |
| |
| Liabilities: | | | | |
Loan payable (Note 5) | | | 61,000,000 | |
Investment management fee payable | | | 234,391 | |
Interest expense payable | | | 65,405 | |
Directors’ fees payable | | | 3,441 | |
Accrued expenses | | | 90,172 | |
Total Liabilities | | | 61,393,409 | |
| Total Net Assets | | $ | 274,636,171 | |
| |
| Net Assets: | | | | |
Par value ($0.001 par value; 17,468,653 shares issued and outstanding; 100,000,000 shares authorized) | | $ | 17,469 | |
Paid-in capital in excess of par value | | | 183,037,166 | |
Total distributable earnings (loss) | | | 91,581,536 | |
| Total Net Assets | | $ | 274,636,171 | |
| |
| Shares Outstanding | | | 17,468,653 | |
| |
| Net Asset Value | | | $15.72 | |
See Notes to Financial Statements.
| | |
| 8 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
Statement of operations (unaudited)
For the Six Months Ended May 31, 2022
| | | | |
| |
| Investment Income: | | | | |
Dividends | | $ | 4,316,250 | |
Interest | | | 99,956 | |
Less: Foreign taxes withheld | | | (26,611) | |
Total Investment Income | | | 4,389,595 | |
| |
| Expenses: | | | | |
Investment management fee (Note 2) | | | 1,442,124 | |
Interest expense (Note 5) | | | 304,181 | |
Legal fees | | | 46,373 | |
Directors’ fees | | | 45,751 | |
Audit and tax fees | | | 33,478 | |
Transfer agent fees | | | 28,309 | |
Fund accounting fees | | | 18,026 | |
Stock exchange listing fees | | | 6,233 | |
Shareholder reports | | | 5,463 | |
Franchise taxes | | | 2,279 | |
Commitment fees (Note 5) | | | 960 | |
Insurance | | | 691 | |
Custody fees | | | 590 | |
Miscellaneous expenses | | | 3,561 | |
Total Expenses | | | 1,938,019 | |
| Net Investment Income | | | 2,451,576 | |
| |
| Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions (Notes 1 and 3): | | | | |
Net Realized Gain (Loss) From: | | | | |
Investment transactions | | | 7,001,417 | |
Foreign currency transactions | | | (178) | |
Net Realized Gain | | | 7,001,239 | |
Change in Net Unrealized Appreciation (Depreciation) From: | | | | |
Investments | | | (4,290,296) | |
Foreign currencies | | | 909 | |
Change in Net Unrealized Appreciation (Depreciation) | | | (4,289,387) | |
| Net Gain on Investments and Foreign Currency Transactions | | | 2,711,852 | |
| Increase in Net Assets From Operations | | $ | 5,163,428 | |
See Notes to Financial Statements.
| | |
| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 9 |
Statements of changes in net assets
| | | | | | | | |
For the Six Months Ended May 31, 2022 (unaudited) and the Year Ended
November 30, 2021 | | 2022 | | | 2021 | |
| | |
| Operations: | | | | | | | | |
Net investment income | | $ | 2,451,576 | | | $ | 9,008,336 | |
Net realized gain | | | 7,001,239 | | | | 9,779,804 | |
Change in net unrealized appreciation (depreciation) | | | (4,289,387) | | | | 49,878,093 | |
Increase in Net Assets From Operations | | | 5,163,428 | | | | 68,666,233 | |
| | |
| Distributions to Shareholders From (Note 1): | | | | | | | | |
Total distributable earnings | | | (9,140,183) | | | | (9,314,359) | |
Return of capital | | | — | | | | (9,261,692) | |
Decrease in Net Assets From Distributions to Shareholders | | | (9,140,183) | | | | (18,576,051) | |
| | |
| Fund Share Transactions: | | | | | | | | |
Cost of shares repurchased (218,055 and 296,622 shares repurchased, respectively) (Note 7) | | | (3,153,725) | | | | (4,197,215) | |
Decrease in Net Assets From Fund Share Transactions | | | (3,153,725) | | | | (4,197,215) | |
Increase (Decrease) in Net Assets | | | (7,130,480) | | | | 45,892,967 | |
| | |
| Net Assets: | | | | | | | | |
Beginning of period | | | 281,766,651 | | | | 235,873,684 | |
End of period | | $ | 274,636,171 | | | $ | 281,766,651 | |
See Notes to Financial Statements.
| | |
| 10 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
Statement of cash flows (unaudited)
For the Six Months Ended May 31, 2022
| | | | |
| |
| Increase (Decrease) in Cash: | | | | |
| Cash Flows from Operating Activities: | | | | |
Net increase in net assets resulting from operations | | $ | 5,163,428 | |
Adjustments to reconcile net increase in net assets resulting from operations
to net cash provided (used) by operating activities: | | | | |
Purchases of portfolio securities | | | (31,530,190) | |
Sales of portfolio securities | | | 38,421,626 | |
Net purchases, sales and maturities of short-term investments | | | 1,548,785 | |
Net amortization of premium (accretion of discount) | | | 36,771 | |
Return of capital | | | 3,301,994 | |
Securities litigation proceeds | | | 2,585 | |
Increase in receivable for securities sold | | | (228,902) | |
Decrease in dividends and interest receivable | | | 218,196 | |
Decrease in prepaid expenses | | | 1,753 | |
Decrease in payable for securities purchased | | | (1,471,317) | |
Decrease in investment management fee payable | | | (12,698) | |
Decrease in Directors’ fees payable | | | (5,203) | |
Increase in interest expense payable | | | 50,098 | |
Increase in accrued expenses | | | 42,572 | |
Net realized gain on investments | | | (7,001,417) | |
Change in net unrealized appreciation (depreciation) of investments | | | 4,290,296 | |
Net Cash Provided in Operating Activities* | | | 12,828,377 | |
| |
| Cash Flows from Financing Activities: | | | | |
Distributions paid on common stock | | | (9,140,183) | |
Proceeds from loan facility borrowings | | | 61,000,000 | |
Repayment of loan facility borrowings | | | (61,000,000) | |
Payment for Fund shares repurchased | | | (3,153,725) | |
Net Cash Used by Financing Activities | | | (12,293,908) | |
| Net Increase in Cash and Restricted Cash | | | 534,469 | |
Cash and restricted cash at beginning of period | | | 77,502 | |
Cash and restricted cash at end of period | | $ | 611,971 | |
| * | Included in operating expenses is $254,083 paid for interest on borrowings. |
| | The following table provides a reconciliation of cash (including foreign currency) and restricted cash reported within the Statement of Assets and Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows. |
| | | | |
| | | May 31, 2022 | |
| Cash | | $ | 611,971 | |
| Restricted cash | | | — | |
| Total cash and restricted cash shown in the Statement of Cash Flows | | $ | 611,971 | |
See Notes to Financial Statements.
| | |
| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 11 |
Financial highlights
| | | | | | | | | | | | | | | | | | | | | | | | |
For a share of capital stock outstanding throughout each year ended November 30,
unless otherwise noted: | |
| | | 20221,2 | | | 20211 | | | 20201 | | | 20191 | | | 20181 | | | 20171 | |
| | | | | | |
| Net asset value, beginning of period | | | $15.93 | | | | $13.12 | | | | $15.60 | | | | $14.24 | | | | $15.34 | | | | $15.33 | |
| | | | |
| Income (loss) from operations: | | | | | | | | | | | | | | | | | |
Net investment income | | | 0.14 | | | | 0.50 | | | | 0.56 | | | | 0.44 | | | | 0.53 | | | | 0.47 | |
Net realized and unrealized gain (loss) | | | 0.15 | | | | 3.33 | | | | (1.80) | | | | 2.16 | | | | (0.39) | | | | 0.78 | |
Total income (loss) from operations | | | 0.29 | | | | 3.83 | | | | (1.24) | | | | 2.60 | | | | 0.14 | | | | 1.25 | |
| | | |
| Less distributions from: | | | | | | | | | | | | | |
Net investment income | | | (0.52) | 3 | | | (0.52) | | | | (0.46) | | | | (0.45) | | | | (0.54) | | | | (0.57) | |
Return of capital | | | — | | | | (0.52) | | | | (0.78) | | | | (0.79) | | | | (0.70) | | | | (0.67) | |
Total distributions | | | (0.52) | | | | (1.04) | | | | (1.24) | | | | (1.24) | | | | (1.24) | | | | (1.24) | |
Anti-dilutive impact of repurchase plan | | | 0.02 | 4 | | | 0.02 | 4 | | | — | | | | — | | | | — | | | | — | |
Capital contributions | | | — | | | | — | | | | 0.00 | 5 | | | — | | | | — | | | | — | |
| | | | | | |
| Net asset value, end of period | | | $15.72 | | | | $15.93 | | | | $13.12 | | | | $15.60 | | | | $14.24 | | | | $15.34 | |
| | | | | | |
| Market price, end of period | | | $13.81 | | | | $14.27 | | | | $11.33 | | | | $14.62 | | | | $12.42 | | | | $13.76 | |
Total return, based on NAV6,7 | | | 1.92 | % | | | 30.38 | % | | | (5.82) | %8 | | | 19.45 | % | | | 0.99 | % | | | 8.40 | % |
Total return, based on Market Price9 | | | 0.17 | % | | | 36.28 | % | | | (12.83) | % | | | 29.56 | % | | | (1.04) | % | | | 14.47 | % |
| | | | | | |
| Net assets, end of period (millions) | | | $275 | | | | $282 | | | | $236 | | | | $281 | | | | $256 | | | | $276 | |
| | | | | | |
| Ratios to average net assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Gross expenses | | | 1.39 | %10 | | | 1.33 | % | | | 1.65 | % | | | 2.18 | % | | | 2.18 | % | | | 1.80 | % |
Net expenses | | | 1.39 | 10 | | | 1.33 | | | | 1.65 | 11 | | | 2.11 | 11 | | | 2.18 | | | | 1.80 | |
Net investment income | | | 1.76 | 10 | | | 3.35 | | | | 4.40 | | | | 2.98 | | | | 3.62 | | | | 3.00 | |
| | | | | | |
| Portfolio turnover rate | | | 9 | % | | | 33 | % | | | 52 | % | | | 36 | % | | | 26 | % | | | 37 | % |
| | | | | | |
| Supplemental data: | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Outstanding, End of Period (000s) | | | $61,000 | | | | $61,000 | | | | $55,000 | | | | $82,000 | | | | $90,000 | | | | $90,000 | |
Asset Coverage Ratio for Loan Outstanding12 | | | 550 | % | | | 562 | % | | | 529 | % | | | 442 | % | | | 384 | % | | | 407 | % |
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding12 | | | $5,502 | | | | $5,619 | | | | $5,289 | | | | $4,421 | | | | $3,845 | | | | $4,065 | |
Weighted Average Loan (000s) | | | $61,000 | | | | $57,663 | | | | $62,973 | | | | $82,548 | | | | $90,000 | | | | $88,849 | |
Weighted Average Interest Rate on Loan | | | 0.99 | % | | | 0.79 | % | | | 1.44 | % | | | 2.98 | % | | | 2.63 | % | | | 1.72 | % |
See Notes to Financial Statements.
| | |
| 12 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | For the six months ended May 31, 2022 (unaudited). |
| 3 | The actual source of the Fund’s current fiscal year distributions may be from net investment income, return of capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year. |
| 4 | The repurchase plan was completed at an average repurchase price of $14.46 for 218,055 shares and $3,153,725 for the six months ended May 31, 2022 and $14.15 for 296,622 shares and $4,197,215 for the year ended November 30, 2021. |
| 5 | Amount represents less than $0.005 per share. |
| 6 | Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 7 | The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 8 | Includes the effect of a capital contribution. Absent the capital contribution, the total return would have been unchanged. |
| 9 | The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 11 | Reflects fee waivers and/or expense reimbursements. |
| 12 | Represents value of net assets plus the loan outstanding at the end of the period divided by the loan outstanding at the end of the period. |
See Notes to Financial Statements.
| | |
| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 13 |
Notes to financial statements (unaudited)
1. Organization and significant accounting policies
LMP Capital and Income Fund Inc. (the “Fund”) was incorporated in Maryland on November 12, 2003 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Board of Directors authorized 100 million shares of $0.001 par value common stock. The Fund’s investment objective is total return with an emphasis on income.
Under normal market conditions, the Fund seeks to maximize total return by investing at least 80% of its Managed Assets in a broad range of equity and fixed income securities of both U.S. and foreign issuers. The Fund will vary its allocation between equity and fixed income securities depending on ClearBridge’s view of economic, market or political conditions, fiscal and monetary policy and security valuation. The Fund may use leverage through borrowings in an aggregate amount of up to approximately 33 1/3% of the Fund’s total assets less all liabilities and indebtedness not represented by senior securities (for these purposes, “total net assets”) immediately after such borrowings. Furthermore, the Fund may use leverage through the issuance of preferred stock in an aggregate amount of liquidation preference attributable to the preferred stock combined with the aggregate amount of any borrowings of up to approximately 50% of the Fund’s total net assets immediately after such issuance.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services typically use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the
| | |
| 14 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Global Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information
| | |
| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 15 |
Notes to financial statements (unaudited) (cont’d)
generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are 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) |
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:
| | | | | | | | | | | | | | | | |
| ASSETS | |
| Description | | Quoted Prices
(Level 1) | | | Other Significant
Observable Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | Total | |
| Long-Term Investments†: | | | | | | | | | | | | | | | | |
Common Stocks | | $ | 187,429,496 | | | | — | | | | — | | | $ | 187,429,496 | |
Master Limited Partnerships | | | 85,798,663 | | | | — | | | | — | | | | 85,798,663 | |
Convertible Preferred Stocks: | | | | | | | | | | | | | | | | |
Communication Services | | | 3,455,290 | | | $ | 3,816,242 | | | | — | | | | 7,271,532 | |
Other Convertible Preferred Stocks | | | 30,371,985 | | | | — | | | | — | | | | 30,371,985 | |
Investments in Underlying Funds | | | 8,378,499 | | | | — | | | | — | | | | 8,378,499 | |
Convertible Bonds & Notes | | | — | | | | 5,178,178 | | | | — | | | | 5,178,178 | |
| Total Long-Term Investments | | | 315,433,933 | | | | 8,994,420 | | | | — | | | | 324,428,353 | |
| Short-Term Investments† | | | 9,711,975 | | | | — | | | | — | | | | 9,711,975 | |
| Total Investments | | $ | 325,145,908 | | | $ | 8,994,420 | | | | — | | | $ | 334,140,328 | |
| † | See Schedule of Investments for additional detailed categorizations. |
(b) Business development companies. The Fund may invest in securities of closed-end investment companies that have elected to be treated as a business development company under the 1940 Act. The Fund may purchase a business development company to gain exposure to the securities in the underlying portfolio. The risks of owning a business
| | |
| 16 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
development company generally reflect the risks of owning the underlying securities. Business development companies have expenses that reduce their value.
(c) Master limited partnerships. The Fund may invest without limit in the securities of both energy and non-energy Master Limited Partnerships (“MLPs”), so long as no more than 25% of the Fund’s total assets are invested in MLPs that are treated for U.S. federal tax purposes as qualified publicly traded partnerships. This 25% limitation applies generally to MLPs that focus on commodity and energy-related industries. Entities commonly referred to as “MLPs” are generally organized under state law as limited partnerships or limited liability companies. To be treated as a partnership for U.S. federal income tax purposes, an MLP whose units are traded on a securities exchange must receive at least 90% of its income from qualifying sources such as interest, dividends, real estate rents, gain from the sale or disposition of real property, income and gain from mineral or natural resources activities, income and gain from the transportation or storage of certain fuels, and, in certain circumstances, income and gain from commodities or futures, forwards and options with respect to commodities. Mineral or natural resources activities include exploration, development, production, processing, mining, refining, marketing and transportation (including pipelines) of oil and gas, minerals, geothermal energy, fertilizer, timber or industrial source carbon dioxide. An MLP consists of a general partner and limited partners (or in the case of MLPs organized as limited liability companies, a managing member and members). The general partner or managing member typically controls the operations and management of the MLP and has an ownership stake in the partnership. The limited partners or members, through their ownership of limited partner or member interests, provide capital to the entity, are intended to have no role in the operation and management of the entity and receive cash distributions. The MLPs themselves generally do not pay U.S. federal income taxes. Thus, unlike investors in corporate securities, direct MLP investors are generally not subject to double taxation (i.e., corporate level tax and tax on corporate dividends). Currently, most MLPs operate in the energy and/or natural resources sector.
The Fund, and entities in which the Fund invests, may be subject to audit by the Internal Revenue Service or other applicable tax authorities. The Fund’s taxable income or tax liability for prior taxable years could be adjusted if there is an audit of the Fund, or of any entity that is treated as a partnership for tax purposes in which the Fund holds an equity interest. The Fund may be required to pay a fund-level tax as a result of such an adjustment or may pay a “deficiency dividend” to its current shareholders in order to avoid a fund-level tax associated with the adjustment. The Fund could also be required to pay interest and penalties in connection with such an adjustment.
(d) Cash flow information. The Fund invests in securities and distributes dividends from net investment income and net realized gains, which are paid in cash and may be reinvested at the discretion of shareholders. These activities are reported in the Statements
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| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 17 |
Notes to financial statements (unaudited) (cont’d)
of Changes in Net Assets and additional information on cash receipts and cash payments is presented in the Statement of Cash Flows.
(e) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting from fluctuations 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 and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not
typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(f) Foreign investment risks. The Fund’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or may pay interest or dividends in foreign currencies, 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 affect the market and/or credit risk of the investments.
(g) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income (including interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. Foreign dividend income is recorded on the ex-dividend
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| 18 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
date or as soon as practicable after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(h) Return of capital estimates. Distributions received from the Fund’s investments in MLPs generally are comprised of income and return of capital and distributions received from the Fund’s investments in Real Estate Investment Trusts (“REITs”) generally are comprised of income, realized capital gains and return of capital. The Fund records investment income, realized capital gains and return of capital based on estimates made at the time such distributions are received. Such estimates are based on historical information available from each MLP or REIT and other industry sources. These estimates may subsequently be revised based on information received from the MLPs and REITs after their tax reporting periods are concluded.
(i) Partnership accounting policy. The Fund records its pro rata share of the income (loss) and capital gains (losses), to the extent of distributions it has received, allocated from the underlying partnerships and accordingly adjusts the cost basis of the underlying partnerships for return of capital. These amounts are included in the Fund’s Statement of Operations.
(j) Distributions to shareholders. Distributions from net investment income by the Fund, if any, are declared and paid on a quarterly basis. The actual source of the Fund’s current fiscal year distributions may be from net investment income, return of capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year. The Fund intends to distribute all of its net investment income earned each quarter and any cash received during the quarter from its investments in MLPs and REITs. The Fund intends to distribute the cash received from MLPs and REITs even if all or a portion of that cash may represent a return of capital to the Fund. The Fund may distribute additional amounts if required under the income tax regulations. Distributions of net realized gains, if any, are declared at least annually. Pursuant to its Managed Distribution Policy, the Fund intends to make regular quarterly distributions to shareholders at a fixed rate per common share, which rate may be adjusted from time to time by the Fund’s Board of Directors. Under the Fund’s Managed Distribution Policy, if, for any quarterly distribution, the value of the Fund’s net investment income and net realized capital gain is less than the amount of the distribution, the difference will be distributed from the Fund’s net assets (and may constitute a “return of capital”). The Board of Directors may modify, terminate or suspend the Managed Distribution Policy at any time, including when certain events would make part of the return of capital taxable to shareholders. Any such modification, termination or suspension could have an adverse effect on the market
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| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 19 |
Notes to financial statements (unaudited) (cont’d)
price of the Fund’s shares. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(k) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.
(l) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.
The Fund may invest without limit in the securities of MLPs, so long as no more than 25% of its total assets are invested in MLPs that are treated as qualified publicly traded partnerships for U.S. federal income tax purposes. As a limited partner in the MLPs, the Fund reports its allocable share of the MLP’s taxable income in computing its own taxable income. The distributions paid by the MLPs generally do not constitute income for tax purposes. Each MLP may allocate losses to the Fund which are generally not deductible in computing the Fund’s taxable income until such time as that particular MLP either generates income to offset those losses or the Fund disposes of units in that MLP. This may result in the Fund’s taxable income being substantially different than its book income in any given year. As a result, the Fund may have insufficient taxable income to support its distributions paid resulting in a return of capital to shareholders. A return of capital distribution is generally not treated as taxable income to shareholders and instead reduces a shareholder’s basis in their shares of the Fund.
Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of November 30, 2021, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.
(m) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share.
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| 20 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager. ClearBridge Investments, LLC (“ClearBridge”), Western Asset Management Company, LLC (“Western Asset”) and Western Asset Management Company Limited (“Western Asset London”) are the Fund’s subadvisers. LMPFA, ClearBridge, Western Asset and Western Asset London are indirect, wholly-owned subsidiaries of Franklin Resources, Inc. (“Franklin Resources”).
LMPFA provides administrative and certain oversight services to the Fund. The Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.85% of the Fund’s average daily net assets plus the proceeds of any outstanding borrowings used for leverage and any proceeds from the issuance of preferred stock (“Managed Assets”).
LMPFA delegates to the subadvisers the day-to-day portfolio management of the Fund. ClearBridge provides investment advisory services to the Fund by both determining the allocation of the Fund’s assets between equity and fixed income investments and performing the day-to-day management of the Fund’s investments in equity securities. Western Asset provides advisory services to the Fund by performing the day-to-day management of the Fund’s fixed income investments. For its services, LMPFA pays the subadvisers monthly 70% of the net management fee it receives from the Fund. This fee will be divided on a pro rata basis, based on assets allocated to each subadviser.
Western Asset London provides certain advisory services to the Fund relating to currency transactions and investments in non-U.S. dollar denominated securities. Western Asset London does not receive any compensation from the Fund. In turn, Western Asset pays Western Asset London monthly a subadvisory fee of 0.30% on the assets managed by Western Asset London.
During periods in which the Fund utilizes financial leverage, the fees paid to LMPFA will be higher than if the Fund did not utilize leverage because the fees are calculated as a percentage of the Fund’s assets, including those investments purchased with leverage.
All officers and one Director of the Fund are employees of Franklin Resources or its affiliates and do not receive compensation from the Fund.
3. Investments
During the six months ended May 31, 2022, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
| | | | |
| Purchases | | $ | 31,530,190 | |
| Sales | | | 38,421,626 | |
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| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 21 |
Notes to financial statements (unaudited) (cont’d)
At May 31, 2022, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:
| | | | | | | | | | | | | | | | |
| | | Cost | | | Gross
Unrealized
Appreciation | | | Gross
Unrealized
Depreciation | | | Net
Unrealized
Appreciation | |
| Securities | | $ | 221,526,915 | | | $ | 117,729,709 | | | $ | (5,116,296) | | | $ | 112,613,413 | |
4. Derivative instruments and hedging activities
During the six months ended May 31, 2022, the Fund did not invest in derivative instruments.
5. Loan
Effective May 6, 2022, the Fund entered into a Margin Loan and Security Agreement (the “Credit Agreement”) with Bank of America, N.A. (“BofA”) that allows the Fund to borrow up to an aggregate amount of $80,000,000 and renews daily for a 179-day term unless notice to the contrary is given to the Fund. The Fund pays interest on borrowings calculated based on SOFR plus applicable margin. The Fund pays a commitment fee on the unutilized portion of the loan commitment amount at an annual rate of 0.10% except that the commitment fee is 0.07% when the aggregate outstanding balance of the loan is equal to or greater than 50% of the maximum commitment amount. To the extent of the borrowing outstanding, the Fund is required to maintain collateral in a special custody account at the Fund’s custodian on behalf of BofA. The Fund’s Credit Agreement contains customary covenants that, among other things, may limit the Fund’s ability to pay distributions in certain circumstances, incur additional debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the 1940 Act. In addition, the Credit Agreement may be subject to early termination under certain conditions and may contain other provisions that could limit the Fund’s ability to utilize borrowing under the agreement. Interest expense related to the Credit Agreement for the period ended May 31, 2022 was $65,490. For the period ended May 31, 2022, the Fund incurred commitment fees of $960. For the period ended May 31, 2022, based on the number of days during the reporting period that the Fund had a loan balance outstanding, the average daily loan balance was $61,000,000 and the weighted average interest rate was 1.49%. At May 31, 2022, the Fund had $61,000,000 of borrowings outstanding.
Effective May 6, 2022, the Fund’s Credit Agreement for Margin Financing (the “BNY Credit Agreement”), assigned from Pershing LLC to The Bank of New York Mellon on March 14, 2022, was terminated. The BNY Credit Agreement allowed the Fund to borrow up to an aggregate amount of $110,000,000, subject to approval by BNYM, and renewed daily for a 180-day term unless notice to the contrary was given to the Fund. The Fund paid interest on borrowings calculated based on the Overnight Bank Funding Rate plus applicable margin.
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| 22 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
The Overnight Bank Funding Rate means the Overnight Bank Funding Rate as reported by the New York Federal Reserve in the FR2420 Report of Selected Money Market Rates or any successor report or website. To the extent of the borrowing outstanding, the Fund was required to maintain collateral in a special custody account at the Fund’s custodian on the behalf of BNYM. Interest expense related to the Prior Credit Agreement for the period ended May 6, 2022 was $238,776. For the period ended May 5, 2022, based on the number of days during the reporting period that the Fund had a loan balance outstanding, the Fund had an average daily loan balance outstanding of $61,000,000 and the weighted average interest rate was 0.92%.
6. Distributions subsequent to May 31, 2022
The following distribution has been declared by the Fund’s Board of Directors and is payable subsequent to the period end of this report:
| | | | | | | | |
| Record Date | | Payable Date | | | Amount | |
| 6/23/2022 | | | 7/1/2022 | | | $ | 0.2600 | |
7. Stock repurchase program
On November 16, 2015, the Fund announced that the Fund’s Board of Directors (the “Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts.
During the six months ended May 31, 2022, the Fund repurchased and retired 1.21% of its common shares outstanding under the repurchase plan. The weighted average discount per share on these repurchases was 10.13% for the six months ended May 31, 2022. During the year ended November 30, 2021, the Fund repurchased and retired 1.65% of its common shares outstanding under the repurchase plan. The weighted average discount per share on these repurchases was 8.41% for the year ended November 30, 2021. Shares repurchased and the corresponding dollar amount are included in the Statement of Changes in Net Assets. The anti-dilutive impact of these share repurchases is included in the Financial Highlights.
Since the commencement of the stock repurchase program through May 31, 2022, the Fund repurchased 514,677 shares or 2.86% of its common shares outstanding for a total amount of $7,350,940.
8. Deferred capital losses
As of November 30, 2021, the Fund had deferred capital losses of $14,139,682, which have no expiration date, that will be available to offset future taxable capital gains.
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| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 23 |
Notes to financial statements (unaudited) (cont’d)
9. Recent accounting pronouncement
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued ASU No. 2021-01, with further amendments to Topic 848. The amendments in the ASUs provide optional temporary accounting recognition and financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the LIBOR and other interbank-offered based reference rates as of the end of 2021 and 2023. The ASUs are effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has reviewed the requirements and believes the adoption of these ASUs will not have a material impact on the financial statements.
10. Other matters
The outbreak of the respiratory illness COVID-19 (commonly referred to as “coronavirus”) has continued to rapidly spread around the world, causing considerable uncertainty for the global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not known. The COVID-19 pandemic could adversely affect the value and liquidity of the Fund’s investments and negatively impact the Fund’s performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
* * *
The London Interbank Offered Rate, or “LIBOR,” the offered rate for short-term Eurodollar deposits between major international banks, is used extensively in the United States and globally as a reference rate in various financing and commercial transactions. On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, stated that it will cease the publication of the overnight and one-, three-, six- and twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023. All other LIBOR settings, including the one-week and two-month USD LIBOR settings, have ceased publication as of January 1, 2022. There remains uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the financial markets generally, transactions that use LIBOR as a reference rate and financial institutions that engage in such transactions, including issuers of securities in which the Fund invests. As such, the potential effect of a transition away from LIBOR on the Fund or the Fund’s investments cannot yet be determined.
* * *
On February 24, 2022, Russia engaged in military actions in the sovereign territory of Ukraine. The current political and financial uncertainty surrounding Russia and Ukraine may
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| 24 | | LMP Capital and Income Fund Inc. 2022 Semi-Annual Report |
increase market volatility and the economic risk of investing in securities in these countries and may also cause uncertainty for the global economy and broader financial markets. The ultimate fallout and long-term impact from these events are not known. The Fund will continue to assess the impact on valuations and liquidity and will take any potential actions needed in accordance with procedures approved by the Board of Directors.
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| LMP Capital and Income Fund Inc. 2022 Semi-Annual Report | | 25 |
Board approval of management and subadvisory agreements (unaudited)
Background
The Investment Company Act of 1940, as amended (the “1940 Act”), requires that the Board of Directors (the “Board”) of LMP Capital and Income Fund Inc. (the “Fund”), including a majority of its members who are not considered to be “interested persons” under the 1940 Act (the “Independent Directors”) voting separately, approve on an annual basis the continuation of the investment management agreement (the “Management Agreement”) between the Fund and the Fund’s manager, Legg Mason Partners Fund Advisor, LLC (the “Manager”), and the sub-advisory agreements (individually, a “Sub-Advisory Agreement,” and collectively, the “Sub-Advisory Agreements”) with the Manager’s affiliates, ClearBridge Investments, LLC (“ClearBridge”), Western Asset Management Company, LLC (“Western Asset”) and Western Asset Management Company Limited (“Western Asset London,” and with ClearBridge and Western Asset, collectively, the “Sub-Advisers”), with respect to the Fund.
At an in-person meeting (the “Contract Renewal Meeting”) held on May 10-11, 2022, the Board, including the Independent Directors, considered and approved the continuation of each of the Management Agreement and the Sub-Advisory Agreements for an additional one-year period. To assist in its consideration of the renewal of each of the Management Agreement and the Sub-Advisory Agreements, the Board received and considered extensive information (together with the information provided at the Contract Renewal Meeting, the “Contract Renewal Information”) about the Manager and the Sub-Advisers, as well as the management and sub-advisory arrangements for the Fund and the other closed-end funds in the same complex under the Board’s purview (the “Franklin Templeton/Legg Mason Closed-end Funds”), certain portions of which are discussed below.
A presentation made by the Manager and the Sub-Advisers to the Board at the Contract Renewal Meeting in connection with the Board’s evaluation of each of the Management Agreement and the Sub-Advisory Agreements encompassed the Fund and other Franklin Templeton/Legg Mason Closed-end Funds. In addition to the Contract Renewal Information, the Board received performance and other information throughout the year related to the respective services rendered by the Manager and the Sub-Advisers to the Fund. The Board’s evaluation took into account the information received throughout the year and also reflected the knowledge and experience gained as members of the Boards of the Fund and other Franklin Templeton/Legg Mason Closed-end Funds with respect to the services provided to the Fund by the Manager and the Sub-Advisers. The information received and considered by the Board (including its various committees) both in conjunction with the Contract Renewal Meeting and throughout the year was both written and oral. The contractual arrangements discussed below are the product of multiple years of review and negotiation and information received and considered by the Board during those years.
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| 26 | | LMP Capital and Income Fund Inc. |
At a meeting held by videoconference on April 19, 2022, the Independent Directors, in preparation for the Contract Renewal Meeting, met in a private session with their independent legal counsel to review the Contract Renewal Information regarding the Franklin Templeton/Legg Mason Closed-end Funds, including the Fund, received to date. No representatives of the Manager or the Sub-Advisers participated in this meeting. Following the April 19, 2022 meeting, the Independent Directors submitted certain questions and requests for additional information to management. The Independent Directors also met in private sessions with their independent legal counsel to consider the Contract Renewal Information and management’s responses to the Independent Directors’ questions and requests for additional information in advance of and during the Contract Renewal Meeting. The discussion below reflects all of these reviews.
The Manager provides the Fund with investment advisory and administrative services pursuant to the Management Agreement and the Sub-Advisers together provide the Fund with investment sub-advisory services pursuant to the Sub-Advisory Agreements. The discussion below covers both the advisory and administrative functions being rendered by the Manager, each such function being encompassed by the Management Agreement, and the investment sub-advisory functions being rendered by the Sub-Advisers pursuant to the Sub-Advisory Agreements.
Board Approval of Management Agreement and Sub-Advisory Agreements
The Independent Directors were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Directors received a memorandum discussing the legal standards for their consideration of the proposed continuation of the Management Agreement and the Sub-Advisory Agreements. The Independent Directors considered the Management Agreement and each Sub-Advisory Agreement separately in the course of their review. In doing so, they noted the respective roles of the Manager and the Sub-Advisers in providing services to the Fund.
In approving the continuation of the Management Agreement and Sub-Advisory Agreements, the Board, including the Independent Directors, considered a variety of factors, including those factors discussed below. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the continuation of the Management Agreement and the Sub-Advisory Agreements. Each Director may have attributed different weight to the various factors in evaluating the Management Agreement and the Sub-Advisory Agreements.
After considering all relevant factors and information, the Board, exercising its reasonable business judgment, determined that the continuation of the Management Agreement and Sub-Advisory Agreements were in the best interests of the Fund’s shareholders and approved the continuation of each such agreement for an additional one-year period.
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| LMP Capital and Income Fund Inc. | | 27 |
Board approval of management and subadvisory agreements (unaudited) (cont’d)
Nature, Extent and Quality of the Services under the Management Agreement and Sub-Advisory Agreements
The Board received and considered Contract Renewal Information regarding the nature, extent, and quality of services provided to the Fund by the Manager and the Sub-Advisers under the Management Agreement and the Sub-Advisory Agreements, respectively, during the past year. The Board noted information received at regular meetings throughout the year related to the services provided by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Sub-Advisers and the Fund’s other service providers. The Board observed that the scope of services provided by the Manager and the Sub-Advisers, and of the undertakings required of the Manager and Sub-Advisers in connection with those services, including maintaining and monitoring their own and the Fund’s compliance programs had expanded over time as a result of regulatory, market and other developments. The Board also noted that on a regular basis it received and reviewed information from the Manager and the Sub-Advisers regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the 1940 Act. The Board also considered the risks associated with the Fund borne by the Manager, the Sub-Advisers and their affiliates, including entrepreneurial, operational, reputational, litigation and regulatory risks, as well as the Manager’s and the Sub-Advisers’ risk management processes.
The Board reviewed the qualifications, backgrounds, and responsibilities of the Manager’s senior personnel and the Sub-Advisers’ portfolio management teams primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources of Franklin Resources, Inc., the parent organization of the Manager and the Sub-Advisers. The Board recognized the importance of having a fund manager with significant resources.
The Board considered the division of responsibilities between the Manager and the Sub-Advisers under the Management Agreement and the Sub-Advisory Agreements, respectively, including the Manager’s coordination and oversight of the services provided to the Fund by the Sub-Advisers and other fund service providers and Western Asset’s coordination and oversight of the services provided to the Fund by Western Asset London. The Management Agreement permits the Manager to delegate certain of its responsibilities, including its investment advisory duties thereunder, provided that the Manager, in each case, will supervise the activities of the delegee.
In reaching its determinations regarding continuation of the Management Agreement and the Sub-Advisory Agreements, the Board took into account that Fund stockholders, in pursuing their investment goals and objectives, may have purchased their shares of the
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| 28 | | LMP Capital and Income Fund Inc. |
Fund based upon the reputation and the investment style, philosophy and strategy of the Manager and the Sub-Advisers, as well as the resources available to the Manager and the Sub-Advisers.
The Board concluded that, overall, the nature, extent, and quality of the management and other services provided (and expected to be provided) to the Fund, under the Management Agreement and the Sub-Advisory Agreements were satisfactory.
Fund Performance
The Board received and considered information regarding Fund performance, including information and analyses (the “Broadridge Performance Information”) for the Fund, as well as for a group of funds (the “Performance Universe”) selected by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third-party provider of investment company data. The Board was provided with a description of the methodology Broadridge used to determine the similarity of the Fund with the funds included in the Performance Universe. It was noted that while the Board found the Broadridge Performance Information generally useful, they recognized its limitations, including that the data may vary depending on the end date selected, and that the results of the performance comparisons may vary depending on the selection of the peer group and its composition over time. The Board also noted that Board members had received and discussed with the Manager and the Sub-Advisers information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and against the Fund’s peers. In addition, the Board considered the Fund’s performance in view of overall financial market conditions.
The information comparing the Fund’s performance to that of its Performance Universe, consisting of the Fund and all leveraged closed-end income and preferred stock funds, regardless of asset size, showed, among other data, that based on net asset value per share, the Fund’s performance was above the median for the 1-, 3- and 5-year periods ended December 31, 2021, and was equal to the median for the 10-year period ended December 31, 2021. The Board noted the explanations from the Manager and the Sub-Advisers regarding the Fund’s relative performance versus the Performance Universe for the various periods.
Based on the reviews and discussions of Fund performance and considering other relevant factors, including those noted above, the Board concluded, under the circumstances, that continuation of the Management Agreement and the Sub-Advisory Agreements for an additional one-year period would be consistent with the interests of the Fund and its stockholders.
Management and Sub-Advisory Fees and Expense Ratios
The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) and the actual management fee (the “Actual Management Fee”)
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| LMP Capital and Income Fund Inc. | | 29 |
Board approval of management and subadvisory agreements (unaudited) (cont’d)
payable by the Fund to the Manager under the Management Agreement and the sub-advisory fees (the “Sub-Advisory Fees”) payable by the Manager to the Sub-Advisers under the Sub-Advisory Agreements in view of the nature, extent and overall quality of the management, investment advisory and other services provided by the Manager and the Sub-Advisers, respectively. The Board noted that the Sub-Advisory Fees payable to ClearBridge and Western Asset under their Sub-Advisory Agreements with the Manager are paid by the Manager, not the Fund, and, accordingly, that the retention of ClearBridge and Western Asset does not increase the fees or expenses otherwise incurred by the Fund’s stockholders. Similarly, the Board noted that the Sub-Advisory Fee payable to Western Asset London under its Sub-Advisory Agreement with Western Asset are paid by Western Asset, not the Fund, and, accordingly, that the retention of Western Asset London does not increase the fees or expenses otherwise incurred by the Fund’s stockholders.
In addition, the Board received and considered information and analyses prepared by Broadridge (the “Broadridge Expense Information”) comparing the Contractual Management Fee and the Actual Management Fee and the Fund’s total actual expenses with those of funds in an expense group (the “Expense Group”), as well as a broader group of funds, each selected and provided by Broadridge. The comparison was based upon the constituent funds’ latest fiscal years. It was noted that while the Board found the Broadridge Expense Information generally useful, they recognized its limitations, including that the data may vary depending on the selection of the peer group.
The Broadridge Expense Information showed that the Fund’s Contractual Management Fee was above the median. The Broadridge Expense Information also showed that the Fund’s Actual Management Fee was below the median on the basis of common share assets and above the median on the basis of leveraged assets. The Broadridge Expense Information also showed that the Fund’s actual total expenses were below the median based on both common share assets and leveraged assets. The Board took into account management’s discussion of the Fund’s expenses and noted the limited size of the Expense Group.
The Board also reviewed Contract Renewal Information regarding fees charged by the Manager and/or the Sub-Advisers to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, institutional and separate accounts. The Manager reviewed with the Board the differences in services provided to these different types of accounts, noting that the Fund is provided with certain administrative services, office facilities, and Fund officers, and that the Fund is subject not only to heightened regulatory requirements relative to institutional clients but also to requirements for listing on the New York Stock Exchange, and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Board considered the fee comparisons in view of the different services provided in managing these other types of clients and funds.
| | |
| 30 | | LMP Capital and Income Fund Inc. |
The Board considered the overall management fee, the fees of the Sub-Advisers and the amount of the management fee retained by the Manager after payment of the subadvisory fees in each case in view of the services rendered for those amounts. The Board also received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a framework of fees based on asset classes.
Taking all of the above into consideration, as well as the factors identified below, the Board determined that the management fee and the Sub-Advisory Fees were reasonable in view of the nature, extent and overall quality of the management, investment advisory and other services provided by the Manager and the Sub-Advisers to the Fund under the Management Agreement and the Sub-Advisory Agreements, respectively.
Manager Profitability
The Board, as part of the Contract Renewal Information, received an analysis of the profitability to the Manager and its affiliates in providing services to the Fund for the Manager’s fiscal years ended September 30, 2021 and September 30, 2020. The Board also received profitability information with respect to the Franklin Templeton/Legg Mason fund complex as a whole. In addition, the Board received Contract Renewal Information with respect to the Manager’s revenue and cost allocation methodologies used in preparing such profitability data. It was noted that the allocation methodologies had been reviewed by an outside consultant. The profitability to each of the Sub-Advisers was not considered to be a material factor in the Board’s considerations since the Sub-Advisory Fee is paid by the Manager in the case of ClearBridge and Western Asset and by Western Asset in the case of Western Asset London, not the Fund, although the Board noted the affiliation of the Manager with the Sub-Advisers. The profitability of the Manager and its affiliates was considered by the Board to be reasonable in view of the nature, extent and quality of services provided to the Fund.
Economies of Scale
The Board received and discussed Contract Renewal Information concerning whether the Manager realizes economies of scale if the Fund’s assets grow. The Board noted that because the Fund is a closed-end fund it has limited ability to increase its assets. The Board determined that the Management Fee structure was appropriate under the circumstances. For similar reasons as stated above with respect to the Sub-Advisers’ profitability and the costs of the Sub-Advisers’ provision of services, the Board did not consider the potential for economies of scale in the Sub-Advisers’ management of the Fund to be a material factor in the Board’s consideration of the Sub-Advisory Agreements.
Other Benefits to the Manager and the Sub-Advisers
The Board considered other benefits received by the Manager, the Sub-Advisers and their affiliates as a result of their relationship with the Fund, including the opportunity to offer
| | |
| LMP Capital and Income Fund Inc. | | 31 |
Board approval of management and subadvisory agreements (unaudited) (cont’d)
additional products and services to the Fund’s shareholders. In view of the costs of providing investment management and other services to the Fund and the ongoing commitment of the Manager and the Sub-Advisers to the Fund, the Board considered that the ancillary benefits that the Manager and its affiliates, including the Sub-Advisers, were reasonable.
| | |
| 32 | | LMP Capital and Income Fund Inc. |
Additional shareholder information (unaudited)
Results of annual meeting of shareholders
The Annual Meeting of Shareholders of LMP Capital and Income Fund Inc. was held on April 8, 2022, for the purpose of considering and voting upon the proposals presented at the Meeting. The following table provides information concerning the matters voted upon at the Meeting:
Election of Directors
| | | | | | | | | | | | |
| Nominees | | FOR | | | WITHHELD | | | ABSTAIN | |
| William R. Hutchinson | | | 14,282,865 | | | | 568,193 | | | | 204,975 | |
| Nisha Kumar | | | 14,298,624 | | | | 571,091 | | | | 186,318 | |
| Jane Trust | | | 14,223,493 | | | | 652,135 | | | | 180,405 | |
At May 31, 2022, in addition to William R. Hutchinson, Nisha Kumar and Jane Trust, the other Directors of the Fund were as follows:
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
Eileen A. Kamerick
Ratification of Selection of Independent Registered Public Accountants
To ratify the selection of PricewaterhouseCoopers LLP (“PwC”) as independent registered public accountants of the Fund for the fiscal year ended November 30, 2022.
| | | | |
| FOR | | AGAINST | | ABSTAIN |
| 14,636,025 | | 235,397 | | 184,611 |
| | |
| LMP Capital and Income Fund Inc. | | 33 |
Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and return of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stock-holders (the “Plan Agent”), in additional shares of Common Stock under the Fund’s Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare Trust Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date is not a NYSE trading day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close of trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the day prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e., opt-out) by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any dividend or distribution record date; otherwise such withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Stock.
| | |
34 | | LMP Capital and Income Fund Inc. |
Plan participants who sell their shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions in Common Stock. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional shares of Common Stock, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your account may be obtained from the Plan Agent at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151.
| | |
| LMP Capital and Income Fund Inc. | | 35 |
LMP
Capital and Income Fund Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive Officer
Christopher Berarducci
Treasurer and Principal Financial Officer
Fred Jensen
Chief Compliance Officer
George P. Hoyt
Secretary and Chief Legal Officer
Thomas C. Mandia*
Senior Vice President
Jeanne M. Kelly
Senior Vice President
LMP Capital and Income Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadvisers
ClearBridge Investments, LLC
Western Asset Management Company, LLC
Western Asset Management Company Limited
Custodian
The Bank of New York Mellon
Transfer agent
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher & Bartlett LLP
900 G Street NW
Washington, DC 20001
New York Stock Exchange Symbol
SCD
| * | Effective February 10, 2022, Mr. Mandia became a Senior Vice President. |
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’
privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Franklin Distributors, LLC, as well as Legg Mason-sponsored closed-end funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
| • | | Personal information included on applications or other forms; |
| • | | Account balances, transactions, and mutual fund holdings and positions; |
| • | | Bank account information, legal documents, and identity verification documentation; |
| • | | Online account access user IDs, passwords, security challenge question responses; and |
| • | | Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.). |
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with
affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law.
The Funds may disclose information about you to:
| • | | Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators; |
| • | | Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform statistical analysis, market research and marketing services solely for the Funds; |
| • | | Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators; |
| • | | The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators; |
| • | | Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust. |
|
| NOT PART OF THE SEMI-ANNUAL REPORT |
Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf, including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform. The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary, so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, if you have questions about the Funds’ privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.franklintempleton.com, or contact the Fund at 1-888-777-0102.
Revised April 2018
Legg Mason California Consumer Privacy Act Policy
Although much of the personal information we collect is “nonpublic personal information” subject to federal law, residents of California may, in certain circumstances, have additional rights under the California Consumer Privacy Act (“CCPA”). For example, if you are a broker,
|
| NOT PART OF THE SEMI-ANNUAL REPORT |
Legg Mason Funds Privacy and Security Notice (cont’d)
dealer, agent, fiduciary, or representative acting by or on behalf of, or for, the account of any other person(s) or household, or a financial advisor, or if you have otherwise provided personal information to us separate from the relationship we have with personal investors, the provisions of this Privacy Policy apply to your personal information (as defined by the CCPA).
| • | | In addition to the provisions of the Legg Mason Funds Security and Privacy Notice, you may have the right to know the categories and specific pieces of personal information we have collected about you. |
| • | | You also have the right to request the deletion of the personal information collected or maintained by the Funds. |
If you wish to exercise any of the rights you have in respect of your personal information, you should advise the Funds by contacting them as set forth below. The rights noted above are subject to our other legal and regulatory obligations and any exemptions under the CCPA. You may designate an authorized agent to make a rights request on your behalf, subject to the identification process described below. We do not discriminate based on requests for information related to our use of your personal information, and you have the right not to receive discriminatory treatment related to the exercise of your privacy rights.
We may request information from you in order to verify your identity or authority in making such a request. If you have appointed an authorized agent to make a request on your behalf, or you are an authorized agent making such a request (such as a power of attorney or other written permission), this process may include providing a password/passcode, a copy of government issued identification, affidavit or other applicable documentation, i.e. written permission. We may require you to verify your identity directly even when using an authorized agent, unless a power of attorney has been provided. We reserve the right to deny a request submitted by an agent if suitable and appropriate proof is not provided.
For the 12-month period prior to the date of this Privacy Policy, the Legg Mason Funds have not sold any of your personal information; nor do we have any plans to do so in the future.
Contact Information
Address: Data Privacy Officer, 100 International Dr., Baltimore, MD 21202
Email: DataProtectionOfficer@franklintempleton.com
Phone: 1-800-396-4748
Revised October 2020
|
| NOT PART OF THE SEMI-ANNUAL REPORT |
LMP Capital and Income Fund Inc.
LMP Capital and Income Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Forms N-PORT are available on the SEC’s website at www.sec.gov. To obtain information on Form N-PORT, shareholders can call the Fund at 1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) at www.franklintempleton.com and (3) on the SEC’s website at www.sec.gov.
Quarterly performance, semi-annual and annual reports, current net asset value and other information regarding the Fund may be found on Franklin Templeton’s website, which can be accessed at www.franklintempleton.com. Any reference to Franklin Templeton’s website in this report is intended to allow investors public access to information regarding the Fund and does not, and is not intended to, incorporate Franklin Templeton’s website in this report.
This report is transmitted to the shareholders of LMP Capital and Income Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
FD04219 7/22 SR22-4451
Not applicable.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Not applicable.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Not applicable.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable.
| ITEM 6. | SCHEDULE OF INVESTMENTS. |
Included herein under Item 1.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Effective August 1, 2022, Patrick McElroy will become a portfolio manager of the Fund.
| | | | |
NAME AND ADDRESS | | LENGTH OF TIME SERVED | | PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS |
Patrick McElroy, CFA Clearbridge 620 Eighth Avenue New York, NY 10018 | | Effective August 1, 2022 | | Co-portfolio manager of the fund; Director and Portfolio Manager with ClearBridge; Mr. McElroy has 29 years of investment industry experience. |
(a)(2): DATA TO BE PROVIDED BY FINANCIAL CONTROL
The following tables set forth certain additional information with respect to the above named fund’s investment professional responsible for the day-to-day management with other members of the Fund’s portfolio management team for the fund. Unless noted otherwise, all information is provided as of May 31, 2022.
Other Accounts Managed by Investment Professional
The table below identifies the number of accounts (other than the fund) for which the below named fund’s investment professional has day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.
| | | | | | | | | | |
Name of PM | | Type of Account | | Number of
Accounts
Managed | | Total Assets
Managed | | Number of
Accounts Managed
for which
Advisory Fee is
Performance-Based | | Assets Managed for
which
Advisory Fee is
Performance-Based |
Patrick McElroy | | Other Registered Investment Companies | | None | | None | | None | | None |
| | Other Pooled Vehicles | | None | | None | | None | | None |
| | Other Accounts | | 121 | | $70 million | | None | | None |
(a)(3): Portfolio Manager Compensation
Portfolio Manager Compensation (ClearBridge)
Potential Conflicts of Interest
In this subsection and the next subsection titled “Portfolio Manager Compensation Structure”, “Subadviser” refers to ClearBridge Investments, LLC.
Potential conflicts of interest may arise when the Fund’s portfolio managers also have day-to-day management responsibilities with respect to one or more other funds or other accounts, as is the case for the Fund’s portfolio managers.
The Subadviser and the Fund have adopted compliance policies and procedures that are designed to address various conflicts of interest that may arise for the Subadviser and the individuals that each employs. For example, the Subadviser seeks to minimize the effects of competing interests for the time and attention of portfolio managers by assigning portfolio managers to manage funds and accounts that share a similar investment style. The Subadviser has also adopted trade allocation procedures that are designed to facilitate the fair allocation of investment opportunities among multiple funds and accounts. There is no guarantee, however, that the policies and procedures adopted by the Subadviser and the Fund will be able to detect and/or prevent every situation in which an actual or potential conflict may appear. These potential conflicts include:
Allocation of Limited Time and Attention. A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.
Allocation of Investment Opportunities. If a portfolio manager identifies an investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit a fund’s ability to take full advantage of the investment opportunity. The Subadviser has adopted policies and procedures to ensure that all accounts, including the Fund, are treated equitably.
Pursuit of Differing Strategies. At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts.
Selection of Broker/Dealers. In addition to executing trades, some broker/dealers provide brokerage and research services (as those terms are defined in Section 28(e) of the 1934 Act), which may result in the payment of higher brokerage fees than might have otherwise been available. These services may be more beneficial to certain funds or accounts than to others. For this reason, the Subadviser has formed a brokerage committee that reviews, among other things, the allocation of brokerage to broker/dealers, best execution and soft dollar usage.
Variation in Compensation. A conflict of interest may arise where the financial or other benefits available to the portfolio manager differ among the funds and/or accounts that he or she manages. If the structure of the manager’s management fee (and the percentage paid to the Subadviser) differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others.
The portfolio manager might be motivated to favor funds and/or accounts in which he or she has an interest or in which the manager and/or its affiliates have interests. Similarly, the desire to maintain assets under management or to enhance the portfolio manager’s performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager.
Portfolio Manager Compensation Structure
The Subadviser’s portfolio managers participate in a competitive compensation program that is designed to attract and retain outstanding investment professionals and closely align the interests of its investment professionals with those of its clients and overall firm results. The total compensation program includes a significant incentive component that rewards high performance standards, integrity, and collaboration consistent with the firm’s values. Portfolio manager compensation is reviewed and modified each year as appropriate to reflect changes in the market and to ensure the continued alignment with the goals stated above. The Subadviser’s portfolio managers and other investment professionals receive a combination of base compensation and discretionary compensation, comprising a cash incentive award and deferred incentive plans described below.
Base salary compensation. Base salary is fixed and primarily determined based on market factors and the experience and responsibilities of the investment professional within the firm.
Discretionary compensation. In addition to base compensation managers may receive discretionary compensation.
Discretionary compensation can include:
| | • | | The Subadviser’s Deferred Incentive Plan (CDIP)—a mandatory program that typically defers 15% of discretionary year-end compensation into the Subadviser’s managed products. For portfolio managers, one-third of this deferral tracks the performance of their primary managed product, one-third tracks the performance of a composite portfolio of the firm’s new product and one-third can be elected to track the performance of one or more of the Subadviser’s managed funds. Consequently, portfolio managers can have two-thirds of their CDIP award tracking the performance of their primary managed products. For centralized research analysts, two-thirds of their deferral is elected to track the performance of one of more of Subadviser’s managed funds, while one-third tracks the performance of the new product composite. The Subadviser then makes a company investment in the proprietary managed funds equal to the deferral amounts by fund. This investment is a company asset held on the balance sheet and paid out to the employees in the shares subject to vesting requirements. |
| | • | | Franklin Resources Restricted Stock Deferral—a mandatory program that typically defers 5% of discretionary year-end compensation into Franklin Resources restricted stock. The award is paid out to employees in shares subject to vesting requirements. |
Several factors are considered by the Subadviser’s Senior Management when determining discretionary compensation for portfolio managers. These include but are not limited to:
| | • | | Investment performance. A portfolio manager’s compensation is linked to the pre-tax investment performance of the fund/accounts managed by the portfolio manager. Investment performance is calculated for 1-, 3-, and 5-year periods measured against the applicable product benchmark (e.g., a securities index and, with respect to a fund, the benchmark set forth in the Fund’s Prospectus) and relative to applicable industry peer groups. The greatest weight is generally placed on 3- and 5-year performance. |
| | • | | Appropriate risk positioning that is consistent with the Subadviser’s investment philosophy and the Investment Committee/CIO approach to generation of alpha. |
| | • | | Overall firm profitability and performance. |
| | • | | Amount and nature of assets managed by the portfolio manager. |
| | • | | Contributions for asset retention, gathering and client satisfaction. |
| | • | | Contribution to mentoring, coaching and/or supervising. |
| | • | | Contribution and communication of investment ideas in the Subadviser’s Investment Committee meetings and on a day to day basis. |
| | • | | Market compensation survey research by independent third parties. |
(a)(4): Portfolio Manager Securities Ownership
The table below identifies the dollar range of securities beneficially owned by each portfolio manager as of May 31, 2022.
| | | | |
Portfolio Manager(s) | | Dollar Range of
Portfolio
Securities
Beneficially
Owned | |
Patrick McElroy | | | A | |
Dollar Range ownership is as follows:
A: none
B: $1 - $10,000
C: 10,001 - $50,000
D: $50,001 - $100,000
E: $100,001 - $500,000
F: $500,001 - $1 million
G: over $1 million
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
| | | | | | | | | | | | | | | | |
| | | (a) | | | (b) | | | (c) | | | (d) | |
Period | | Total
Number
of Shares
Purchased | | | Average
Price Paid
per Share | | | Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs | | | Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs | |
December 1 through December 31 | | | 109,513 | | | $ | 14.67 | | | | 109,513 | | | | 1,392,198 | |
January 1 through January 31 | | | 9,785 | | | $ | 14.11 | | | | 9,785 | | | | 1,382,413 | |
February 1 through February 28 | | | 27,537 | | | $ | 13.97 | | | | 27,537 | | | | 1,354,876 | |
March 1 through March 31 | | | 0 | | | | 0 | | | | 0 | | | | 1,354,876 | |
April 1 through April 30 | | | 71,220 | | | $ | 14.39 | | | | 71,220 | | | | 1,283,656 | |
May 1 through May 31 | | | 0 | | | | 0 | | | | 0 | | | | 1,283,656 | |
Total | | | 218,055 | | | $ | 14.46 | | | | 218,055 | | | | 1,283,656 | |
On November 16, 2015, the Fund announced that the Fund’s Board of Directors (the “Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not applicable.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| | (a) | The registrant’s principal executive officer and principal financial 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”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
| | (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 second fiscal quarter of the period covered by this report that have materially affected, or are 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
(a) (1) Not applicable.
Exhibit 99.CODE ETH
(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.CERT
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.906CERT
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
LMP Capital and Income Fund Inc.
| | |
| |
| By: | | /s/ Jane Trust |
| | Jane Trust |
| | Chief Executive Officer |
| |
| Date: | | July 28, 2022 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | |
| By: | | /s/ Jane Trust |
| | Jane Trust |
| | Chief Executive Officer |
| |
| Date: | | July 28, 2022 |
| |
| By: | | /s/ Christopher Berarducci |
| | Christopher Berarducci |
| | Principal Financial Officer |
| |
| Date: | | July 28, 2022 |
