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 811-21333
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Nuveen Preferred and Convertible Income Fund 2
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(Exact name of registrant as specified in charter)
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
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(Address of principal executive offices) (Zip code)
Jessica R. Droeger
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
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(Name and address of agent for service)
Registrant's telephone number, including area code: (312) 917-7700
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2006
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL REPORT DECEMBER 31, 2006
NUVEEN INVESTMENTS
CLOSED-END
FUNDS
NUVEEN PREFERRED
AND CONVERTIBLE
INCOME FUND
JPC
NUVEEN PREFERRED
AND CONVERTIBLE
INCOME FUND 2
JQC
ATTRACTIVE MONTHLY DISTRIBUTIONS
FROM A PORTFOLIO OF
PREFERRED AND CONVERTIBLE
SECURITIES, DOMESTIC AND FOREIGN
EQUITIES, AND DEBT INSTRUMENTS
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NUVEEN LOGO
(TIMOTHY SCHWERTFEGER PHOTO)
Timothy R. Schwertfeger
Chairman of the Board
CHAIRMAN'S
LETTER TO SHAREHOLDERS
Dear Shareholder,
I am very pleased to report that over the twelve-month period covered by
this report, your Fund continued to provide you with attractive monthly
distributions from a diversified portfolio of quality preferred
securities, convertible securities, high yield debt and equities. For more
information on your Fund's performance, please read the Portfolio
Managers' Comments, the Distribution and Share Price Information, and the
Performance Overview sections of this report.
During 2006, the Board of Trustees' of each Fund authorized a series of
changes to the Funds' investment and distribution policies. These changes
were designed to enhance the Funds' ability to meet their investment
objectives by providing for increased portfolio management flexibility,
greater diversification, and increased capital appreciation potential over
time through direct equity exposure. I urge you to review the Investment
Strategy and Management Update section of this report for more detailed
information. Some of these changes will require shareholder approval and
you will receive proxy materials in the mail soon. I encourage you to read
the complete proxy statement and vote.
As you look through this report, be sure to review the inside front cover.
This contains information on how you can receive future Fund reports and
other Fund information faster by using e-mails and the Internet. Sign up
is quick and easy - just follow the step-by-step instructions.
At Nuveen Investments, our mission continues to be to assist you and your
financial advisor by offering investment services and products that can
help you to secure your financial objectives. We are grateful that you
have chosen us as a partner as you pursue your financial goals, and we
look forward to continuing to earn your trust in the months and years
ahead.
Sincerely,
(TIMOTHY SCHWERFEGER SIG)
Timothy R. Schwertfeger
Chairman of the Board
February 15, 2007
Nuveen Investments Closed-End Funds (JPC and JQC)
INVESTMENT STRATEGY AND MANAGEMENT
UPDATE
ON NOVEMBER 22, 2006, the Funds' Board of Trustees approved certain investment
policy changes designed to provide both Funds with greater flexibility to pursue
their investment objectives of high current income and total return. The
following changes were approved for each Fund:
- Eliminating the requirement to invest a minimum of each Fund's managed
assets in preferred and/or convertible securities
- Expanding the Funds' direct equity investment types to include both
domestic and international equities
- Increasing the percentage of the Funds' managed assets that may be
invested directly in equity securities
- Adding Tradewinds NWQ Global Investors, LLC, as a sub-adviser to manage a
portion of each Fund's direct equity investments, subject to shareholder
approval
Reflecting these enhancements, the Funds also plan to change their names to the
Nuveen Multi-Strategy Income and Growth Fund (JPC) and Nuveen Multi-Strategy
Income and Growth Fund 2 (JQC). The anticipated implementation date for these
changes is on or about April 11, 2007, assuming shareholder approval of
Tradewinds NWQ Global Investors, LLC as one of the Fund's sub-advisers.
Shareholders will receive more information and proxy materials for the upcoming
shareholder vote in the coming weeks.
ON APRIL 28, 2006, the Funds received authorization from their Board of Trustees
to expand the range of permissible investments and implement a managed
distribution policy. Symphony, which acts as sub-advisor for approximately 20%
of each Fund's portfolio, was allowed to diversify its debt investments across
high-yield bonds, senior loans and convertible securities, as well as invest up
to 10% of each Fund's portfolio in equity securities. These changes were
intended to better enable the Funds to meet their investment objectives and
provide for increased capital appreciation potential over time.
The investment parameters for the Funds' other sub-advisors, Spectrum and
Froley, Revy, did not change. Additionally, the Funds' new managed distribution
policy gives each Fund the flexibility to draw upon net investment income as
well as realized and unrealized portfolio gains and non-taxable returns of
principal when making its monthly distributions to common shareholders. See the
Distribution and Share Price Information section of this report immediately
following the Portfolio Manager's Comments for more details about this managed
distribution policy.
4
Nuveen Investments Closed-End Funds (JPC and JQC)
PORTFOLIO MANAGERS'
COMMENTS
In 2006, these Funds were subadvised by a team of specialists from Spectrum
Asset Management, Inc., (Spectrum) Froley, Revy Investment Co., Inc. (Froley,
Revy), and Symphony Asset Management LLC (Symphony), an affiliate of Nuveen
Investments.
Spectrum, an affiliate of Principal Capital(SM), manages the preferred
securities portion of each Fund's portfolio. Mark Lieb, Bernie Sussman and Phil
Jacoby, who have more than 50 years of combined experience in the preferred
securities markets, lead the team.
Froley, Revy, one of the oldest firms specializing in convertible securities,
manages that portion of each Fund's portfolio. Their investment team is led by
Andrea Revy O'Connell and Michael Revy, who each have more than 10 years
experience in convertible securities investing.
The Symphony team managing the high yield securities and other debt and equity
instruments in both Funds is led by Igor Lotsvin.
Here representatives from Spectrum; Froley, Revy; and Symphony talk about their
management strategies and the performance of both Funds for the 12-month period
ended December 31, 2006.
WHAT WERE THE GENERAL ECONOMIC AND MARKET CONDITIONS YOU FACED DURING THIS
ANNUAL REPORTING PERIOD ENDED DECEMBER 31, 2006?
In 2006, the U.S. economy benefited from increased flexibility stemming mainly
from productivity advancements and globalization, which seems to be reducing the
reliance on monetary policy actions to offset unexpected shocks. We began the
year still in the midst of a Federal Reserve Bank (Fed) tightening cycle. Our
departing Fed Chairman, Alan Greenspan warned, "History cautions that people
experiencing long periods of relative stability are prone to excess. We must
thus remain vigilant against complacency, especially since several important
economic challenges confront policymakers in the years ahead." Chairman
Greenspan's work was complete and Fed Chairman, Ben Bernanke, took the helm. By
June and after two full years of rate tightening, the Fed finally paused with
Fed Funds at 5.25%. The uncertainty of the Fed's actions throughout the year led
to a fair amount of volatility in the long end of the bond market as the 30-year
Treasury bond traded as high as 5.31% only to rally for the entire summer and
close the year at 4.81%, just 27 basis points cheaper than where it started in
January. The bond rally in the 2nd half of the year lead to a U.S. Treasury
yield curve inversion which is continuing for 7 months running now. In order to
put a perspective on yield curve inversions, note that the U.S. has experienced
5 inversions since the 1970s with the average length of time being 12 months and
the longest being 19 months. We do not think that this inversion will last too
much longer because, according to the Fed, "economic growth has slowed over the
course of the year, partly reflecting a substantial cooling of the housing
market." Notably, the extended housing market was a concern of the Fed and its
orderly cooling is indeed a policy victory. Nonetheless, Chairman Bernanke still
has lingering concerns over inflation risks even though the
5
pressures seem likely to moderate along with slowing aggregate demand around the
globe.
There were some very good buying opportunities in the preferred sleeves of the
Funds during the year. We were able to take advantage of several closed-end
funds that were under-priced and confusion in the hybrid preferred market due to
the National Association of Insurance Commissioners' (NAIC) classification of
several preferred structures as common equity. As about 25% of the hybrid
capital securities market was comprised of insurance company buyers
traditionally, the IPO market for institutional deals took a timeout in April
thanks to the NAIC, only to come back strong in May (continuing through
December) as it became evident that the buyer base went significantly beyond
insurance companies to newer buyers such as hedge funds and traditional
corporate bond. Even the $25 par preferred market has found new buyer breadth as
equity income and balanced funds are the latest institutional buyers competing
with retail. Overall, new issuance in hybrid-preferred securities set a record
of over $74 billion -- about 60% more than the issuance amount last year, which
at the time was also a record year.
Convertibles ended 2006 with positive returns and kept close pace with the
underlying equities. For 2006, the Merrill Lynch All Convertibles Index was up
12.8%, with the underlying equities up 14.7%. Mirroring the bond market, the
Speculative Grade Index outperformed the Investment Grade Index, posting a 13.8%
return for the year. Many of the fallen angels of 2005 ended up outperforming in
2006, in particular automotives and airlines. Convertibles across all sectors
performed well in 2006, with Materials (up 30.3%) the best performing sector.
High yield new issuance soared in 2006, helped by a large pickup in Leveraged
Buyout (LBO) activity. Landmark deals during the year included HCA, which agreed
to be acquired by a consortium of private equity investors for $33 billion in
July, and Freescale Semiconductor, which agreed to be purchased by private
equity group for $17.6 billion in September. The total new issue volume for the
twelve-month period was $114.8 billion, a $33.6 billion increase from 2005 new
issuance. While supply was large, there was plenty of demand in the market to
absorb it, especially from hedge funds.
6
WHAT WAS YOUR OVERALL MANAGEMENT STRATEGY FOR THE TWELVE-MONTH PERIOD ENDED
DECEMBER 31, 2006?
In 2006, the Funds continued to allocate their assets in order to maintain a
strategic asset mix of approximately 70% in income-oriented debt securities and
30% in equities and equity-like securities. (In response to market changes over
time, Nuveen Asset Management, together with the funds' sub-advisers, will
determine how best to allocate each fund's assets among the fund's sub-advisors,
consistent with the fund's objectives and strategic asset allocation target.)
PLEASE SEE THE INVESTMENT STRATEGY AND MANAGEMENT UPDATE FROM NUVEEN FOR MORE
INFORMATION REGARDING THE FUNDS' STRATEGY
HOW DID THE FUNDS PERFORM OVER THE TWELVE-MONTHS ENDED DECEMBER 31, 2006?
The performance of each Fund, as well as the performance of comparative
benchmark is shown below:
TOTAL RETURN ON NET ASSET VALUE
For the 12-month period ended December 31, 2006
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JPC 8.71%
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JQC 8.73%
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Comparative benchmark(1) 9.28%
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1 Comparative benchmark performance is a blended return consisting of: 1) 33% of
the Merrill Lynch Preferred Stock Hybrid Securities Index, an unmanaged index
of investment-grade, exchange traded preferred issues with outstanding market
values of at least $30 million and at least one year to maturity; 2) 27% of
the Lehman Tier 1 Capital Securities Index, an unmanaged index that includes
securities that can generally be viewed as hybrid fixed-income securities that
either receive regulatory capital treatment or a degree of "equity credit"
from a rating agency; 3) 30% of the Merrill Lynch All U.S. Convertibles Index,
consisting of approximately 575 securities with par value greater than $50
million that were issued by U.S. companies or non-U.S. based issuers that have
a significant business presence in the U.S.; and 4) 10% of the CSFB High Yield
Index, which includes approximately $375 billion of $US-denominated high yield
debt with a minimum of $75 million in par value and at least one rating below
investment-grade. Index returns do not include the effects of any management
fees or fund expenses. It is not possible to invest directly in an index.
--------------------------------------------------------------------------------
Past performance does not guarantee future results. Current performance may be
higher or lower than the data shown.
Returns do not reflect the deduction of taxes that a shareholder may have to pay
on Fund distributions or upon the sale of Fund shares.
For more information, please see the individual Performance Overview pages in
this report.
As indicated in the accompanying table, both Funds posted positive results for
the twelve-month period.
In the Preferred Securities sleeves of the Funds, we generally maintained the
60/40 portfolio mix between the $25 par preferred sector and the Capital
Securities sector. Dividends Received Deduction (DRDs) Tax-Advantaged securities
were sold as spreads tightened from the cheap positioning that took place in
2005. The sale proceeds were reinvested roughly equally in fully taxable $25 par
securities and in competitor closed-end funds (CEFs) that were priced at
discounts to their Net Asset Value trading price.
We continued to opportunistically increase the Funds' concentration in DRDs due
to the relative attractiveness of the sector that carried over from 2005 into
the first quarter of 2006. As the year progressed and spreads tightened while
other sectors widened, we took some profits with spreads as much as 85 basis
points tighter in order to redeploy proceeds into CEFs and newer hybrid issues.
We also switched from $25 par paper and capital securities that were soon
callable and into relatively cheap bullet capital securities and perpetual
preferreds where structure paid us well. We benefited from the capital
performance of the IPO market for floating rate DRD paper.
7
In the convertibles sleeve of JPC and JQC the Financials, Media, Transportation
and Utilities sectors benefited the portfolio relative to the index.
Financials represent the largest sector in the convertible universe at just
under 20%. Over the period, our exposure to financials in the Funds increased.
The fundamentals of the financial sector improved throughout the year and the
higher credit quality of the financial sector also contributed to our market
weight relative to the index. Relative to the ML All Convertibles Index, our
financial sector holdings have significantly lower investment value premiums,
making the sector very attractive.
Our superior convertible security selection in the Media sector also contributed
significantly to performance. The portfolios benefited from the Interpublic
Group floating rate issue as well as Walt Disney and Time Warner who were also
strong contributors to performance due to company specific issues. Technology
also benefited performance for the year. The portfolios had an equal weight
relative to the index, but our security selection again contributed to
performance. In addition, our overweight position in RF Micro Devices
contributed to total performance. Convertibles issued by Metlife, Alleghany, and
Merrill Lynch contributed to the portfolio's out-performance over the year.
In the high yield portion of the Funds, we continued to employ a value-oriented
strategy, focusing on relatively higher quality credits with strong fundamental
business models, more diversified revenue streams, strong asset coverage and
relatively low earnings volatility. We stayed away from positions with
escalating credit issues, limited upside potential, or significant downside risk
with weak asset protection.
The Funds had several positions that constrained performance over this reporting
period.
In the preferred sleeve of JPC and JQC while the added volatility in the
"enhanced equity" hybrid and Tier 1 spaces provided some trading opportunities
for the funds, it also slowed performance, as we were long the sector, as well.
We also made a decision to stop selling the callable hybrid securities because
it became unclear whether or not the issuers would have adequate incentive to
call them. As a result, the portfolio duration was consciously lower than our
benchmark and switches for lower yield and more duration became less attractive
than holding for high income and low duration. This served the primary income
objective very well, but the capital performance of the fund was a bit slower
than it likely would have been otherwise when spreads tightened in the second
half of the year.
8
Very similar to the first half of 2006, Consumer Discretionary performance
lagged ML All Convertibles Index due to an underweight in General Motors. In the
Materials sector, the Funds did not own Titanium Metals. The security is nearly
impossible to invest in; is highly illiquid and 65+% is held by the Chairman of
the company. However, behind the largest issues in the index (GM and Ford),
Titanium Metals added 30bps to the performance of the Index in 2006. Health Care
and Energy also detracted from total performance. Specific names that led to the
portfolio underperformance include Nabors Industries in the Energy sector and CV
Therapeutics in the Health Care sector. Both issues had a larger position in the
portfolio versus the index. In addition to the specific issues, the Health Care
sector relative to the broader index suffered from slight underperformance.
Another factor that hindered the benchmark-relative performance of the
portfolios' convertibles securities investments was the investment policies
limiting investments in CCC-rated securities to no more than 5% of a Fund's net
assets. The CCC-rated securities were up over 35% for the year in ML All
Convertibles Index and the inability to more fully participate in this sector
detracted from the overall performance of the Funds' allocation to convertible
securities.
In the high yield sleeve, our strategy of investing in higher quality names
allowed us to reduce the overall risk in the portfolio; however, it limited our
exposure to some of the upside in the high yield market from lower rated credits
which outperformed higher rated credits. Within the CS High Yield Index,
distressed credits returned close to 40%, CCC/Split CCC rated credits returned
close to 20%, B rated credits returned close to 11%, and BB rated credits
returned 8%.
9
DISTRIBUTION AND SHARE PRICE
INFORMATION
DISTRIBUTION INFORMATION
Each of these Funds issues FundPreferred(TM) shares and uses financial leverage
in an effort to enhance its distribution-paying capabilities. While this
strategy adds volatility to a Fund's net asset value and share price, it
generally enhances the amount of income the Fund has to distribute to its common
shareholders. The extent of this benefit is tied in part to the short-term rates
these Funds pay their FundPreferred shareholders. As short-term rates rose
through this reporting period, the Funds paid higher dividends to their
FundPreferred shareholders.
Effective with the distribution payable June 1, 2006, the Funds began
implementing a Managed Distribution Policy. Under this policy, the Funds will
make monthly distributions of a stated dollar amount per common share, comprised
of net investment income, realized capital gains and/or, if necessary,
non-taxable distributions (which generally are expected to represent unrealized
capital appreciation).
Over this twelve month reporting period, both JPC and JQC announced increases in
their monthly distribution to shareholders. JPC increased its monthly
distribution to $0.095 from $0.085 a share. JQC increased its monthly
distribution to $0.095 from $0.084 per share.
The goal of a managed distribution program is to provide shareholders relatively
consistent and predictable cash flow by systematically converting its expected
long-term return potential into regular monthly distributions. As a result,
regular distributions throughout the year will likely include a portion of
expected long-term gains (both realized and unrealized), along with net
investment income.
Important points to understand about the managed distribution program are:
- Each Fund seeks to establish a relatively stable distribution rate that
roughly corresponds to the projected total return from its investment
strategy over an extended period of time. However, you should not draw any
conclusions about the Fund's past or future investment performance from its
current distribution rate.
- Actual returns will differ from projected long-term returns (and therefore
the Fund's distribution rate), at least over shorter time periods. Over a
specific timeframe, the difference between actual returns and total
distributions will be reflected in an increasing (returns exceed
distributions) or a decreasing (distributions exceed returns) fund net asset
value.
10
- Each month's distributions are expected to be paid from some or all of the
following sources:
- net investment income (regular interest and dividends),
- realized capital gains, and
- unrealized gains, or, in certain cases, a return of principal
(non-taxable distributions)
- A non-taxable distribution is a payment of a portion of a Fund's capital.
When a Fund's returns exceed distributions, it may represent portfolio gains
generated, but not realized as a taxable capital gain. In periods when a
Fund's return falls short of distributions, it will represent a portion of
your original principal unless the shortfall is offset during other time
periods over the life of your investment (previous or subsequent) when the
fund's total return exceeds distributions.
- Because distribution source estimates are updated monthly during the year,
based on a Fund's performance and forecast for its current fiscal year
(which is the calendar year for each Fund), these estimates may differ from
both the tax information reported to you in your Fund's 1099 statement
provided at year end, as well as the ultimate economic sources of
distributions over the life of your investment.
The following table provides information regarding each Fund's distributions and
total return performance for the fiscal year ended December 31, 2006. The
distribution information is presented on a tax basis rather than on a generally
accepted accounting principles (GAAP) basis. This information is intended to
help you better understand whether the Fund's returns for the specified time
period was sufficient to meet each Fund's distributions. Information regarding
such distributions in the future will likely vary based on the Fund's investment
activities and portfolio investment value changes at that time.
11
DISTRIBUTION AND SHARE PRICE
INFORMATION (continued)
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AS OF 12/31/2006 JPC JQC
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Inception date 3/26/03 6/25/03
Calendar Year:
Per share distribution:
From net investment income $0.87 $0.93
From short-term capital gains $0.01 $0.01
From long-term capital gains $0.07 $0.08
From return of capital $0.15 $0.08
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Total per share distribution $1.10 $1.10
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Distribution rate on NAV 7.71% 7.70%
One-year total return on NAV 8.71% 8.73%
Annualized since inception total return on NAV 8.72% 7.95%
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SHARE REPURCHASE AND SHARE PRICE INFORMATION
On February 3, 2006, the Funds' Board of Trustees approved an open market share
repurchase program, as part of a broad, ongoing effort designed to support the
market prices of the Funds' common shares. Under the terms of the program, each
Fund may repurchase up to 10% of its outstanding common shares. As of December
31, 2006, JPC had repurchased 432,200 common shares and JQC had repurchased
511,200 common shares.
At the end of the reporting period, the Funds' share prices were trading
relative to their NAVs as shown in the accompanying table:
AS OF 12/31/06 12-MONTH AVERAGE
PREMIUM DISCOUNT DISCOUNT
-------------------------------------------------------------------------------
JPC 0.21% -8.91%
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JQC -1.26% -9.62%
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12
Nuveen Preferred and Convertible Income Fund
JPC
PERFORMANCE
OVERVIEW As of December 31, 2006
(PORTFOLIO ALLOCATION PIE CHART)
(as a % of total investments)
--------------------------------------------------------------------------------
$25 Par (or similar) Preferred Securities 32.8%
--------------------------------------------------------------------------------
Convertible Bonds 24.5%
--------------------------------------------------------------------------------
Capital Preferred Securities 19.5%
--------------------------------------------------------------------------------
Corporate Bonds 7.8%
--------------------------------------------------------------------------------
Common Stocks 6.7%
--------------------------------------------------------------------------------
Convertible Preferred Securities 5.8%
--------------------------------------------------------------------------------
Variable Rate Senior Loan Interests 1.3%
--------------------------------------------------------------------------------
Investment Companies 0.9%
--------------------------------------------------------------------------------
Short-Term Investments 0.7%
--------------------------------------------------------------------------------
(2006 MONTHLY DISTRIBUTIONS PER SHARE BAR CHART)
Jan 0.085
Feb 0.085
Mar 0.085
Apr 0.085
May 0.095
Jun 0.095
Jul 0.095
Aug 0.095
Sep 0.095
Oct 0.095
Nov 0.095
Dec 0.095
(SHARE PRICE PERFORMANCE CHART)
Past performances is not predictive of future results.
1/01/06 12.17
12.37
12.47
12.51
12.53
12.71
12.76
12.70
12.71
12.75
12.53
12.53
12.62
12.38
12.27
11.98
12.03
12.12
12.45
12.45
12.43
12.36
12.51
12.41
12.22
12.28
12.29
12.38
12.42
12.46
12.44
12.78
13.00
13.08
13.19
13.33
13.51
13.32
13.58
13.69
13.76
13.93
13.63
13.85
14.06
13.69
13.95
13.87
13.95
14.02
14.18
14.32
14.22
14.26
14.29
12/31/06 14.26
FUND SNAPSHOT
--------------------------------------------------------------------------------
Common Share Price $14.29
--------------------------------------------------------------------------------
Common Share Net Asset Value $14.26
--------------------------------------------------------------------------------
Premium/(Discount) to NAV 0.21%
--------------------------------------------------------------------------------
Current Distribution Rate(1) 7.98%
--------------------------------------------------------------------------------
Net Assets Applicable to Common Shares ($000) $1,421,951
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 3/26/03)
--------------------------------------------------------------------------------
ON SHARE PRICE ON NAV
--------------------------------------------------------------------------------
1-Year 29.81% 8.71%
--------------------------------------------------------------------------------
Since
Inception 8.07% 8.72%
--------------------------------------------------------------------------------
INDUSTRIES
(as a % of total investments)
--------------------------------------------------------------------------------
Commercial Banks 19.0%
--------------------------------------------------------------------------------
Insurance 10.7%
--------------------------------------------------------------------------------
Real Estate 10.4%
--------------------------------------------------------------------------------
Capital Markets 7.2%
--------------------------------------------------------------------------------
Media 5.5%
--------------------------------------------------------------------------------
Diversified Financial Services 4.8%
--------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels 2.5%
--------------------------------------------------------------------------------
Biotechnology 2.4%
--------------------------------------------------------------------------------
Thrifts & Mortgage Finance 2.3%
--------------------------------------------------------------------------------
Hotels, Restaurants & Leisure 2.1%
--------------------------------------------------------------------------------
Energy Equipment & Services 1.8%
--------------------------------------------------------------------------------
Aerospace & Defense 1.8%
--------------------------------------------------------------------------------
Pharmaceuticals 1.7%
--------------------------------------------------------------------------------
Diversified Telecommunication Services 1.7%
--------------------------------------------------------------------------------
Software 1.6%
--------------------------------------------------------------------------------
Semiconductors & Equipment 1.5%
--------------------------------------------------------------------------------
Computers & Peripherals 1.5%
--------------------------------------------------------------------------------
Communications Equipment 1.4%
--------------------------------------------------------------------------------
Health Care Equipment & Supplies 1.4%
--------------------------------------------------------------------------------
Electric Utilities 1.3%
--------------------------------------------------------------------------------
Health Care Providers & Services 1.3%
--------------------------------------------------------------------------------
Automobiles 1.2%
--------------------------------------------------------------------------------
Short-Term Investments 0.7%
--------------------------------------------------------------------------------
Other 14.2%
--------------------------------------------------------------------------------
TOP FIVE ISSUERS
(EXCLUDING SHORT-TERM INVESTMENTS)
(as a % of total investments)
--------------------------------------------------------------------------------
Wachovia Corporation 2.0%
--------------------------------------------------------------------------------
ING Group N.V. 1.7%
--------------------------------------------------------------------------------
Morgan Stanley 1.6%
--------------------------------------------------------------------------------
Union Planters Corporation 1.6%
--------------------------------------------------------------------------------
Countrywide Financial Corporation 1.5%
--------------------------------------------------------------------------------
1 Current Distribution Rate is based on the Fund's current annualized monthly
distribution divided by the Fund's current market price. The Fund's monthly
distributions to its shareholders may be comprised of ordinary income, net
realized capital gains and, if at the end of the calendar year the Fund's
cumulative net ordinary income and net realized gains are less than the amount
of the Fund's distributions, a return of capital for tax purposes.
13
Nuveen Preferred and Convertible Income Fund 2
JQC
PERFORMANCE
OVERVIEW As of December 31, 2006
(PORTFOLIO ALLOCATION PIE CHART)
(as a % of total investments)
--------------------------------------------------------------------------------
$25 Par (or similar) Preferred Securities 29.8%
--------------------------------------------------------------------------------
Convertible Bonds 24.6%
--------------------------------------------------------------------------------
Capital Preferred Securities 22.3%
--------------------------------------------------------------------------------
Corporate Bonds 8.4%
--------------------------------------------------------------------------------
Common Stocks 6.7%
--------------------------------------------------------------------------------
Convertible Preferred Securities 5.9%
--------------------------------------------------------------------------------
Variable Rate Senior Loan Interests 1.0%
--------------------------------------------------------------------------------
Investment Companies 0.9%
--------------------------------------------------------------------------------
Short-Term Investments 0.4%
--------------------------------------------------------------------------------
(2006 MONTHLY DISTRIBUTIONS PER SHARE BAR CHART)
Jan 0.084
Feb 0.084
Mar 0.084
Apr 0.084
May 0.095
Jun 0.095
Jul 0.095
Aug 0.095
Sep 0.095
Oct 0.095
Nov 0.095
Dec 0.095
(SHARE PRICE PERFORMANCE CHART)
Past performance is not predictive of future results.
1/01/06 12.18
12.43
12.49
12.50
12.44
12.49
12.64
12.55
12.57
12.58
12.30
12.38
12.43
12.34
12.26
11.97
12.02
12.10
12.38
12.35
12.32
12.37
12.52
12.47
12.27
12.26
12.28
12.38
12.44
12.41
12.49
12.74
13.02
13.15
13.22
13.32
13.46
13.29
13.54
13.68
13.69
13.87
13.64
13.80
13.90
13.62
13.91
13.89
13.93
14.05
14.27
14.29
14.22
14.07
14.11
12/31/06 14.29
FUND SNAPSHOT
--------------------------------------------------------------------------------
Common Share Price $14.11
--------------------------------------------------------------------------------
Common Share Net Asset Value $14.29
--------------------------------------------------------------------------------
Premium/(Discount) to NAV -1.26%
--------------------------------------------------------------------------------
Current Distribution Rate(1) 8.08%
--------------------------------------------------------------------------------
Net Assets Applicable to Common Shares ($000) $2,008,154
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 6/25/03)
--------------------------------------------------------------------------------
ON SHARE PRICE ON NAV
--------------------------------------------------------------------------------
1-Year 26.71% 8.73%
--------------------------------------------------------------------------------
Since
Inception 6.81% 7.95%
--------------------------------------------------------------------------------
INDUSTRIES
(as a % of total investments)
--------------------------------------------------------------------------------
Commercial Banks 18.8%
--------------------------------------------------------------------------------
Insurance 12.2%
--------------------------------------------------------------------------------
Real Estate 8.6%
--------------------------------------------------------------------------------
Capital Markets 6.8%
--------------------------------------------------------------------------------
Media 6.6%
--------------------------------------------------------------------------------
Diversified Financial Services 6.3%
--------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels 2.5%
--------------------------------------------------------------------------------
Biotechnology 2.4%
--------------------------------------------------------------------------------
Hotels, Restaurants & Leisure 2.1%
--------------------------------------------------------------------------------
Diversified Telecommunication Services 1.9%
--------------------------------------------------------------------------------
Energy Equipment & Services 1.8%
--------------------------------------------------------------------------------
Aerospace & Defense 1.8%
--------------------------------------------------------------------------------
Pharmaceuticals 1.7%
--------------------------------------------------------------------------------
Computers & Peripherals 1.5%
--------------------------------------------------------------------------------
Semiconductors & Equipment 1.5%
--------------------------------------------------------------------------------
Software 1.5%
--------------------------------------------------------------------------------
Communications Equipment 1.5%
--------------------------------------------------------------------------------
Health Care Equipment & Supplies 1.4%
--------------------------------------------------------------------------------
Automobiles 1.2%
--------------------------------------------------------------------------------
Thrifts & Mortgage Finance 1.2%
--------------------------------------------------------------------------------
Health Care Providers & Services 1.2%
--------------------------------------------------------------------------------
Short-Term Investments 0.4%
--------------------------------------------------------------------------------
Other 15.1%
--------------------------------------------------------------------------------
TOP FIVE ISSUERS
(EXCLUDING SHORT-TERM INVESTMENTS)
(as a % of total investments)
--------------------------------------------------------------------------------
Wachovia Corporation 2.1%
--------------------------------------------------------------------------------
JPMorgan Chase & Company 2.1%
--------------------------------------------------------------------------------
Merrill Lynch and Company Inc. 2.0%
--------------------------------------------------------------------------------
Citigroup Inc. 1.7%
--------------------------------------------------------------------------------
Washington Mutual 1.6%
--------------------------------------------------------------------------------
1 Current Distribution Rate is based on the Fund's current annualized monthly
distribution divided by the Fund's current market price. The Fund's monthly
distributions to its shareholders may be comprised of ordinary income, net
realized capital gains and, if at the end of the calendar year the Fund's
cumulative net ordinary income and net realized gains are less than the amount
of the Fund's distributions, a return of capital for tax purposes.
14
Report of
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
THE BOARD OF TRUSTEES AND SHAREHOLDERS
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND 2
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Nuveen Preferred and Convertible Income Fund
and Nuveen Preferred and Convertible Income Fund 2 (the "Funds") as of December
31, 2006, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Funds' internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Funds' internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2006, by correspondence with the custodian,
selling or agent banks and brokers or by other appropriate auditing procedures
where replies from selling or agent banks were not received. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of
Nuveen Preferred and Convertible Income Fund and Nuveen Preferred and
Convertible Income Fund 2 at December 31, 2006, the results of their operations
for the year then ended, changes in their net assets for each of the two years
in the period then ended, and the financial highlights for the periods indicated
therein in conformity with U.S. generally accepted accounting principles.
(ERNST & YOUNG LLP LOGO)
Chicago, Illinois
February 20, 2007
15
Nuveen Preferred and Convertible Income Fund (JPC)
Portfolio of
INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) VALUE
---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 10.0% (6.7% OF TOTAL INVESTMENTS)
AEROSPACE & DEFENSE - 0.3%
18,710 Boeing Company $ 1,662,196
18,626 Lockheed Martin Corporation 1,714,896
11,060 Orbital Sciences Corporation, (2) 203,946
---------------------------------------------------------------------------------------------------------------------------
Total Aerospace & Defense 3,581,038
--------------------------------------------------------------------------------------------------------------
AIR FREIGHT & LOGISTICS - 0.2%
20,032 FedEx Corporation 2,175,876
11,840 Ryder System Inc. 604,550
---------------------------------------------------------------------------------------------------------------------------
Total Air Freight & Logistics 2,780,426
--------------------------------------------------------------------------------------------------------------
BEVERAGES - 0.1%
25,300 Coca-Cola Company 1,220,725
8,306 Pepsi Bottling Group Inc. 256,738
---------------------------------------------------------------------------------------------------------------------------
Total Beverages 1,477,463
--------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY - 0.3%
14,790 Biogen Idec Inc., (2) 727,520
6,980 Cephalon, Inc., (2) 491,462
13,183 Genentech, Inc., (2) 1,069,537
21,878 Gilead Sciences, Inc., (2) 1,420,539
---------------------------------------------------------------------------------------------------------------------------
Total Biotechnology 3,709,058
--------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS - 0.2%
52,780 JPMorgan Chase & Co. 2,549,274
11,620 Lehman Brothers Holdings Inc. 907,754
---------------------------------------------------------------------------------------------------------------------------
Total Capital Markets 3,457,028
--------------------------------------------------------------------------------------------------------------
CHEMICALS - 0.2%
12,710 Air Products & Chemicals Inc. 893,259
18,270 Airgas, Inc. 740,300
19,640 Ashland Inc. 1,358,695
7,740 Sparetech Corporation 202,943
---------------------------------------------------------------------------------------------------------------------------
Total Chemicals 3,195,197
--------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 0.5%
21,980 Bank of Hawaii Corporation 1,185,821
14,630 Colonial BancGroup Inc. 376,576
7,394 Greater Bay Bancorp 194,684
18,730 Mellon Financial Corporation 789,470
9,530 Northern Trust Corporation 578,376
31,300 PNC Financial Services Group, Inc. 2,317,452
8,175 Sterling Bancshares Inc. 106,439
4,760 Umpqua Holdings Corporation 140,087
19,067 Washington Mutual, Inc. 867,358
---------------------------------------------------------------------------------------------------------------------------
Total Commercial Banks 6,556,263
--------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.6%
6,260 Administaff, Inc. 267,740
4,343 American Ecology Corporation 80,389
3,136 Consolidated Graphics Inc., (2) 185,244
27,420 Convergys Corporation, (2) 652,048
6,319 Corporate Executive Board Company 554,176
22,480 Corrections Corporation of America, (2) 1,016,770
27,909 Global Payments Inc. 1,292,187
9,930 ITT Educational Services, Inc., (2) 659,054
37,520 Republic Services, Inc. 1,525,938
31,520 SEI Investments Company 1,877,331
---------------------------------------------------------------------------------------------------------------------------
Total Commercial Services & Supplies 8,110,877
--------------------------------------------------------------------------------------------------------------
16
SHARES DESCRIPTION (1) VALUE
---------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 0.1%
83,360 Corning Incorporated, (2) $ 1,559,666
3,543 Harris Corporation 162,482
9,710 Polycom Inc., (2) 300,136
---------------------------------------------------------------------------------------------------------------------------
Total Communications Equipment 2,022,284
--------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.4%
18,441 Apple Computer, Inc., (2) 1,564,534
38,130 Hewlett-Packard Company 1,570,575
22,900 Lexmark International, Inc., (2) 1,676,280
36,563 Network Appliance Inc., (2) 1,436,195
---------------------------------------------------------------------------------------------------------------------------
Total Computers & Peripherals 6,247,584
--------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.1%
13,130 Capital One Financial Corporation 1,008,647
---------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED CONSUMER SERVICES - 0.0%
10,419 Jackson Hewitt Tax Services Inc. 353,933
---------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.2%
13,290 Alltel Corporation 803,779
25,420 AT&T Inc. 908,765
4,780 Cbeyond Inc., (2) 146,220
5,920 CT Communications, Inc. 135,686
62,880 Sprint Nextel Corporation 1,187,803
---------------------------------------------------------------------------------------------------------------------------
Total Diversified Telecommunication Services 3,182,253
--------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.3%
21,740 Great Plains Energy Incorporated 691,332
13,060 OGE Energy Corp. 522,400
34,950 PG&E Corporation 1,654,184
10,264 TXU Corporation 556,411
15,770 Xcel Energy, Inc. 363,656
---------------------------------------------------------------------------------------------------------------------------
Total Electric Utilities 3,787,983
--------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 0.2%
62,600 Emerson Electric Co. 2,760,034
4,244 Ormat Technologies Inc. 156,264
---------------------------------------------------------------------------------------------------------------------------
Total Electrical Equipment 2,916,298
--------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.3%
3,420 American Science & Engineering Inc., (2) 203,524
4,704 Itron Inc., (2) 243,855
53,460 MEMC Electronic Materials, (2) 2,092,424
9,308 Millipore Corporation, (2) 619,913
10,194 Plexus Corporation, (2) 243,433
10,387 Teledyne Technologies Inc., (2) 416,830
15,874 Waters Corporation, (2) 777,350
---------------------------------------------------------------------------------------------------------------------------
Total Electronic Equipment & Instruments 4,597,329
--------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES - 0.0%
7,170 Matrix Service Company, (2) 115,437
7,739 Unit Corporation, (2) 374,955
---------------------------------------------------------------------------------------------------------------------------
Total Energy Equipment & Services 490,392
--------------------------------------------------------------------------------------------------------------
FOOD & STAPLES RETAILING - 0.2%
36,880 Safeway Inc. 1,274,573
12,940 Whole Foods Market, Inc. 607,274
---------------------------------------------------------------------------------------------------------------------------
Total Food & Staples Retailing 1,881,847
--------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.3%
33,750 Campbell Soup Company 1,312,538
80,670 ConAgra Foods, Inc. 2,178,090
14,290 H.J. Heinz Company 643,193
13,340 McCormick and Company Inc. 514,390
---------------------------------------------------------------------------------------------------------------------------
Total Food Products 4,648,211
--------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.3%
77,410 Energen Corporation 3,633,625
11,940 Questar Corporation 991,617
---------------------------------------------------------------------------------------------------------------------------
Total Gas Utilities 4,625,242
--------------------------------------------------------------------------------------------------------------
17
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) VALUE
---------------------------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES - 0.3%
11,976 American Medical Systems Holdings, Inc., (2) $ 221,796
30,410 Baxter International Inc. 1,410,720
16,290 Dade Behring Holdings Inc. 648,505
7,072 Express Scripts, Inc., (2) 506,355
8,470 Hillenbrand Industries 482,197
26,480 Hospira Inc., (2) 889,198
5,642 Surmodics Inc., (2) 175,579
---------------------------------------------------------------------------------------------------------------------------
Total Health Care Equipment & Supplies 4,334,350
--------------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES - 0.3%
5,490 Centene Corporation, (2) 134,889
10,206 Healthways Inc., (2) 486,928
3,980 Humana Inc., (2) 220,134
5,630 Mentor Corporation 275,138
6,830 Nighthawk Radiology Holdings Inc., (2) 174,165
22,160 Quest Diagnostics Incorporated 1,174,480
29,703 Wellcare Health Plans Inc., (2) 2,046,537
---------------------------------------------------------------------------------------------------------------------------
Total Health Care Providers & Services 4,512,271
--------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 0.1%
30,756 Choice Hotels International, Inc. 1,294,828
11,334 Starbucks Corporation, (2) 401,450
---------------------------------------------------------------------------------------------------------------------------
Total Hotels, Restaurants & Leisure 1,696,278
--------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 0.1%
36,551 Newell Rubbermaid Inc. 1,058,151
11,780 Snap-on Incorporated 561,199
---------------------------------------------------------------------------------------------------------------------------
Total Household Durables 1,619,350
--------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS - 0.2%
37,900 Colgate-Palmolive Company 2,472,596
13,297 Kimberly-Clark Corporation 903,531
---------------------------------------------------------------------------------------------------------------------------
Total Household Products 3,376,127
--------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.1%
17,550 NRG Energy Inc., (2) 982,976
---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 0.1%
21,130 General Electric Company 786,247
2,720 Teleflex Inc. 175,603
---------------------------------------------------------------------------------------------------------------------------
Total Industrial Conglomerates 961,850
--------------------------------------------------------------------------------------------------------------
INSURANCE - 0.6%
36,445 AFLAC Incorporated 1,676,470
34,663 HCC Insurance Holdings Inc. 1,112,336
45,317 Philadelphia Consolidated Holding Corporation, (2) 2,019,326
5,064 Tower Group Inc. 157,338
104,440 W.R. Berkley Corporation 3,604,224
---------------------------------------------------------------------------------------------------------------------------
Total Insurance 8,569,694
--------------------------------------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL - 0.0%
2,806 Coldwater Creek Inc., (2) 68,803
---------------------------------------------------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES - 0.1%
5,630 F5 Networks, Inc., (2) 417,802
1,236 Google Inc., Class A, (2) 569,153
---------------------------------------------------------------------------------------------------------------------------
Total Internet Software & Services 986,955
--------------------------------------------------------------------------------------------------------------
IT SERVICES - 0.0%
11,022 Websense Inc., (2) 251,632
---------------------------------------------------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS - 0.0%
15,710 Marvel Entertainment Inc., (2) 422,756
---------------------------------------------------------------------------------------------------------------------------
LIFE SCIENCES TOOLS & SERVICES - 0.0%
2,500 Illumina Inc., (2) 98,275
---------------------------------------------------------------------------------------------------------------------------
MACHINERY - 0.2%
5,440 Flow International Corporation, (2) 59,949
2,147 Freightcar America Inc. 119,051
9,883 Harsco Corporation 752,096
7,130 Joy Global Inc. 344,664
18
SHARES DESCRIPTION (1) VALUE
---------------------------------------------------------------------------------------------------------------------------
MACHINERY (continued)
5,720 Paccar Inc. $ 371,228
10,857 Parker Hannifin Corporation 834,686
2,650 Robbins & Myers, Inc. 121,688
10,780 Terex Corporation, (2) 696,172
---------------------------------------------------------------------------------------------------------------------------
Total Machinery 3,299,534
--------------------------------------------------------------------------------------------------------------
MEDIA - 0.5%
9,484 Comcast Corporation, Class A, (2) 401,458
33,460 DIRECTV Group, Inc., (2) 834,492
19,277 John Wiley and Sons Inc., Class A 741,586
10,640 Liberty Global Inc., A Shares, (2) 310,156
10,640 Liberty Global Inc., Class C, (2) 297,920
5,731 Lodgenet Entertainment Corporation, (2) 143,447
43,840 McGraw-Hill Companies, Inc. 2,981,997
7,900 NetFlix.com Inc., (2) 204,294
57,760 Time Warner Inc. 1,258,013
---------------------------------------------------------------------------------------------------------------------------
Total Media 7,173,363
--------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.0%
3,280 Compass Minerals International, Inc. 103,517
---------------------------------------------------------------------------------------------------------------------------
MULTILINE RETAIL - 0.3%
21,400 Big Lots Inc., (2) 490,488
30,360 Dollar Tree Stores Inc., (2) 913,836
34,780 Kohl's Corporation, (2) 2,379,995
---------------------------------------------------------------------------------------------------------------------------
Total Multiline Retail 3,784,319
--------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 0.4%
4,640 Bill Barnett Corporation, (2) 126,254
8,320 Cabot Oil & Gas Corporation 504,608
24,520 EOG Resources, Inc. 1,531,274
5,920 Equitable Resources Inc. 247,160
4,490 Houston Exploration Company, (2) 232,492
7,436 Pioneer Drilling Company, (2) 98,750
6,450 St Mary Land and Exploration Company 237,618
20,405 Sunoco, Inc. 1,272,456
11,472 Valero Energy Corporation 586,908
36,172 W&T Offshore Inc. 1,111,204
---------------------------------------------------------------------------------------------------------------------------
Total Oil, Gas & Consumable Fuels 5,948,724
--------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS - 0.1%
18,590 Plum Creek Timber Company 740,812
---------------------------------------------------------------------------------------------------------------------------
PERSONAL PRODUCTS - 0.2%
5,200 NBTY Inc., (2) 216,164
16,790 Nutri System Inc., (2) 1,064,318
---------------------------------------------------------------------------------------------------------------------------
Total Personal Products 1,280,482
--------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.2%
9,170 Abraxis Bioscience Inc., (2) 250,708
9,930 Allergan Inc. 1,189,018
7,530 Johnson & Johnson 497,131
10,550 Merck & Co. Inc. 459,980
5,150 New River Pharmaceuticals Inc., (2) 281,757
8,070 Pozen Inc., (2) 137,109
---------------------------------------------------------------------------------------------------------------------------
Total Pharmaceuticals 2,815,703
--------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.3%
5,110 American Home Mortgage Investment Corp. 179,463
9,950 Camden Property Trust 734,808
9,091 Equity Inns Inc. 145,092
8,200 Health Care Property Investors Inc. 301,924
6,286 LaSalle Hotel Properties 288,213
11,830 Northstar Realty Finance Corporation 196,023
8,196 Public Storage, Inc. 799,110
5,981 SL Green Realty Corporation 794,157
10,381 Tanger Factory Outlet Centers 405,689
1,903 Taubman Centers Inc. 96,787
9,703 United Dominion Realty Trust 308,458
---------------------------------------------------------------------------------------------------------------------------
Total Real Estate 4,249,724
--------------------------------------------------------------------------------------------------------------
19
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) VALUE
---------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 0.2%
12,736 Advanced Micro Devices, Inc., (2) $ 259,178
125,820 Micron Technology, Inc., (2) 1,756,447
25,710 National Semiconductor Corporation 583,617
20,950 Trident Microsystems Inc., (2) 380,871
---------------------------------------------------------------------------------------------------------------------------
Total Semiconductors & Equipment 2,980,113
--------------------------------------------------------------------------------------------------------------
SOFTWARE - 0.5%
3,070 Ansys Inc., (2) 133,514
8,005 Aspen Technology Inc., (2) 88,215
33,919 Autodesk, Inc., (2) 1,372,363
10,908 Blackbaud, Inc. 283,608
66,940 BMC Software Inc., (2) 2,155,468
35,010 Intuit Inc., (2) 1,068,155
37,820 Salesforce.com, Inc., (2) 1,378,539
---------------------------------------------------------------------------------------------------------------------------
Total Software 6,479,862
--------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.3%
48,200 American Eagle Outfitters, Inc. 1,504,322
9,700 Ann Taylor Stores Corporation, (2) 318,548
5,196 Build-A-Bear-Workshop, Inc., (2) 145,592
2,686 Childrens Place Retail Stores Inc., (2) 170,615
4,700 Dick's Sporting Goods Inc., (2) 230,253
4,730 Gymboree Corporation, (2) 180,497
12,100 Office Depot, Inc., (2) 461,857
8,750 PetSmart Inc. 252,525
25,244 Staples, Inc. 674,015
---------------------------------------------------------------------------------------------------------------------------
Total Specialty Retail 3,938,224
--------------------------------------------------------------------------------------------------------------
TEXTILES, APPAREL & LUXURY GOODS - 0.0%
10,489 Guess Inc., (2) 665,317
---------------------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE - 0.0%
14,350 Washington Federal Inc. 337,656
---------------------------------------------------------------------------------------------------------------------------
TOBACCO - 0.1%
34,750 UST Inc. 2,022,450
---------------------------------------------------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS - 0.0%
5,294 GATX Corporation 229,389
---------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $135,432,664) 142,559,859
==============================================================================================================
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED SECURITIES - 8.7% (5.8% OF TOTAL INVESTMENTS)
AUTOMOBILES - 1.8%
287,000 Ford Motor Company Capital Trust II 6.500% CCC $ 9,815,400
468,700 General Motors Corporation 5.250% B- 9,931,753
271,100 General Motors Corporation 6.250% B- 6,159,392
-----------------------------------------------------------------------------------------------------------------------------
Total Automobiles 25,906,545
----------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS - 0.6%
9,500 Affiliated Managers Group Inc. 5.100% BB 499,938
51,150 Affiliated Managers Group Inc. 5.100% BB 2,691,769
102,200 E*Trade Financial Corporation 6.125% Ba3 2,983,218
39,875 Lazard Limited 6.625% Ba1 1,654,414
-----------------------------------------------------------------------------------------------------------------------------
Total Capital Markets 7,829,339
----------------------------------------------------------------------------------------------------------------
CHEMICALS - 0.1%
36,215 Celanese Corporation 4.250% N/R 1,303,740
-----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 0.7%
6,475,000 Fortis Insurance NV, 144A 7.750% A+ 9,251,661
-----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.6%
23,925 Allied Waste Industries Inc. 6.250% B 7,898,241
-----------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.1%
750,000 SLM Corporation 5.326% A 752,175
-----------------------------------------------------------------------------------------------------------------------------
20
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.5%
77,660 Entergy Corporation 7.625% BBB $ 4,619,217
56,800 PNM Resources Inc. 6.750% Baa3 3,001,312
-----------------------------------------------------------------------------------------------------------------------------
Total Electric Utilities 7,620,529
----------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.3%
43,825 Bunge Limited 4.875% N/R 4,601,625
-----------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.1%
27,000 Southern Union Company 5.000% BBB- 1,446,390
-----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.1%
3,900 NRG Energy Inc. 5.750% B2 1,053,000
-----------------------------------------------------------------------------------------------------------------------------
INSURANCE - 1.2%
334,000 MetLife Inc. 6.375% BBB+ 10,213,720
272,390 Travelers Property Casualty Corporation 4.500% Baa1 7,120,275
-----------------------------------------------------------------------------------------------------------------------------
Total Insurance 17,333,995
----------------------------------------------------------------------------------------------------------------
MEDIA - 0.5%
190,000 Comcast Corporation 2.000% BBB 7,695,000
-----------------------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.2%
2,385 Freeport McMoran Copper & Gold, Inc. 5.500% B- 3,116,301
-----------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.7%
180,055 Schering-Plough Corporation 6.000% BBB 10,243,329
-----------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.2%
106,935 Annaly Mortgage Management Inc. 6.000% N/R 3,074,381
-----------------------------------------------------------------------------------------------------------------------------
U.S. AGENCY - 0.8%
110 Fannie Mae 5.375% AA- 11,001,609
-----------------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.2%
55,050 Crown Castle International Corporation 6.250% N/R 3,055,275
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED SECURITIES (COST 123,183,135
$113,067,554)
================================================================================================================
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
$25 PAR (OR SIMILAR) PREFERRED SECURITIES - 48.7% (32.8% OF TOTAL INVESTMENTS)
CAPITAL MARKETS - 5.4%
271,087 BNY Capital Trust V, Series F 5.950% A1 $ 6,703,982
148,300 Compass Capital Trust III 7.350% A3 3,720,847
11,300 CSFB USA, Series 2002-10 (SATURNS) 7.000% AA- 286,455
41,500 First Union Institutional Capital II (CORTS) 8.200% A1 1,114,275
5,900 Goldman Sachs Capital I, Series A (CORTS) 6.000% A1 144,786
4,800 Goldman Sachs Group Inc., Series 2004-06 (SATURNS) 6.000% A1 116,640
41,600 Goldman Sachs Group Inc., Series 2004-4 (CORTS) 6.000% A1 1,019,200
7,000 Goldman Sachs Group Inc., Series GSC-3 (PPLUS) 6.000% A1 168,980
4,400 Goldman Sachs Group Incorporated (SATURNS) 5.750% AA- 104,236
527,188 Lehman Brothers Holdings Capital Trust III, Series 6.375% A2 13,227,147
K
2,400 Lehman Brothers Holdings Capital Trust IV, Series 6.375% A2 60,648
L
28,100 Merrill Lynch Capital Trust II 8.000% A1 712,335
153,700 Merrill Lynch Preferred Capital Trust III 7.000% A1 3,927,035
124,400 Merrill Lynch Preferred Capital Trust IV 7.120% A1 3,199,568
358,400 Merrill Lynch Preferred Capital Trust V 7.280% A1 9,243,136
71,100 Morgan Stanley Capital Trust II 7.250% A1 1,805,940
333,722 Morgan Stanley Capital Trust III 6.250% A1 8,379,759
626,759 Morgan Stanley Capital Trust IV 6.250% A1 15,700,313
285,641 Morgan Stanley Capital Trust VII 6.600% A2 7,209,579
2,600 Washington Mutual Capital Trust I, Series 2001-22, 7.650% Baa1 65,442
Class A-1 (CORTS)
-----------------------------------------------------------------------------------------------------------------------------
Total Capital Markets 76,910,303
----------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 8.6%
173,100 Abbey National PLC, Series C 7.375% A2 4,407,126
83,300 ABN AMRO Capital Fund Trust V 5.900% A 2,020,025
10,000 ABN AMRO Capital Trust Fund VII 6.080% A 250,000
73,600 ASBC Capital I 7.625% Baa1 1,856,928
43,785 BAC Capital Trust I 7.000% Aa3 1,098,128
111,055 BAC Capital Trust II 7.000% Aa3 2,809,692
284,700 BAC Capital Trust III 7.000% Aa3 7,239,921
317,222 Banco Santander 144A 6.800% A2 7,970,203
21
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS (continued)
45,182 Banco Santander, (6) 6.410% A2 $ 1,145,816
9,100 BancorpSouth Capital Trust I 8.150% Baa2 228,137
231,600 Banesto Holdings, Series A, 144A 10.500% A2 7,005,900
81,700 Bank One Capital Trust VI 7.200% A1 2,072,729
35,700 BankNorth Capital Trust II 8.000% A3 898,926
7,300 Capital One Capital II Corporation 7.500% Baa1 191,397
62,300 Chittenden Capital Trust I 8.000% Baa1 1,573,698
214,600 Citizens Funding Trust I 7.500% Baa2 5,606,425
107,000 Cobank ABC, 144A, (6) 7.000% N/R 5,446,407
85,900 Comerica Capital Trust I 7.600% A3 2,166,398
338,700 Fleet Capital Trust VIII 7.200% Aa3 8,508,144
771,620 HSBC Finance Corporation 6.875% AA- 19,830,634
22,360 HSBC Holdings PLC, Series A 6.200% A1 567,944
539,400 National City Capital Trust II 6.625% A3 13,636,733
43,550 PNC Capital Trust 6.125% A3 1,083,960
115,938 Royal Bank of Scotland Group PLC, Series L 5.750% A1 2,799,903
91,395 Royal Bank of Scotland Group PLC, Series N 6.350% A1 2,331,486
391,100 USB Capital Trust VI 5.750% Aa3 9,323,824
36,050 USB Capital Trust XI 6.600% A1 914,949
33,400 VNB Capital Trust I 7.750% Baa1 844,686
7,400 Wells Fargo Capital Trust IV 7.000% Aa2 185,740
80,735 Wells Fargo Capital Trust V 7.000% Aa2 2,033,715
127,369 Wells Fargo Capital Trust VII 5.850% Aa2 3,128,183
44,000 Wells Fargo Capital Trust IX 5.625% Aa2 1,045,880
80,700 Zions Capital Trust B 8.000% Baa1 2,057,043
-----------------------------------------------------------------------------------------------------------------------------
Total Commercial Banks 122,280,680
----------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.0%
4,600 IBM Inc., Trust Certificates, Series 2001-2 7.100% A+ 116,012
-----------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.1%
39,700 SLM Corporation 6.000% A 969,077
-----------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 3.6%
63,130 BAC Capital Trust XII 6.875% Aa3 1,660,003
16,500 CIT Group Incorporated (CORTS) 7.750% A3 438,900
86,500 Citigroup Capital Trust VII 7.125% Aa2 2,192,775
241,654 Citigroup Capital Trust VIII 6.950% Aa2 6,084,848
68,255 Citigroup Capital XV 6.500% Aa3 1,717,043
13,400 Citigroup, Series CIT (CORTS) 6.750% A3 343,174
4,500 General Electric Capital Corporation (CORTS) 6.000% AAA 111,465
33,100 General Electric Capital Corporation 6.625% AAA 834,451
570,518 ING Group N.V. 7.200% A 14,588,145
786,475 ING Group N.V. 7.050% A 19,968,600
16,800 ING Group N.V. 6.200% A 427,896
54,000 JPMorgan Chase & Company (PCARS) 7.125% A2 1,348,380
48,200 JPMorgan Chase Trust, Series 2002-6, Class A 7.125% A1 1,247,898
(SATURNS)
-----------------------------------------------------------------------------------------------------------------------------
Total Diversified Financial Services 50,963,578
----------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.4%
21,900 BellSouth Capital Funding (CORTS) 7.100% A 563,925
18,300 BellSouth Corporation (CORTS) 7.000% Aa3 460,428
34,300 BellSouth Corporation, Series 2001-3 (SATURNS) 7.125% A 857,843
2,400 BellSouth Corporation, Series BLS (CORTS) 7.000% A 60,144
12,300 BellSouth Corporation 7.125% A 308,976
10,000 BellSouth Inc. (CORTS) 7.000% A 257,000
18,300 BellSouth Telecommunications (PPLUS) 7.300% A 459,879
17,500 Verizon Communications (CORTS) 7.625% A 449,750
22,200 Verizon Communications (CORTS) 7.375% A 566,100
4,700 Verizon Communications, Series 2004-1 (SATURNS) 6.125% A+ 116,043
1,300 Verizon Global Funding Corporation Trust III, 6.250% A 32,240
Series III (CORTS)
13,900 Verizon New England Inc., Series B 7.000% A3 351,809
45,155 Verizon South Inc., Series F 7.000% A 1,141,518
-----------------------------------------------------------------------------------------------------------------------------
Total Diversified Telecommunication Services 5,625,655
----------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.8%
10,000 Consolidated Edison, Inc. 7.250% A2 255,300
22,200 DTE Energy Trust I 7.800% Baa3 562,770
40,670 Entergy Louisiana LLC 7.600% A- 1,021,224
8,100 FPL Group Capital Inc. 6.600% A3 204,768
44,570 Georgia Power Capital Trust V 7.125% A3 1,120,490
22
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES (continued)
153,100 Georgia Power Company 5.900% A $ 3,705,020
1,700 Georgia Power Company 5.750% A 40,630
1,100 National Rural Utilities Cooperative Finance 7.400% A3 27,885
Corporation
6,600 National Rural Utilities Cooperative Finance 6.100% A3 161,964
Corporation
4,900 National Rural Utilities Cooperative Finance 5.950% A3 118,335
Corporation
2,100 Southern Company Capital Trust I (CORTS) 7.375% BBB+ 54,317
2,800 Southern Company Capital Trust VI 7.125% BBB+ 70,644
134,400 Virginia Power Capital Trust 7.375% Baa2 3,437,952
-----------------------------------------------------------------------------------------------------------------------------
Total Electric Utilities 10,781,299
----------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.3%
41,900 Dairy Farmers of America Inc., 144A, (6) 7.875% BBB- 4,137,625
-----------------------------------------------------------------------------------------------------------------------------
INSURANCE - 10.5%
556,210 Ace Ltd., Series C 7.800% Baa2 14,405,839
11,456 Aegon N.V. 6.875% A- 299,460
982,000 Aegon N.V., (6) 6.375% A- 25,502,540
26,600 AMBAC Financial Group Inc. 5.950% AA 646,912
25,700 Arch Capital Group Limited, Series B 7.785% Baa3 667,172
408,100 Arch Capital Group Limited 8.000% Baa3 10,794,245
1,221,100 Delphi Financial Group, Inc. 8.000% BBB 31,479,958
322,955 EverestRe Capital Trust II 6.200% Baa1 7,712,165
110,400 EverestRe Group Limited 7.850% Baa1 2,819,616
82,200 Financial Security Assurance Holdings 6.250% AA 2,066,508
3,500 Lincoln National Capital Trust VI 6.750% A- 89,250
5,000 Markel Corporation 7.500% BBB- 129,975
809,050 PartnerRe Limited, Series C 6.750% BBB+ 20,549,870
82,200 PLC Capital Trust III 7.500% BBB+ 2,082,126
32,900 PLC Capital Trust IV 7.250% BBB+ 834,015
8,300 PLC Capital Trust V 6.125% BBB+ 206,504
34,700 Protective Life Corporation 7.250% BBB 905,323
37,400 Prudential PLC 6.750% A 958,936
86,381 RenaissanceRe Holdings Limited, Series A 8.100% BBB+ 2,175,074
325,410 RenaissanceRe Holdings Limited, Series B 7.300% BBB 8,341,885
3,134 RenaissanceRe Holdings Limited, Series C 6.080% BBB+ 74,589
27,800 RenaissanceRe Holdings Ltd 6.600% BBB 693,054
27,300 Safeco Capital Trust I (CORTS) 8.750% Baa2 802,211
39,100 Safeco Capital Trust III (CORTS) 8.072% Baa2 1,014,254
7,500 Safeco Capital Trust IV (CORTS) 8.375% Baa2 211,050
47,400 Safeco Corporation, Series 2001-7 (SATURNS) 8.250% Baa2 1,186,896
44,900 Safeco Corporation, Series 2002-5 (SATURNS) 8.250% Baa2 1,131,929
14,700 W.R. Berkley Corporation 6.750% BBB- 369,705
151,100 XL Capital Ltd, Series A 8.000% Baa1 3,815,275
340,500 XL Capital Ltd, Series B 7.625% Baa1 8,716,800
-----------------------------------------------------------------------------------------------------------------------------
Total Insurance 150,683,136
----------------------------------------------------------------------------------------------------------------
MEDIA - 1.7%
43,700 CBS Corporation 7.250% BBB 1,096,433
449,200 Comcast Corporation 7.000% BBB+ 11,609,035
461,200 Viacom Inc. 6.850% BBB 11,501,175
-----------------------------------------------------------------------------------------------------------------------------
Total Media 24,206,643
----------------------------------------------------------------------------------------------------------------
MULTI-UTILITIES - 0.1%
55,600 Dominion CNG Capital Trust I 7.800% Baa2 1,410,016
-----------------------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 0.9%
477,200 Nexen Inc. 7.350% Baa3 12,311,760
-----------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 13.5%
10,500 AvalonBay Communities, Inc., Series H 8.700% BBB 282,135
3,000 BRE Properties, Series B 8.080% BBB- 76,575
15,266 BRE Properties, Series C 6.750% BBB- 384,703
20,600 Developers Diversified Realty Corporation, Series 8.600% BBB- 523,034
F
658,185 Developers Diversified Realty Corporation, Series 8.000% BBB- 16,829,790
G
74,900 Developers Diversified Realty Corporation, Series 7.375% BBB- 1,891,974
H
81,100 Duke Realty Corporation, Series L 6.600% BBB 2,044,531
36,828 Duke-Weeks Realty Corporation 6.950% BBB 956,791
208,656 Equity Office Properties Trust, Series G 7.750% BBB- 5,249,785
11,800 Equity Residential Properties Trust, Series D 8.600% BBB 303,850
393,070 Equity Residential Properties Trust, Series N 6.480% BBB 9,925,018
267,400 First Industrial Realty Trust, Inc., Series J 7.250% BBB- 6,848,114
232,400 HRPT Properties Trust, Series B 8.750% BBB- 5,975,004
23
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
REAL ESTATE (continued)
652,100 HRPT Properties Trust, Series C 7.125% BBB- $ 17,045,894
458,887 Kimco Realty Corporation, Series F 6.650% BBB+ 11,568,541
13,693 New Plan Excel Realty Trust, Series D 7.800% BBB- 732,576
876,975 New Plan Excel Realty Trust, Series E 7.625% BBB- 22,801,350
32,982 Prologis Trust, Series C 8.540% BBB 1,991,288
13,600 Prologis Trust, Series G 6.750% BBB 347,072
13,000 PS Business Parks, Inc., Series F 8.750% BBB- 324,870
2,000 PS Business Parks, Inc., Series K 7.950% BBB- 53,000
149,400 Public Storage Inc., Series I 7.250% BBB+ 3,891,870
110,000 Public Storage Inc. 6.750% BBB+ 2,780,943
51,900 Public Storage, Inc., Series E 6.750% BBB+ 1,318,260
15,000 Public Storage, Inc., Series F 6.450% BBB+ 372,750
97,600 Public Storage, Inc., Series H 6.950% BBB+ 2,520,032
28,200 Public Storage, Inc., Series T 7.625% BBB+ 704,436
30,200 Public Storage, Inc., Series U 7.625% BBB+ 754,396
32,300 Public Storage, Inc., Series V 7.500% BBB+ 822,035
2,600 Public Storage, Inc., Series X 6.450% BBB+ 65,572
323,900 Realty Income Corporation, Series E 6.750% BBB- 8,168,369
216,495 Regency Centers Corporation 7.450% BBB- 5,537,942
9,100 Regency Centers Corporation 7.250% BBB- 232,505
7,000 Simon Property Group, Inc., Series G 7.890% BBB 357,000
2,800 Vornado Realty Trust, Series F 6.750% BBB- 70,532
16,800 Vornado Realty Trust, Series G 6.625% BBB- 417,480
3,400 Vornado Realty Trust, Series H 6.750% BBB- 85,170
54,200 Vornado Realty Trust, Series I 6.625% BBB- 1,350,122
1,446,545 Wachovia Preferred Funding Corporation 7.250% A2 40,633,449
628,830 Weingarten Realty Trust 6.750% A- 15,953,417
-----------------------------------------------------------------------------------------------------------------------------
Total Real Estate 192,192,175
----------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE - 2.3%
99,500 Countrywide Capital Trust III (PPLUS) 8.050% BBB+ 2,572,075
1,201,200 Countrywide Capital Trust IV 6.750% BBB+ 30,042,012
-----------------------------------------------------------------------------------------------------------------------------
Total Thrifts & Mortgage Finance 32,614,087
----------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.5%
34,100 AT&T Wireless (CORTS) 8.000% A 888,646
18,200 AT&T Wireless, Series 2002-B (SATURNS) 9.250% A 484,120
33,900 United States Cellular Corporation 8.750% A- 876,654
213,404 United States Cellular Corporation 7.500% BBB 5,495,153
-----------------------------------------------------------------------------------------------------------------------------
Total Wireless Telecommunication Services 7,744,573
-----------------------------------------------------------------------------------------------------------------------------
TOTAL $25 PAR (OR SIMILAR) PREFERRED SECURITIES (COST $690,691,665) 692,946,619
================================================================================================================
WEIGHTED
PRINCIPAL AVERAGE
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY (5) RATINGS (3) VALUE
----------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE SENIOR LOAN INTERESTS - 2.1% (1.3% OF TOTAL INVESTMENTS) (4)
BUILDING PRODUCTS - 0.2%
$ 998 TFS Acquisition, Term Loan 8.921% 8/11/13 B+ $ 1,004,981
----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.1%
2,000 Banta Corporation, Term Loan 7.110% 10/31/13 B+ 2,005,000
----------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES - 0.5%
5,000 HCA, Inc., Term Loan 8.114% 11/17/13 Ba3 5,061,180
1,500 LifePoint Hospitals Holdings, Inc., Term Loan B 6.975% 4/18/12 Ba3 1,496,156
----------------------------------------------------------------------------------------------------------------------------------
6,500 Total Health Care Providers & Services 6,557,336
----------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 0.1%
995 Cedar Fair LP, Term Loan 7.850% 8/30/12 BB- 1,006,069
----------------------------------------------------------------------------------------------------------------------------------
MACHINERY - 0.1%
2,000 Oshkosh Truck Corporation, Term Loan 7.350% 12/06/13 Ba3 2,004,063
----------------------------------------------------------------------------------------------------------------------------------
MEDIA - 0.3%
1,000 Charter Communications Inc., Term Loan B 8.005% 4/28/13 B 1,007,688
2,000 Neilsen Finance LLC, Term Loan B 8.125% 8/01/13 B+ 2,016,389
1,521 Panamsat Corporation, Term Loan 7.872% 1/03/14 BB 1,538,483
995 Philadelphia Newspapers, Term Loan 8.120% 6/29/13 N/R 990,440
----------------------------------------------------------------------------------------------------------------------------------
5,516 Total Media 5,553,000
----------------------------------------------------------------------------------------------------------------------------------
24
WEIGHTED
PRINCIPAL AVERAGE
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY (5) RATINGS (3) VALUE
----------------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS - 0.2%
$ 345 Bluegrass Container Company, LLC, 1st Lien Term 7.609% 7/31/13 BB- $ 348,941
Loan
1,152 Bluegrass Container Company, LLC, Term Loan B 7.610% 6/30/13 BB- 1,163,895
995 Georgia-Pacific Corporation, Term Loan B 7.356% 2/13/12 BB- 1,000,779
----------------------------------------------------------------------------------------------------------------------------------
2,492 Total Paper & Forest Products 2,513,615
----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 0.1%
1,000 LNR Property Corporation, Term Loan B 8.120% 7/12/11 B2 1,005,209
----------------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 0.1%
1,333 Advanced Micro Devices, Term Loan B 7.620% 12/31/13 BB- 1,341,239
----------------------------------------------------------------------------------------------------------------------------------
SOFTWARE - 0.3%
2,993 Dealer Computer Service, Term Loan 7.850% 10/26/12 BB- 3,011,469
1,500 Intergraph Corporation, Term Loan 7.870% 5/29/14 B 1,508,438
----------------------------------------------------------------------------------------------------------------------------------
4,493 Total Software 4,519,907
----------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.1%
979 Michaels Stores Inc., Term Loan 8.375% 10/31/13 B- 986,255
----------------------------------------------------------------------------------------------------------------------------------
$ 28,306 TOTAL VARIABLE RATE SENIOR LOAN INTERESTS (COST $28,283,071) 28,496,674
==================================================================================================================================
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
----------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS - 36.4% (24.5% OF TOTAL INVESTMENTS)
AEROSPACE & DEFENSE - 2.2%
$ 4,115 AAR Corporation, 144A 1.750% 2/01/26 BB $ 4,835,125
500 Alliant Techsystems Inc., 144A 2.750% 9/15/11 B+ 513,750
500 Armor Holdings Inc. 2.000% 11/01/24 B+ 605,000
6,650 L-3 Communications Corporation 3.000% 8/01/35 BB+ 7,015,750
3,410 L-3 Communications Corporation, 144A 3.000% 8/01/35 BB+ 3,597,550
8,375 Lockheed Martin Corporation 5.124% 8/15/33 BBB+ 11,155,584
3,145 Triumph Group Inc 2.625% 10/01/26 N/R 3,648,200
----------------------------------------------------------------------------------------------------------------------------------
26,695 Total Aerospace & Defense 31,370,959
----------------------------------------------------------------------------------------------------------------------------------
AIRLINES - 0.7%
1,225 AMR Corporation 4.500% 2/15/24 CCC+ 1,865,063
1,000 Continental Airlines, Inc. 5.000% 6/15/23 CCC+ 2,205,000
4,065 UAL Corporation, 144A 4.500% 6/30/21 N/R 5,862,502
----------------------------------------------------------------------------------------------------------------------------------
6,290 Total Airlines 9,932,565
----------------------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY - 3.3%
9,575 Amgen Inc., 144A 0.125% 2/01/11 A+ 9,383,500
10,060 Amgen Inc., 144A 0.375% 2/01/13 A+ 9,934,250
4,625 Cephalon, Inc. 0.000% 6/15/33 B- 6,174,375
9,450 Genzyme Corporation 1.250% 12/01/23 BBB 9,875,250
9,550 Gilead Sciences Inc., 144A 0.625% 5/01/13 N/R 9,836,500
2,000 Sepracor Inc. 5.000% 2/15/07 B- 2,000,000
----------------------------------------------------------------------------------------------------------------------------------
45,260 Total Biotechnology 47,203,875
----------------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS - 0.5%
6,600 Goldman Sachs Group, Inc. 0.125% 6/28/11 AA- 7,276,632
----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 0.5%
5,500 U.S. Bancorp, 144A 3.615% 9/20/36 Aa2 5,578,100
1,000 Wells Fargo & Company 5.625% 5/01/33 Aa1 1,008,230
----------------------------------------------------------------------------------------------------------------------------------
6,500 Total Commercial Banks 6,586,330
----------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 1.9%
2,900 Andrew Corporation 3.250% 8/15/13 B+ 2,939,875
2,695 Arris Group Inc. 2.000% 11/15/26 N/R 2,867,480
2,000 Ciena Corporation 3.750% 2/01/08 B 1,945,000
2,545 Fibertower Corporation, 144A 9.000% 11/15/12 N/R 3,050,819
7,525 Lucent Technologies Inc., Series B 2.750% 6/15/25 Ba3 8,540,875
7,625 Lucent Technologies Inc. 2.750% 6/15/23 Ba3 8,235,000
----------------------------------------------------------------------------------------------------------------------------------
25,290 Total Communications Equipment 27,579,049
----------------------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 1.7%
2,100 Electronics for Imaging Inc. 1.500% 6/01/23 N/R 2,331,000
6,145 EMC Corporation, 144A 1.750% 12/01/11 BBB+ 6,398,481
25
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS December 31, 2006
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS (continued)
$ 6,075 EMC Corporation, 144A 1.750% 12/01/13 BBB+ $ 6,325,594
10,930 Sandisk Corporation 1.000% 5/15/13 BB- 9,727,700
-------------------------------------------------------------------------------------------------------------------------------
25,250 Total Computers & Peripherals 24,782,775
-------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION & ENGINEERING - 0.3%
3,250 Quanta Services Inc., 144A 3.750% 4/30/26 N/R 3,676,563
-------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.2%
3,095 Compucredit Corporation 5.875% 11/30/35 N/R 3,160,769
-------------------------------------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING - 0.7%
9,925 Sealed Air Corporation, 144A 3.000% 6/30/33 BBB 10,346,813
-------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 1.6%
10,525 Citigroup Funding Inc. 0.125% 9/07/11 Aa1 10,438,695
9,600 Merrill Lynch & Co. Inc. 0.000% 3/13/32 Aa3 12,784,320
-------------------------------------------------------------------------------------------------------------------------------
20,125 Total Diversified Financial Services 23,223,015
-------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.9%
1,400 Level 3 Communications Inc. 3.500% 6/15/12 Caa2 1,746,500
4,725 Level 3 Communications Inc. 2.875% 7/15/10 Caa2 4,978,969
2,625 Qwest Communications International Inc. 3.500% 11/15/25 B+ 4,117,969
1,500 Time Warner Telecom Inc. 2.375% 4/01/26 CCC+ 1,893,750
-------------------------------------------------------------------------------------------------------------------------------
10,250 Total Diversified Telecommunication Services 12,737,188
-------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.1%
725 PPL Energy Supply LLC 2.625% 5/15/23 BBB 1,046,719
-------------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 0.1%
1,800 General Cable Corporation 0.875% 11/15/13 B+ 1,928,250
-------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.1%
2,000 SCI Systems Inc. 3.000% 3/15/07 B1 1,997,500
-------------------------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES - 2.5%
4,600 Cameron International Corporation, 144A 2.500% 6/15/26 BBB+ 4,962,250
3,095 Core Laboratories LP, 144A 0.250% 10/31/11 N/R 3,247,816
500 Halliburton Company 3.125% 7/15/23 BBB+ 848,125
3,125 Hanover Compressor Company 4.750% 1/15/14 B 4,480,469
9,610 Nabors Industries Inc., 144A 0.940% 5/15/11 A- 9,237,613
850 Nabors Industries Inc., 144A 0.940% 5/15/11 A- 817,063
9,200 Nabors Industries Inc. 0.000% 6/15/23 N/R 9,706,000
500 Pride International Inc. 3.250% 5/01/33 Ba2 630,625
1,525 SESI LLC, Convertible Bond, 144A 1.500% 12/15/26 BB- 1,515,469
-------------------------------------------------------------------------------------------------------------------------------
33,005 Total Energy Equipment & Services 35,445,430
-------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES - 1.8%
500 Advanced Medical Optics 3.250% 8/01/26 N/R 454,375
2,925 CYTYC Corporation 2.250% 3/15/24 N/R 3,159,000
16,650 Medtronicm Inc. 1.500% 4/15/11 AA- 17,732,250
3,250 Medtronic, Inc. 1.625% 4/15/13 AA- 3,481,563
250 Medtronic, Inc. 1.500% 4/15/11 AA- 266,250
-------------------------------------------------------------------------------------------------------------------------------
23,575 Total Health Care Equipment & Supplies 25,093,438
-------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES - 0.9%
500 LifePoint Hospitals Inc. 3.250% 8/15/25 B+ 451,875
2,800 Manor Care Inc. 2.000% 6/01/36 BBB 2,954,000
2,525 PSS World Medical Inc. 2.250% 3/15/24 B+ 3,118,375
6,210 Roche Holdings Inc., 144A 0.000% 7/25/21 N/R 5,981,907
-------------------------------------------------------------------------------------------------------------------------------
12,035 Total Health Care Providers & Services 12,506,157
-------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 1.5%
1,000 Caesars Entertainment Inc. 5.370% 4/15/24 Baa3 1,301,300
2,170 Carnival Corporation 2.000% 4/15/21 A- 2,788,450
13,715 Carnival Corporation 1.132% 4/29/33 A- 10,046,238
500 Hilton Hotels Corporation 3.375% 4/15/23 BB 791,250
3,225 International Game Technology, 144A 2.600% 12/15/36 BBB 3,229,031
3,005 RARE Hospitality International Inc., 144A 2.500% 11/15/26 N/R 3,023,781
-------------------------------------------------------------------------------------------------------------------------------
23,615 Total Hotels, Restaurants & Leisure 21,180,050
-------------------------------------------------------------------------------------------------------------------------------
26
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 0.0%
$ 500 3M Company 0.000% 11/21/32 Aa1 $ 458,750
-------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 1.5%
10 Alleghany Corporation 5.750% 6/15/09 BBB- 3,444,300
5,655 American Financial Group Inc. 1.486% 6/02/33 BBB 3,569,719
2,600 Berkshire Hathaway Inc., 144A 0.000% 5/15/07 N/R 3,189,576
10,225 Prudential Financial Inc. 2.613% 11/15/35 A 10,442,895
-------------------------------------------------------------------------------------------------------------------------------
18,490 Total Insurance 20,646,490
-------------------------------------------------------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL - 0.2%
1,680 Priceline.com Inc., 144A 0.500% 9/30/11 B 2,007,600
-------------------------------------------------------------------------------------------------------------------------------
IT SERVICES - 0.4%
2,150 Digital River Inc. 1.250% 1/01/24 N/R 2,953,563
2,200 DST Systems Inc. 4.125% 8/15/23 N/R 3,069,000
-------------------------------------------------------------------------------------------------------------------------------
4,350 Total IT Services 6,022,563
-------------------------------------------------------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS - 0.5%
6,195 K2 Corporation, 144A 5.000% 6/15/10 N/R 6,868,706
-------------------------------------------------------------------------------------------------------------------------------
MEDIA - 2.6%
2,700 ELF Special Financing Limited, 144A 5.710% 6/15/09 Ba3 3,292,313
8,850 Liberty Media Corporation 0.750% 3/30/23 BB+ 11,261,625
7,150 Omnicom Group Inc. 0.000% 7/01/38 A- 7,757,750
700 Playboy Enterprises Inc. 3.000% 3/15/25 N/R 660,625
2,650 Shuffle Master Inc. 1.250% 4/15/24 N/R 2,924,938
8,850 Walt Disney Company 2.125% 4/15/23 A- 10,797,000
-------------------------------------------------------------------------------------------------------------------------------
30,900 Total Media 36,694,251
-------------------------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.3%
1,005 Century Aluminum Company 1.750% 8/01/24 BB- 1,585,388
2,400 Placer Dome Inc. 2.750% 10/15/23 A- 3,297,000
-------------------------------------------------------------------------------------------------------------------------------
3,405 Total Metals & Mining 4,882,388
-------------------------------------------------------------------------------------------------------------------------------
MULTI-UTILITIES - 0.6%
1,200 Centerpoint Energy Inc. 2.875% 1/15/24 BBB- 1,594,500
6,325 Dominion Resources Inc., Series C 2.125% 12/15/23 BBB 7,297,469
-------------------------------------------------------------------------------------------------------------------------------
7,525 Total Multi-Utilities 8,891,969
-------------------------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 1.2%
7,585 Chesapeake Energy Corporation, 144A 2.750% 11/15/35 BB 7,708,256
2,500 Devon Energy Corporation 4.900% 8/15/08 BBB 3,475,000
1,765 Goodrich Petroleum Corporation, 144A 3.250% 12/01/26 N/R 1,716,463
3,950 Peabody Energy Corp. 4.375% 12/15/66 Ba2 3,787,063
-------------------------------------------------------------------------------------------------------------------------------
15,800 Total Oil, Gas & Consumable Fuels 16,686,782
-------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 1.3%
5,585 Allergan Inc., 144A 1.500% 4/01/26 A 6,115,575
3,650 Allergan Inc. 1.500% 4/01/26 A 3,996,750
500 Bristol-Myers Squibb Company 4.860% 9/15/23 A+ 502,500
500 Sepracor Inc. 0.000% 10/15/24 B- 540,625
250 Teva Pharmaceutical Finance Company B.V., Series D 1.750% 2/01/26 BBB 231,563
6,400 Wyeth, 144A 1.000% 1/15/24 A 6,979,840
-------------------------------------------------------------------------------------------------------------------------------
16,885 Total Pharmaceuticals 18,366,853
-------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 1.0%
2,860 Archstone-Smith Trust 4.000% 7/15/36 BBB+ 3,063,775
500 Developers Diversified Realty Corporation, 144A 3.500% 8/15/11 BBB 532,500
5,275 Vornado Realty 3.875% 4/15/25 BBB 7,332,250
3,100 Vornado Realty 3.625% 11/15/26 BBB 3,111,625
-------------------------------------------------------------------------------------------------------------------------------
11,735 Total Real Estate 14,040,150
-------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 0.6%
4,625 EOP Operating LP, 144A 4.000% 7/15/26 BBB 5,521,094
2,675 Tanger Properties Limited Partnership 3.750% 8/15/26 BBB- 3,133,094
-------------------------------------------------------------------------------------------------------------------------------
7,300 Total Real Estate Management & Development 8,654,188
-------------------------------------------------------------------------------------------------------------------------------
ROAD & RAIL - 0.2%
2,000 Yellow Roadway Corporation 5.000% 8/08/23 BBB- 2,522,500
-------------------------------------------------------------------------------------------------------------------------------
27
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS December 31, 2006
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 1.8%
$ 5,050 Cypress Semiconductor Corporation, 144A 1.250% 6/15/08 B- $ 6,318,813
2,900 Diodes Inc. 2.250% 10/01/26 N/R 2,773,125
4,000 Intel Corporation, 144A 2.950% 12/15/35 A- 3,640,000
7,600 Intel Corporation 2.950% 12/15/35 A- 6,916,000
3,435 ON Semiconductor Corporation 0.000% 4/15/24 B- 3,392,063
2,800 Photronics Inc. 2.250% 4/15/08 B 3,223,500
-------------------------------------------------------------------------------------------------------------------------------
25,785 Total Semiconductors & Equipment 26,263,501
-------------------------------------------------------------------------------------------------------------------------------
SOFTWARE - 1.6%
7,350 Amdocs Limited 0.500% 3/15/24 BBB- 7,836,938
500 Computer Associates International Inc., 144A 1.625% 12/15/09 Ba1 603,125
2,450 Mentor Graphics Corporation 6.250% 3/01/26 N/R 3,203,375
500 Sybase, Inc. 1.750% 2/22/25 N/R 558,750
7,950 Symantec Corporation, 144A 0.750% 6/15/11 N/R 9,619,500
250 Symantec Corporation, 144A 1.000% 6/15/13 N/R 305,313
-------------------------------------------------------------------------------------------------------------------------------
19,000 Total Software 22,127,001
-------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.6%
1,550 Group 1 Automotive Inc. 2.250% 6/15/36 N/R 1,592,625
3,005 Lowes Companies, Inc. 0.861% 10/19/21 A+ 3,267,938
685 Sonic Automotive Inc. 4.250% 11/30/15 B 909,338
3,520 TJX Companies, Inc. 0.000% 2/13/21 A- 3,335,200
-------------------------------------------------------------------------------------------------------------------------------
8,760 Total Specialty Retail 9,105,101
-------------------------------------------------------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS - 0.2%
1,640 GATX Corporation 5.000% 8/15/23 Baa1 2,915,100
-------------------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.3%
2,535 NII Holdings Inc., 144A 2.750% 8/15/25 N/R 3,678,919
-------------------------------------------------------------------------------------------------------------------------------
$ 469,770 TOTAL CONVERTIBLE BONDS (COST $488,212,110) 517,906,889
===============================================================================================================================
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 11.5% (7.8% OF TOTAL INVESTMENTS)
AEROSPACE & DEFENSE - 0.3%
$ 1,000 Hexcel Corporation 6.750% 2/01/15 B $ 990,000
2,500 K&F Acquisition Inc. 7.750% 11/15/14 B- 2,587,500
-------------------------------------------------------------------------------------------------------------------------------
3,500 Total Aerospace & Defense 3,577,500
-------------------------------------------------------------------------------------------------------------------------------
AUTO COMPONENTS - 0.2%
2,575 Keystone Automotive Operations Inc. 9.750% 11/01/13 CCC+ 2,562,125
-------------------------------------------------------------------------------------------------------------------------------
CHEMICALS - 0.4%
2,000 Ineos Group Holdings PLC, 144A 8.500% 2/15/16 B2 1,920,000
1,000 Nell AF Sarl 8.375% 8/15/15 B2 1,032,500
1,335 OM Group Inc. 9.250% 12/15/11 B- 1,403,419
1,500 Rockwood Specialties Group Inc., Series WI 7.500% 11/15/14 B- 1,518,750
-------------------------------------------------------------------------------------------------------------------------------
5,835 Total Chemicals 5,874,669
-------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.0%
600 Williams Scotsman Inc. 8.500% 10/01/15 B+ 629,250
-------------------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.1%
1,000 GSC Holdings Corporation, 144A 8.000% 10/01/12 B+ 1,050,000
-------------------------------------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING - 0.3%
2,000 Owens-Brockway Glass Containers, Guaranteed Senior 8.250% 5/15/13 B 2,077,500
Note
2,000 Owens-Illinois Inc. 7.800% 5/15/18 B 2,002,500
-------------------------------------------------------------------------------------------------------------------------------
4,000 Total Containers & Packaging 4,080,000
-------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.1%
2,000 Intelsat Subsidiary Holding Company Limited 8.500% 1/15/13 B+ 2,040,000
-------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.3%
3,000 Midwest Generation LLC 8.750% 5/01/34 Ba2 3,270,000
500 Mirant North America LLC 7.375% 12/31/13 B2 510,000
1,000 Sierra Pacific Resources, Series 2006 6.750% 8/15/17 B1 985,810
-------------------------------------------------------------------------------------------------------------------------------
4,500 Total Electric Utilities 4,765,810
-------------------------------------------------------------------------------------------------------------------------------
28
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.1%
$ 2,000 NXP BV 8.118% 10/15/13 BB+ $ 2,040,000
-------------------------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES - 0.2%
1,200 Hanover Compressor Company 7.500% 4/15/13 B 1,218,000
1,500 Pride International Inc. 7.375% 7/15/14 Ba2 1,556,250
-------------------------------------------------------------------------------------------------------------------------------
2,700 Total Energy Equipment & Services 2,774,250
-------------------------------------------------------------------------------------------------------------------------------
FOOD & STAPLES RETAILING - 0.1%
2,000 Stater Brothers Holdings Inc. 8.125% 6/15/12 B+ 2,040,000
-------------------------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.2%
356 Dole Foods Company 8.875% 3/15/11 B- 352,440
2,243 Dole Foods Company 7.875% 7/15/13 B- 2,186,925
-------------------------------------------------------------------------------------------------------------------------------
2,599 Total Food Products 2,539,365
-------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES - 0.3%
700 HCA The Health Care Corporation Inc, 144A 9.125% 11/15/14 BB- 749,875
700 HCA The Health Care Corporation Inc., 144A 9.250% 11/15/16 BB- 751,625
2,500 US Oncology Inc. 10.750% 8/15/14 B- 2,775,000
-------------------------------------------------------------------------------------------------------------------------------
3,900 Total Health Care Providers & Services 4,276,500
-------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 1.5%
2,000 Boyd Gaming Corporation 8.750% 4/15/12 Ba3 2,100,000
2,000 Boyd Gaming Corporation 7.750% 12/15/12 Ba3 2,077,500
1,500 Herbst Gaming Inc. 7.000% 11/15/14 B- 1,440,000
700 Jacobs Entertainment Inc. 9.750% 6/15/14 B- 714,000
2,000 Landry's Restaurants Inc., Series B 7.500% 12/15/14 B1 1,965,000
1,600 Park Place Entertainment 8.125% 5/15/11 Ba1 1,682,000
2,500 Park Place Entertainment 7.000% 4/15/13 Baa3 2,560,583
2,000 Pinnacle Entertainment Inc. 8.250% 3/15/12 B- 2,030,000
750 Pinnacle Entertainment Inc. 8.750% 10/01/13 B- 798,750
1,283 Town Sports International Inc. 9.625% 4/15/11 B 1,361,584
4,000 Universal City Development Partners 11.750% 4/01/10 B2 4,305,000
-------------------------------------------------------------------------------------------------------------------------------
20,333 Total Hotels, Restaurants & Leisure 21,034,417
-------------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 0.3%
4,675 Technical Olympic USA Inc., Senior Subordinated 10.375% 7/01/12 B3 4,230,875
Notes
-------------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS - 0.1%
1,650 Central Garden & Pet Company 9.125% 2/01/13 B 1,724,250
-------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.1%
400 NRG Energy Inc. 7.250% 2/01/14 B1 404,000
400 NRG Energy Inc. 7.375% 2/01/16 B1 403,000
-------------------------------------------------------------------------------------------------------------------------------
800 Total Independent Power Producers & Energy Traders 807,000
-------------------------------------------------------------------------------------------------------------------------------
IT SERVICES - 0.5%
1,625 Global Cash Access LLC 8.750% 3/15/12 B- 1,714,375
4,750 Sungard Data Systems Inc. 9.125% 8/15/13 B- 5,011,250
-------------------------------------------------------------------------------------------------------------------------------
6,375 Total IT Services 6,725,625
-------------------------------------------------------------------------------------------------------------------------------
MACHINERY - 0.6%
2,000 Greenbrier Companies, Inc. 8.375% 5/15/15 B+ 2,045,000
6,095 Terex Corporation, Senior Subordinated Notes 9.250% 7/15/11 B+ 6,380,703
-------------------------------------------------------------------------------------------------------------------------------
8,095 Total Machinery 8,425,703
-------------------------------------------------------------------------------------------------------------------------------
MEDIA - 2.4%
4,000 Allbritton Communications Company, Series B 7.750% 12/15/12 B1 4,060,000
2,880 American Media Operations Inc., Series B 10.250% 5/01/09 Caa2 2,797,200
2,000 American Media Operations Inc. 8.875% 1/15/11 Caa2 1,835,000
1,000 Cablevision Systems Corporation, Series B 8.125% 8/15/09 B+ 1,041,250
5,000 Cablevision Systems Corporation 7.250% 7/15/08 B+ 5,068,750
2,000 Charter Communications Operating LLC, 144A 8.000% 4/30/12 B- 2,087,500
1,975 Medianews Group Inc. 6.375% 4/01/14 B 1,708,375
1,950 Panamsat Corporation 9.000% 8/15/14 B 2,069,438
5,000 Primedia Inc., Senior Notes 8.875% 5/15/11 B 5,125,000
4,550 Vertis Inc. 9.750% 4/01/09 B1 4,709,250
4,000 Young Broadcasting Inc., Senior Subordinated Note 10.000% 3/01/11 Caa1 3,820,000
-------------------------------------------------------------------------------------------------------------------------------
34,355 Total Media 34,321,763
-------------------------------------------------------------------------------------------------------------------------------
29
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS December 31, 2006
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.2%
$ 2,000 Chaparral Steel Company 10.000% 7/15/13 B+ $ 2,242,500
-------------------------------------------------------------------------------------------------------------------------------
MULTI-UTILITIES - 0.2%
1,400 Bon-Ton Department Stores Inc. 10.250% 3/15/14 B- 1,438,500
1,600 Dynegy Holdings Inc. 8.375% 5/01/16 B2 1,688,000
-------------------------------------------------------------------------------------------------------------------------------
3,000 Total Multi-Utilities 3,126,500
-------------------------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 0.7%
2,400 Baytex Energy Ltd 9.625% 7/15/10 B- 2,514,000
400 Chaparral Energy Inc. 8.500% 12/01/15 CCC+ 400,000
2,345 Chesapeake Energy Corporation 7.750% 1/15/15 BB 2,453,456
2,000 Hilcorp Energy I LP/Hilcorp Finance Company, 144A 7.750% 11/01/15 B 1,975,000
2,000 SemGroup LP, 144A 8.750% 11/15/15 B1 2,020,000
1,000 Whiting Petroleum Corporation 7.000% 2/01/14 B1 1,002,500
-------------------------------------------------------------------------------------------------------------------------------
10,145 Total Oil, Gas & Consumable Fuels 10,364,956
-------------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS - 0.5%
2,000 Georgia Pacific Corporation, Debentures 7.700% 6/15/15 B 2,047,500
5,000 Georgia Pacific Corporation, Notes 8.125% 5/15/11 B 5,275,000
-------------------------------------------------------------------------------------------------------------------------------
7,000 Total Paper & Forest Products 7,322,500
-------------------------------------------------------------------------------------------------------------------------------
PERSONAL PRODUCTS - 0.1%
1,500 Prestige Brands Inc. 9.250% 4/15/12 B- 1,537,500
-------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.3%
3,500 Wyeth 5.109% 1/15/24 A 3,817,100
-------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.4%
3,000 Felcor Lodging Trust Inc., 144A 7.263% 12/01/11 Ba3 3,030,000
600 Saxon Capital Inc., 144A 12.000% 5/01/14 A1 860,358
1,000 Trustreet Properties, Inc. 7.500% 4/01/15 B+ 1,085,000
500 Ventas Realty LP, Series WI 7.125% 6/01/15 BB+ 527,500
-------------------------------------------------------------------------------------------------------------------------------
5,100 Total Real Estate 5,502,858
-------------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 0.1%
1,600 Avago Technologies Finance Pte. Ltd., Floating 10.125% 12/01/13 B 1,716,000
Rate Note, 5.500% plus three-month LIBOR, 144A
-------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.6%
3,100 Asbury Automotive Group Inc. 9.000% 6/15/12 B 3,255,000
1,412 Stripes Acquisition/Susser Finance Corporation, 10.625% 12/15/13 B 1,539,080
Series 144A
3,000 Warnaco Inc., Senior Notes 8.875% 6/15/13 B+ 3,202,500
-------------------------------------------------------------------------------------------------------------------------------
7,512 Total Specialty Retail 7,996,580
-------------------------------------------------------------------------------------------------------------------------------
TEXTILES, APPAREL & LUXURY GOODS - 0.2%
3,000 Jostens IH Corporation 7.625% 10/01/12 B2 3,052,500
-------------------------------------------------------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS - 0.1%
2,000 United Rentals North America Inc. 6.500% 2/15/12 B+ 1,985,000
-------------------------------------------------------------------------------------------------------------------------------
$ 159,849 TOTAL CORPORATE BONDS (COST $164,190,587) 164,183,096
===============================================================================================================================
PRINCIPAL
AMOUNT (000)/
SHARES DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
--------------------------------------------------------------------------------------------------------------------------------
CAPITAL PREFERRED SECURITIES - 28.9% (19.5% OF TOTAL INVESTMENTS)
CAPITAL MARKETS - 4.1%
3,100 BankBoston Capital Trust III 6.103% 6/15/27 Aa3 $ 3,074,875
1,000 BT Capital Trust, Series B1 7.900% 1/15/27 A2 1,035,290
1,250 C.A. Preferred Fund Trust II 7.000% 10/30/49 A1 1,283,478
27,500 C.A. Preferred Funding Trust 7.000% 1/30/49 A1 28,198,363
6,800 Dresdner Funding Trust I, 144A 8.151% 6/30/31 A- 8,214,237
1,600 MUFG Capital Finance 2 4.850% 7/25/56 BBB 2,065,693
8,000 UBS Preferred Funding Trust I 8.622% 10/29/49 AA- 8,844,272
4,800 Washington Mutual Capital Trust I 8.375% 6/01/27 Baa1 5,036,568
--------------------------------------------------------------------------------------------------------------------------------
Total Capital Markets 57,752,776
----------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 18.5%
3,000 AB Svensk Exportkredit, 144A 6.375% 10/27/49 AA- 2,984,262
9,500 Abbey National Capital Trust I 8.963% 6/30/50 A 12,709,794
30
PRINCIPAL
AMOUNT (000)/
SHARES DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
--------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS (continued)
6,500 AgFirst Farm Credit Bank 7.300% 12/15/53 N/R $ 6,402,221
3,000 Bank One Capital III 8.750% 9/01/30 A1 3,946,932
2,000 BanPonce Trust I, Series A 8.327% 2/01/27 Baa1 2,085,830
13,030 Barclays Bank PLC, 144A 8.550% 6/15/49 Aa3 14,594,786
1,000 BOI Capital Funding 3, 144A 6.107% 8/04/56 A2 983,924
3,000 Centura Capital Trust I, 144A 8.845% 6/01/27 A2 3,165,945
1,500 DBS Capital Funding Corporation, 144A 7.657% 3/15/49 A1 1,614,612
1,400 Den Norske Bank, 144A 7.729% 6/29/49 A2 1,511,951
6,200 First Empire Capital Trust I 8.234% 2/01/27 Baa1 6,464,548
2,000 First Midwest Bancorp Inc. 6.950% 12/01/33 Baa2 2,108,260
19,000 HBOS Capital Funding LP 6.850% 3/23/49 A1 19,245,385
4,500 HBOS PLC, Series 144A 6.413% 9/29/49 A1 4,484,349
2,400 HSBC Capital Funding LP, 144A 9.547% 12/31/49 A1 2,705,998
5,750 HSBC Capital Funding LP 10.176% 6/30/50 A1 8,520,155
11,000 KBC Bank Fund Trust III, 144A 9.860% 5/02/50 A 12,246,113
18,600 Lloyds TSB Bank PLC 6.900% 11/22/49 Aa2 18,789,218
20,000 M&I Capital Trust A 7.650% 12/01/26 A2 20,702,740
6,392 Nationsbank Capital Trust III 5.920% 1/15/27 Aa3 6,208,761
5,000 NB Capital Trust IV 8.250% 4/15/27 Aa3 5,219,085
1,000 North Fork Capital Trust I 8.700% 12/15/26 Baa1 1,045,810
8,000 North Fork Capital Trust II 8.000% 12/15/27 Baa1 8,448,456
1,000 Popular North American Capital Trust I 6.564% 9/15/34 Baa1 1,000,382
14,000 RBS Capital Trust B 6.800% 12/31/49 A1 14,178,360
600 Reliance Capital Trust I, Series B 8.170% 5/01/28 N/R 639,012
8,000 Sparebanken Rogaland, Notes, 144A 6.443% 5/01/49 Baa1 7,908,824
10,500 St. George Funding Company LLC 8.485% 6/30/17 Baa1 11,032,350
9,450 Swedbank ForeningsSparbanken AB, 144A 9.000% 9/17/50 A2 10,366,319
4,000 Unicredito Italiano Capital Trust, 144A 9.200% 4/05/51 A- 4,492,040
300 Union Planters Preferred Fund, 144A 7.750% 7/15/53 A2 33,037,500
14,200 Washington Mutual Preferred Funding Cayman, Series 7.250% 3/15/49 BBB 14,170,024
A-1, 144A
--------------------------------------------------------------------------------------------------------------------------------
Total Commercial Banks 263,013,946
----------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 1.5%
4,000 BNP Paribas Capital Trust 7.200% 12/31/49 A+ 4,030,388
3,100 Fulton Capital Trust I 6.290% 2/01/36 A3 3,063,122
10,400 JPMorgan Chase Capital Trust XVIII 6.950% 8/17/36 A2 11,286,288
2,800 Old Mutual Capital Funding 8.000% 6/22/53 Baa2 2,919,000
--------------------------------------------------------------------------------------------------------------------------------
Total Diversified Financial Services 21,298,798
----------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.8%
9,957 Centaur Funding Corporation, Series B, 144A 9.080% 4/21/20 BBB 11,643,467
--------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 2.1%
2,300 American General Capital II 8.500% 7/01/30 Aa3 2,987,739
4,000 Mangrove Bay, Class 3, 144A 6.102% 7/15/33 BBB+ 3,914,372
5,500 MetLife Inc. 6.400% 12/15/66 A3 5,543,753
1,150 Nationwide Financial Services Capital Trust 7.899% 3/01/37 Baa1 1,371,856
3,000 Oil Insurance Limited, 144A 7.550% 12/30/49 Baa1 3,113,493
7,250 Prudential PLC 6.500% 6/29/49 A 7,313,372
4,750 Zurich Capital Trust I, 144A 8.376% 6/01/37 A- 4,979,297
--------------------------------------------------------------------------------------------------------------------------------
Total Insurance 29,223,882
----------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 0.5%
1,200 KN Capital Trust I 8.560% 4/15/27 Baa3 1,202,030
6,110 KN Capital Trust III 7.630% 4/15/28 Baa3 5,691,538
--------------------------------------------------------------------------------------------------------------------------------
Total Oil, Gas & Consumable Fuels 6,893,568
----------------------------------------------------------------------------------------------------------------
ROAD & RAIL - 0.3%
6,400 Burlington Northern Santa Fe Funding Trust I 6.613% 12/15/55 BBB 6,380,710
--------------------------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE - 1.1%
500 Caisse Nationale Des Caisses d'Epargne et de 6.750% 1/27/49 A+ 501,631
Prevoyance
10,000 Dime Capital Trust I, Series A 9.330% 5/06/27 Baa1 10,574,610
1,000 Great Western Financial Trust II, Series A 8.206% 2/01/27 Baa1 1,042,719
3,000 Washington Mutual Preferred Funding Trust II 6.665% 3/15/57 BBB 3,013,485
--------------------------------------------------------------------------------------------------------------------------------
Total Thrifts & Mortgage Finance 15,132,445
----------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL PREFERRED SECURITIES (COST $420,241,627) 411,339,592
================================================================================================================
31
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) VALUE
--------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES - 1.4% (0.9% OF TOTAL INVESTMENTS)
65,094 Blackrock Preferred and Corporate Income $ 1,437,276
Strategies Fund
323,097 Blackrock Preferred Income Strategies Fund 6,536,252
188,002 Flaherty and Crumrine/Claymore Preferred 4,025,123
Securities Income Fund Inc.
109,974 Flaherty and Crumrine/Claymore Total Return Fund 2,362,242
Inc.
205,946 John Hancock Preferred Income Fund III 4,615,231
--------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES (COST $17,709,021) 18,976,124
================================================================================================================
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY VALUE
--------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 1.0% (0.7% OF TOTAL INVESTMENTS)
$ 14,200 Repurchase Agreement with Fixed Income Clearing 4.580% 1/02/07 $ 14,200,488
Corporation, dated 12/29/06, repurchase price
$14,207,714, collateralized by $10,820,000 U.S.
Treasury Bonds, 6.250%, due 8/15/23, value
$12,674,321 and $1,345,000 U.S. Treasury Bonds,
7.625%, due 2/15/25, value $1,815,750
========== ----------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $14,200,488) 14,200,488
================================================================================================================
TOTAL INVESTMENTS (COST $2,072,028,787) - 148.7% 2,113,792,476
================================================================================================================
OTHER ASSETS LESS LIABILITIES - 1.1% 16,158,538
================================================================================================================
PREFERRED SHARES, AT LIQUIDATION VALUE - (49.8)% (708,000,000)
================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES - 100% $1,421,951,014
================================================================================================================
INTEREST RATE SWAPS OUTSTANDING AT DECEMBER 31, 2006:
FUND FIXED RATE UNREALIZED
NOTIONAL PAY/RECEIVE FLOATING RATE FIXED RATE PAYMENT TERMINATION APPRECIATION
COUNTERPARTY AMOUNT FLOATING RATE INDEX (ANNUALIZED) FREQUENCY DATE (DEPRECIATION)
----------------------------------------------------------------------------------------------------------------------------------
JPMorgan Chase $71,000,000 Receive 1-Month USD-LIBOR 2.994% Monthly 1/22/08 $ 1,693,975
Morgan Stanley 71,000,000 Receive 1-Month USD-LIBOR 2.567 Monthly 1/22/07 168,059
Morgan Stanley 71,000,000 Receive 1-Month USD-LIBOR 3.406 Monthly 1/22/09 2,386,505
----------------------------------------------------------------------------------------------------------------------------------
$ 4,248,539
===================================================================================================================================
USD-LIBOR (United States Dollar-London Inter-Bank Offered Rate)
32
(1) All percentages shown in the Portfolio of Investments are based on net assets applicable
to Common shares unless otherwise noted.
(2) Non-income producing.
(3) Ratings (not covered by the report of independent registered public accounting firm):
Using the higher of Standard & Poor's or Moody's rating. Ratings below BBB by Standard &
Poor's Group or Baa by Moody's Investor Service, Inc. are considered to be below
investment grade.
(4) Senior Loans in which the Fund invests generally pay interest at rates which are
periodically adjusted by reference to a base short-term, floating lending rate plus an
assigned fixed rate. These floating lending rates are generally (i) the lending rate
referenced by the London Inter-Bank Offered Rate ('LIBOR'), or (ii) the prime rate offered
by one or more major United States banks.
Senior Loans may be considered restricted in that the Fund ordinarily is contractually
obligated to receive approval from the Agent Bank and/or Borrower prior to the disposition
of a Senior Loan.
(5) Senior Loans generally are subject to mandatory and/or optional prepayment. Because of
these mandatory prepayment conditions and because there may be significant economic
incentives for a Borrower to prepay, prepayments of Senior Loans may occur. As a result,
the actual remaining maturity of Senior Loans held may be substantially less than the
stated maturities shown.
(6) Investment is eligible for the Dividends Received Deduction.
N/R Not rated.
144A Investment is exempt from registration under Rule 144A of the Securities Act of 1933, as
amended. These investments may only be resold in transactions exempt from registration
which are normally those transactions with qualified institutional buyers.
CORTS Corporate Backed Trust Securities.
PCARS Public Credit and Repackaged Securities.
PPLUS PreferredPlus Trust.
SATURNS Structured Asset Trust Unit Repackaging.
See accompanying notes to financial statements.
33
Nuveen Preferred and Convertible Income Fund 2 (JQC)
Portfolio of
INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) VALUE
---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 9.9% (6.7% OF TOTAL INVESTMENTS)
AEROSPACE & DEFENSE - 0.2%
26,030 Boeing Company $ 2,312,505
25,972 Lockheed Martin Corporation 2,391,242
15,390 Orbital Sciences Corporation, (2) 283,792
---------------------------------------------------------------------------------------------------------------------------
Total Aerospace & Defense 4,987,539
--------------------------------------------------------------------------------------------------------------
AIR FREIGHT & LOGISTICS - 0.2%
27,882 FedEx Corporation 3,028,543
16,507 Ryder System Inc. 842,847
---------------------------------------------------------------------------------------------------------------------------
Total Air Freight & Logistics 3,871,390
--------------------------------------------------------------------------------------------------------------
BEVERAGES - 0.1%
35,210 Coca-Cola Company 1,698,883
11,581 Pepsi Bottling Group Inc. 357,969
---------------------------------------------------------------------------------------------------------------------------
Total Beverages 2,056,852
--------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY - 0.3%
20,630 Biogen Idec Inc., (2) 1,014,790
9,710 Cephalon, Inc., (2) 683,681
18,388 Genentech, Inc., (2) 1,491,818
30,507 Gilead Sciences, Inc., (2) 1,980,820
---------------------------------------------------------------------------------------------------------------------------
Total Biotechnology 5,171,109
--------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS - 0.2%
73,590 JPMorgan Chase & Co. 3,554,397
16,210 Lehman Brothers Holdings Inc. 1,266,325
---------------------------------------------------------------------------------------------------------------------------
Total Capital Markets 4,820,722
--------------------------------------------------------------------------------------------------------------
CHEMICALS - 0.2%
17,690 Air Products & Chemicals Inc. 1,243,253
25,458 Airgas, Inc. 1,031,558
27,390 Ashland Inc. 1,894,840
10,780 Sparetech Corporation 282,652
---------------------------------------------------------------------------------------------------------------------------
Total Chemicals 4,452,303
--------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 0.5%
30,650 Bank of Hawaii Corporation 1,653,568
20,380 Colonial BancGroup Inc. 524,581
10,285 Greater Bay Bancorp. 270,804
26,110 Mellon Financial Corporation 1,100,537
13,290 Northern Trust Corporation 806,570
43,640 PNC Financial Services Group, Inc. 3,231,106
11,385 Sterling Bancshares Inc. 148,233
6,630 Umpqua Holdings Corporation 195,121
26,586 Washington Mutual, Inc. 1,209,397
---------------------------------------------------------------------------------------------------------------------------
Total Commercial Banks 9,139,917
--------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.6%
8,710 Administaff, Inc. 372,527
6,042 American Ecology Corporation 111,837
4,368 Consolidated Graphics Inc., (2) 258,018
38,190 Convergys Corporation, (2) 908,158
8,822 Corporate Executive Board Company 773,689
31,300 Corrections Corporation of America, (2) 1,415,699
38,873 Global Payments Inc. 1,799,820
13,840 ITT Educational Services, Inc., (2) 918,561
34
SHARES DESCRIPTION (1) VALUE
---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES (continued)
52,290 Republic Services, Inc. $ 2,126,634
43,930 SEI Investments Company 2,616,471
---------------------------------------------------------------------------------------------------------------------------
Total Commercial Services & Supplies 11,301,414
--------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 0.2%
116,240 Corning Incorporated, (2) 2,174,850
4,939 Harris Corporation 226,503
13,510 Polycom Inc., (2) 417,594
---------------------------------------------------------------------------------------------------------------------------
Total Communications Equipment 2,818,947
--------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.4%
25,700 Apple Computer, Inc., (2) 2,180,388
53,170 Hewlett-Packard Company 2,190,072
31,890 Lexmark International, Inc., (2) 2,334,348
50,974 Network Appliance Inc., (2) 2,002,259
---------------------------------------------------------------------------------------------------------------------------
Total Computers & Peripherals 8,707,067
--------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.1%
18,310 Capital One Financial Corporation 1,406,574
---------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED CONSUMER SERVICES - 0.0%
14,504 Jackson Hewitt Tax Services Inc. 492,701
---------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.2%
18,540 Alltel Corporation 1,121,299
35,450 AT&T Inc. 1,267,338
6,660 Cbeyond Inc., (2) 203,729
8,250 CT Communications, Inc. 189,090
87,690 Sprint Nextel Corporation 1,656,464
---------------------------------------------------------------------------------------------------------------------------
Total Diversified Telecommunication Services 4,437,920
--------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.3%
30,280 Great Plains Energy Incorporated 962,904
18,210 OGE Energy Corp. 728,400
48,740 PG&E Corporation 2,306,864
14,312 TXU Corporation 775,854
21,950 Xcel Energy, Inc. 506,167
---------------------------------------------------------------------------------------------------------------------------
Total Electric Utilities 5,280,189
--------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 0.2%
87,244 Emerson Electric Co. 3,846,588
5,906 Ormat Technologies Inc. 217,459
---------------------------------------------------------------------------------------------------------------------------
Total Electrical Equipment 4,064,047
--------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.3%
4,750 American Science & Engineering Inc., (2) 282,673
6,544 Itron Inc., (2) 339,241
74,540 MEMC Electronic Materials, (2) 2,917,496
12,967 Millipore Corporation, (2) 863,602
14,181 Plexus Corporation, (2) 338,642
14,461 Teledyne Technologies Inc., (2) 580,320
22,135 Waters Corporation, (2) 1,083,951
---------------------------------------------------------------------------------------------------------------------------
Total Electronic Equipment & Instruments 6,405,925
--------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES - 0.0%
9,980 Matrix Service Company, (2) 160,678
10,794 Unit Corporation, (2) 522,969
---------------------------------------------------------------------------------------------------------------------------
Total Energy Equipment & Services 683,647
--------------------------------------------------------------------------------------------------------------
FOOD & STAPLES RETAILING - 0.1%
51,350 Safeway Inc. 1,774,656
18,040 Whole Foods Market, Inc. 846,617
---------------------------------------------------------------------------------------------------------------------------
Total Food & Staples Retailing 2,621,273
--------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.3%
46,970 Campbell Soup Company 1,826,663
112,380 ConAgra Foods, Inc. 3,034,260
35
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) VALUE
---------------------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS (continued)
19,890 H.J. Heinz Company $ 895,249
18,590 McCormick and Company Inc. 716,830
---------------------------------------------------------------------------------------------------------------------------
Total Food Products 6,473,002
--------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.3%
107,913 Energen Corporation 5,065,436
16,650 Questar Corporation 1,382,783
---------------------------------------------------------------------------------------------------------------------------
Total Gas Utilities 6,448,219
--------------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES - 0.3%
16,670 American Medical Systems Holdings, Inc., (2) 308,728
42,400 Baxter International Inc. 1,966,936
22,714 Dade Behring Holdings Inc. 904,244
9,854 Express Scripts, Inc., (2) 705,546
11,820 Hillenbrand Industries 672,913
36,920 Hospira Inc., (2) 1,239,774
7,859 Surmodics Inc., (2) 244,572
---------------------------------------------------------------------------------------------------------------------------
Total Health Care Equipment & Supplies 6,042,713
--------------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES - 0.3%
7,640 Centene Corporation, (2) 187,715
14,209 Healthways Inc., (2) 677,911
5,550 Humana Inc., (2) 306,971
7,840 Mentor Corporation 383,141
9,500 Nighthawk Radiology Holdings Inc., (2) 242,250
30,880 Quest Diagnostics Incorporated 1,636,640
41,383 Wellcare Health Plans Inc., (2) 2,851,289
---------------------------------------------------------------------------------------------------------------------------
Total Health Care Providers & Services 6,285,917
--------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 0.2%
42,846 Choice Hotels International, Inc. 1,803,817
15,807 Starbucks Corporation, (2) 559,884
---------------------------------------------------------------------------------------------------------------------------
Total Hotels, Restaurants & Leisure 2,363,701
--------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 0.1%
50,922 Newell Rubbermaid Inc. 1,474,192
16,410 Snap-on Incorporated 781,772
---------------------------------------------------------------------------------------------------------------------------
Total Household Durables 2,255,964
--------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS - 0.2%
52,840 Colgate-Palmolive Company 3,447,282
18,537 Kimberly-Clark Corporation 1,259,589
---------------------------------------------------------------------------------------------------------------------------
Total Household Products 4,706,871
--------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.1%
24,440 NRG Energy Inc., (2) 1,368,884
---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 0.1%
29,460 General Electric Company 1,096,207
3,790 Teleflex Inc. 244,682
---------------------------------------------------------------------------------------------------------------------------
Total Industrial Conglomerates 1,340,889
--------------------------------------------------------------------------------------------------------------
INSURANCE - 0.6%
50,818 AFLAC Incorporated 2,337,628
48,334 HCC Insurance Holdings Inc. 1,551,038
63,154 Philadelphia Consolidated Holding Corporation, (2) 2,814,142
7,050 Tower Group Inc. 219,044
145,490 W.R. Berkley Corporation 5,020,860
---------------------------------------------------------------------------------------------------------------------------
Total Insurance 11,942,712
--------------------------------------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL - 0.0%
3,926 Coldwater Creek Inc., (2) 96,266
---------------------------------------------------------------------------------------------------------------------------
36
SHARES DESCRIPTION (1) VALUE
---------------------------------------------------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES - 0.1%
7,840 F5 Networks, Inc., (2) $ 581,806
1,724 Google Inc., Class A, (2) 793,868
---------------------------------------------------------------------------------------------------------------------------
Total Internet Software & Services 1,375,674
--------------------------------------------------------------------------------------------------------------
IT SERVICES - 0.0%
15,336 Websense Inc., (2) 350,121
---------------------------------------------------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS - 0.0%
21,860 Marvel Entertainment Inc., (2) 588,253
---------------------------------------------------------------------------------------------------------------------------
LIFE SCIENCES TOOLS & SERVICES - 0.0%
3,480 Illumina Inc., (2) 136,799
---------------------------------------------------------------------------------------------------------------------------
MACHINERY - 0.2%
7,570 Flow International Corporation, (2) 83,421
2,996 Freightcar America Inc. 166,128
13,774 Harsco Corporation 1,048,201
9,935 Joy Global Inc. 480,258
7,980 Paccar Inc. 517,902
15,135 Parker Hannifin Corporation 1,163,579
3,690 Robbins & Myers, Inc. 169,445
15,010 Terex Corporation, (2) 969,346
---------------------------------------------------------------------------------------------------------------------------
Total Machinery 4,598,280
--------------------------------------------------------------------------------------------------------------
MEDIA - 0.5%
13,225 Comcast Corporation, Class A, (2) 559,814
46,570 DIRECTV Group, Inc., (2) 1,161,456
26,864 John Wiley and Sons Inc., Class A 1,033,458
14,818 Liberty Global Inc., A Shares, (2) 431,945
14,818 Liberty Global Inc., Class C, (2) 414,904
7,984 Lodgenet Entertainment Corporation, (2) 199,840
61,140 McGraw-Hill Companies, Inc. 4,158,743
11,000 NetFlix.com Inc., (2) 284,460
80,420 Time Warner Inc. 1,751,548
---------------------------------------------------------------------------------------------------------------------------
Total Media 9,996,168
--------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.0%
4,570 Compass Minerals International, Inc. 144,229
---------------------------------------------------------------------------------------------------------------------------
MULTILINE RETAIL - 0.3%
29,780 Big Lots Inc., (2) 682,558
42,320 Dollar Tree Stores Inc., (2) 1,273,832
48,500 Kohl's Corporation, (2) 3,318,855
---------------------------------------------------------------------------------------------------------------------------
Total Multiline Retail 5,275,245
--------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 0.4%
6,460 Bill Barnett Corporation, (2) 175,777
11,580 Cabot Oil & Gas Corporation 702,327
34,190 EOG Resources, Inc. 2,135,166
8,240 Equitable Resources Inc. 344,020
6,252 Houston Exploration Company, (2) 323,729
10,357 Pioneer Drilling Company, (2) 137,541
8,990 St Mary Land and Exploration Company 331,192
28,441 Sunoco, Inc. 1,773,581
15,992 Valero Energy Corporation 818,151
50,392 W&T Offshore Inc. 1,548,042
---------------------------------------------------------------------------------------------------------------------------
Total Oil, Gas & Consumable Fuels 8,289,526
--------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS - 0.1%
25,920 Plum Creek Timber Company 1,032,912
---------------------------------------------------------------------------------------------------------------------------
PERSONAL PRODUCTS - 0.1%
7,230 NBTY Inc., (2) 300,551
23,410 Nutri System Inc., (2) 1,483,960
---------------------------------------------------------------------------------------------------------------------------
Total Personal Products 1,784,511
--------------------------------------------------------------------------------------------------------------
37
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) VALUE
---------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.2%
12,790 Abraxis Bioscience Inc., (2) $ 349,679
13,847 Allergan Inc. 1,658,040
10,500 Johnson & Johnson 693,210
14,710 Merck & Co. Inc. 641,356
7,170 New River Pharmaceuticals Inc., (2) 392,271
11,220 Pozen Inc., (2) 190,628
---------------------------------------------------------------------------------------------------------------------------
Total Pharmaceuticals 3,925,184
--------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.3%
7,103 American Home Mortgage Investment Corp. 249,457
13,860 Camden Property Trust 1,023,561
12,653 Equity Inns Inc. 201,942
11,430 Health Care Property Investors Inc. 420,853
8,747 LaSalle Hotel Properties 401,050
16,460 Northstar Realty Finance Corporation 272,742
11,421 Public Storage, Inc. 1,113,548
8,334 SL Green Realty Corporation 1,106,589
14,447 Tanger Factory Outlet Centers 564,589
2,654 Taubman Centers Inc. 134,982
13,534 United Dominion Realty Trust 430,246
---------------------------------------------------------------------------------------------------------------------------
Total Real Estate 5,919,559
--------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 0.2%
17,760 Advanced Micro Devices, Inc., (2) 361,416
175,200 Micron Technology, Inc., (2) 2,445,792
35,820 National Semiconductor Corporation 813,114
29,320 Trident Microsystems Inc., (2) 533,038
---------------------------------------------------------------------------------------------------------------------------
Total Semiconductors & Equipment 4,153,360
--------------------------------------------------------------------------------------------------------------
SOFTWARE - 0.4%
4,280 Ansys Inc., (2) 186,137
11,135 Aspen Technology Inc., (2) 122,708
47,301 Autodesk, Inc., (2) 1,913,798
15,184 Blackbaud, Inc. 394,784
93,320 BMC Software Inc., (2) 3,004,904
48,810 Intuit Inc., (2) 1,489,193
52,730 Salesforce.com, Inc., (2) 1,922,009
---------------------------------------------------------------------------------------------------------------------------
Total Software 9,033,533
--------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.3%
67,200 American Eagle Outfitters, Inc. 2,097,312
13,511 Ann Taylor Stores Corporation, (2) 443,701
7,234 Build-A-Bear-Workshop, Inc., (2) 202,697
3,743 Childrens Place Retail Stores Inc., (2) 237,755
6,540 Dick's Sporting Goods Inc., (2) 320,395
6,580 Gymboree Corporation, (2) 251,093
16,860 Office Depot, Inc., (2) 643,546
12,180 PetSmart Inc. 351,515
35,201 Staples, Inc. 939,867
---------------------------------------------------------------------------------------------------------------------------
Total Specialty Retail 5,487,881
--------------------------------------------------------------------------------------------------------------
TEXTILES, APPAREL & LUXURY GOODS - 0.0%
14,599 Guess Inc., (2) 926,015
---------------------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE - 0.0%
20,010 Washington Federal Inc. 470,835
---------------------------------------------------------------------------------------------------------------------------
TOBACCO - 0.2%
48,440 UST Inc. 2,819,208
---------------------------------------------------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS - 0.0%
7,374 GATX Corporation 319,515
---------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $188,595,569) 198,671,482
==============================================================================================================
38
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED SECURITIES - 8.6% (5.9% OF TOTAL INVESTMENTS)
AUTOMOBILES - 1.8%
407,000 Ford Motor Company Capital Trust II 6.500% CCC $ 13,919,400
664,265 General Motors Corporation 5.250% B- 14,075,775
384,100 General Motors Corporation 6.250% B- 8,726,752
-----------------------------------------------------------------------------------------------------------------------------
Total Automobiles 36,721,927
----------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS - 0.6%
13,750 Affiliated Managers Group Inc. 5.100% BB 723,594
72,000 Affiliated Managers Group Inc. 5.100% BB 3,789,000
144,800 E*Trade Financial Corporation 6.125% Ba3 4,226,712
56,250 Lazard Limited 6.625% Ba1 2,333,813
-----------------------------------------------------------------------------------------------------------------------------
Total Capital Markets 11,073,119
----------------------------------------------------------------------------------------------------------------
CHEMICALS - 0.1%
51,100 Celanese Corporation 4.250% N/R 1,839,600
-----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 0.6%
9,100,000 Fortis Insurance NV, 144A 7.750% A+ 13,002,335
-----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.6%
33,890 Allied Waste Industries Inc. 6.250% B 11,187,936
-----------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.0%
750,000 SLM Corporation 5.326% A 752,175
-----------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.5%
108,860 Entergy Corporation 7.625% BBB 6,474,993
76,430 PNM Resources Inc. 6.750% Baa3 4,038,561
-----------------------------------------------------------------------------------------------------------------------------
Total Electric Utilities 10,513,554
----------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.3%
62,000 Bunge Limited 4.875% N/R 6,510,000
-----------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.1%
37,500 Southern Union Company 5.000% BBB- 2,008,875
-----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.2%
5,500 NRG Energy Inc. 5.750% B2 1,485,000
-----------------------------------------------------------------------------------------------------------------------------
INSURANCE - 1.2%
470,000 MetLife Inc. 6.375% BBB+ 14,372,600
375,770 Travelers Property Casualty Corporation 4.500% Baa1 9,822,628
-----------------------------------------------------------------------------------------------------------------------------
Total Insurance 24,195,228
----------------------------------------------------------------------------------------------------------------
MEDIA - 0.5%
270,000 Comcast Corporation 2.000% BBB 10,935,000
-----------------------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.2%
3,380 Freeport McMoran Copper & Gold, Inc. 5.500% B- 4,416,393
-----------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.7%
253,450 Schering-Plough Corporation 6.000% BBB 14,418,771
-----------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.2%
151,465 Annaly Mortgage Management Inc. 6.000% N/R 4,354,619
-----------------------------------------------------------------------------------------------------------------------------
U.S. AGENCY - 0.8%
153 Fannie Mae 5.375% AA- 15,302,238
-----------------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.2%
78,725 Crown Castle International Corporation 6.250% N/R 4,369,238
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED SECURITIES (COST $158,521,379) 173,086,008
================================================================================================================
39
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
$25 PAR (OR SIMILAR) PREFERRED SECURITIES - 43.8% (29.8% OF TOTAL INVESTMENTS)
AUTOMOBILES - 0.0%
3,000 DaimlerChrysler AG (CORTS) 7.875% Baa1 $ 75,750
1,300 DaimlerChrysler Corp. (PPLUS) 7.250% A3 34,099
-----------------------------------------------------------------------------------------------------------------------------
Total Automobiles 109,849
----------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS - 3.1%
269,511 BNY Capital Trust V, Series F 5.950% A1 6,665,007
219,600 Compass Capital Trust III 7.350% A3 5,509,764
31,200 CSFB USA, Series 2002-10 (SATURNS) 7.000% AA- 790,920
22,600 First Union Institutional Capital II (CORTS) 8.200% A1 606,810
8,400 Goldman Sachs Capital I (CORTS) 6.000% A1 204,036
7,700 Goldman Sachs Capital I, Series A (CORTS) 6.000% A1 188,958
6,700 Goldman Sachs Group Inc., Series 2004-04 (SATURNS) 6.000% A1 164,150
2,900 Goldman Sachs Group Inc., Series 2004-06 (SATURNS) 6.000% A1 70,470
2,900 Goldman Sachs Group Inc., Series 2004-4 (CORTS) 6.000% A1 71,050
16,500 Goldman Sachs Group Inc., Series GSC-3 (PPLUS) 6.000% A1 398,310
11,200 Goldman Sachs Group Inc., Series GSG-1 (PPLUS) 6.000% AA- 272,944
4,000 Goldman Sachs Group Inc., Series GSG-2 (PPLUS) 5.750% AA- 93,440
71,500 Merrill Lynch Capital Trust II 8.000% A1 1,812,525
423,200 Merrill Lynch Preferred Capital Trust III 7.000% A1 10,812,760
189,600 Merrill Lynch Preferred Capital Trust IV 7.120% A1 4,876,512
283,400 Merrill Lynch Preferred Capital Trust V 7.280% A1 7,308,886
211,850 Morgan Stanley Capital Trust II 7.250% A1 5,380,990
185,370 Morgan Stanley Capital Trust III 6.250% A1 4,654,641
121,846 Morgan Stanley Capital Trust IV 6.250% A1 3,052,242
310,300 Morgan Stanley Capital Trust VI 6.600% A1 7,943,680
31,980 Morgan Stanley Capital Trust VII 6.600% A2 807,175
-----------------------------------------------------------------------------------------------------------------------------
Total Capital Markets 61,685,270
----------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 8.4%
303,200 Abbey National PLC, Series C 7.375% A2 7,719,472
730,000 ABN AMRO Capital Fund Trust V 5.900% A 17,702,500
35,179 ABN AMRO Capital Fund Trust VI 6.250% A 886,511
17,021 ABN AMRO Capital Trust Fund VII 6.080% A 425,525
115,200 ASBC Capital I 7.625% Baa1 2,906,496
128,410 BAC Capital Trust I 7.000% Aa3 3,220,523
565,500 BAC Capital Trust II 7.000% Aa3 14,307,150
151,300 BAC Capital Trust III 7.000% Aa3 3,847,559
1,000 BAC Capital Trust X 6.250% Aa3 25,060
108,627 Banco Santander 144A 6.800% A2 2,729,253
816,556 Banco Santander, (6) 6.410% A2 20,707,860
6,700 BancorpSouth Capital Trust I 8.150% Baa2 167,969
28,800 Banesto Holdings, Series A, 144A 10.500% A2 871,200
167,700 Bank One Capital Trust VI 7.200% A1 4,254,549
52,800 BankNorth Capital Trust II 8.000% A3 1,329,504
66,042 Barclays Bank PLC, (6) 6.625% Aa3 1,756,717
33,900 Capital One Capital II Corporation 7.500% Baa1 888,817
166,100 Chittenden Capital Trust I 8.000% Baa1 4,195,686
142,300 Citizens Funding Trust I 7.500% Baa2 3,717,588
146,500 Cobank ABC, 144A, (6) 7.000% N/R 7,456,997
119,100 Comerica Capital Trust I 7.600% A3 3,003,702
430,300 Fleet Capital Trust VIII 7.200% Aa3 10,809,136
61,600 HSBC Finance Corporation 6.875% AA- 1,583,120
85,867 KeyCorp Capital Trust V 5.875% A3 2,058,232
4,100 Keycorp Capital VIII 7.000% A3 107,753
723,905 National City Capital Trust II 6.625% A3 18,301,259
21,700 ONB Capital Trust II 8.000% Baa2 551,397
27,300 PNC Capital Trust 6.125% A3 679,497
181,074 Royal Bank of Scotland Group PLC, Series L 5.750% A1 4,372,937
124,740 Royal Bank of Scotland Group PLC, Series N 6.350% A1 3,182,117
14,300 SunAmerica CORTS 6.700% A 368,082
31,800 USB Capital Trust VI 5.750% Aa3 758,112
43,900 USB Capital Trust XI 6.600% A1 1,114,182
39,300 VNB Capital Trust I 7.750% Baa1 993,897
40,000 Wells Fargo Capital Trust IV 7.000% Aa2 1,004,000
483,400 Wells Fargo Capital Trust V 7.000% Aa2 12,176,846
114,700 Wells Fargo Capital Trust VI 6.950% Aa2 2,873,235
40
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS (continued)
129,309 Wells Fargo Capital Trust VII 5.850% Aa2 $ 3,175,829
11,000 Wells Fargo Capital Trust IX 5.625% Aa2 261,470
117,800 Zions Capital Trust B 8.000% Baa1 3,002,722
-----------------------------------------------------------------------------------------------------------------------------
Total Commercial Banks 169,494,461
----------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.0%
20,000 IBM Trust IV (CORTS) 7.000% A+ 503,200
-----------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.0%
14,200 SLM Corporation 6.000% A 346,622
-----------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 4.5%
101,500 BAC Capital Trust XII 6.875% Aa3 2,668,943
27,700 CIT Group Incorporated (CORTS) 7.750% A3 736,820
197,400 Citigroup Capital Trust VII 7.125% Aa2 5,004,090
754,422 Citigroup Capital Trust VIII 6.950% Aa2 18,996,346
6,100 Citigroup Capital XIV 6.875% Aa2 160,186
298,821 Citigroup Capital XV 6.500% Aa3 7,517,231
35,000 Citigroup Capital XVI 6.450% Aa3 882,000
6,500 Citigroup, Series CIT (CORTS) 6.750% A3 166,465
2,000 Deutsche Bank Capital Funding Trust VIII 6.375% A 51,750
1,400 General Electric Capital Corporation (CORTS) 6.000% AAA 34,678
40,500 General Electric Capital Corporation 6.625% AAA 1,021,005
592,320 ING Group N.V. 7.200% A 15,145,622
755,475 ING Group N.V. 7.050% A 19,181,510
71,965 JPMorgan Chase & Company (PCARS) 7.125% A2 1,796,966
73,600 JPMorgan Chase Trust, Series 2002-6, Class A 7.125% A1 1,905,504
(SATURNS)
598,100 Merrill Lynch Capital Trust I 6.450% A1 14,653,450
47,000 Royal Bank of Scotland Public Limited Company, 6.750% A1 1,238,450
Series 2006Q
-----------------------------------------------------------------------------------------------------------------------------
Total Diversified Financial Services 91,161,016
----------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.5%
38,500 BellSouth Capital Funding (CORTS) 7.100% A 991,375
30,500 BellSouth Corporation (CORTS) 7.000% Aa3 767,380
50,600 BellSouth Corporation, Series 2001-3 (SATURNS) 7.125% A 1,265,506
32,600 BellSouth Inc. (CORTS) 7.000% A 837,820
81,200 BellSouth Telecommunications (PPLUS) 7.300% A 2,040,556
28,000 Verizon Communications (CORTS) 7.625% A 719,600
48,100 Verizon Communications (CORTS) 7.375% A 1,226,550
50,700 Verizon New England Inc., Series B 7.000% A3 1,283,217
30,400 Verizon South Inc., Series F 7.000% A 768,512
-----------------------------------------------------------------------------------------------------------------------------
Total Diversified Telecommunication Services 9,900,516
----------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.5%
6,000 Consolidated Edison, Inc. 7.250% A2 153,180
21,100 DTE Energy Trust I 7.800% Baa3 534,885
28,900 Entergy Louisiana LLC 7.600% A- 725,679
8,300 Entergy Mississippi Inc. 7.250% A- 211,899
51,600 FPL Group Capital Inc. 6.600% A3 1,304,448
3,000 Georgia Power Capital Trust V 7.125% A3 75,420
11,700 Mississippi Power Capital Trust II 7.200% A2 292,851
5,200 National Rural Utilities Cooperative Finance 7.400% A3 131,820
Corporation
1,500 National Rural Utilities Cooperative Finance 6.100% A3 36,810
Corporation
1,600 National Rural Utilities Cooperative Finance 5.950% A3 38,640
Corporation
33,600 Northern States Power Company 8.000% A3 858,480
1,500 PPL Energy Supply LLC 7.000% BBB 39,141
15,400 Southern Company Capital Trust I (CORTS) 8.190% BBB+ 415,800
35,700 Southern Company Capital Trust I (CORTS) 7.375% BBB+ 923,381
13,100 Southern Company Capital Trust VI 7.125% BBB+ 330,513
122,500 Virginia Power Capital Trust 7.375% Baa2 3,133,550
-----------------------------------------------------------------------------------------------------------------------------
Total Electric Utilities 9,206,497
----------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.2%
54,200 Dairy Farmers of America Inc., 144A, (6) 7.875% BBB- 5,352,250
-----------------------------------------------------------------------------------------------------------------------------
41
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS December 31, 2006
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 0.1%
72,700 Pulte Homes Inc. 7.375% BBB $ 1,894,744
-----------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 0.0%
5,400 General Electric Company, Series GE (CORTS) 6.800% AAA 138,078
-----------------------------------------------------------------------------------------------------------------------------
INSURANCE - 10.7%
1,210,933 Ace Ltd., Series C 7.800% Baa2 31,363,165
2,100 Aegon N.V. 6.875% A- 54,894
1,402,000 Aegon N.V., (6) 6.375% A- 36,409,940
36,700 AMBAC Financial Group Inc. 5.950% AA 892,544
236,713 Arch Capital Group Limited, Series B 7.785% Baa3 6,145,069
389,973 Arch Capital Group Limited 8.000% Baa3 10,314,786
677,101 Delphi Financial Group, Inc. 8.000% BBB 17,455,664
200,456 EverestRe Capital Trust II 6.200% Baa1 4,786,889
97,100 EverestRe Group Limited 7.850% Baa1 2,479,934
1,401,100 Lincoln National Capital Trust VI 6.750% A- 35,728,050
123,800 Markel Corporation 7.500% BBB- 3,218,181
903,702 PartnerRe Limited, Series C 6.750% BBB+ 22,954,031
80,900 PLC Capital Trust III 7.500% BBB+ 2,049,197
70,800 PLC Capital Trust IV 7.250% BBB+ 1,794,780
23,800 PLC Capital Trust V 6.125% BBB+ 592,144
36,700 Protective Life Corporation 7.250% BBB 957,503
39,200 Prudential PLC 6.750% A 1,005,088
104,088 RenaissanceRe Holdings Limited, Series A 8.100% BBB+ 2,620,936
124,700 RenaissanceRe Holdings Limited, Series B 7.300% BBB 3,196,685
1,534 RenaissanceRe Holdings Limited, Series C 6.080% BBB+ 36,509
18,600 RenaissanceRe Holdings Ltd 6.600% BBB 463,698
24,600 Safeco Capital Trust I (CORTS) 8.750% Baa2 722,871
48,300 Safeco Capital Trust III (CORTS) 8.072% Baa2 1,252,902
17,400 Safeco Capital Trust IV (CORTS) 8.375% Baa2 489,636
40,200 Safeco Corporation, Series 2001-7 (SATURNS) 8.250% Baa2 1,006,608
38,800 Safeco Corporation, Series 2002-5 (SATURNS) 8.250% Baa2 978,148
709,600 W.R. Berkley Corporation 6.750% BBB- 17,846,440
68,800 XL Capital Ltd, Series A 8.000% Baa1 1,737,200
248,540 XL Capital Ltd, Series B 7.625% Baa1 6,362,624
-----------------------------------------------------------------------------------------------------------------------------
Total Insurance 214,916,116
----------------------------------------------------------------------------------------------------------------
IT SERVICES - 0.0%
2,500 Vertex Industries Inc. (PPLUS) 7.625% A 63,250
-----------------------------------------------------------------------------------------------------------------------------
MEDIA - 2.2%
52,700 CBS Corporation 7.250% BBB 1,322,243
1,031,100 Comcast Corporation 7.000% BBB+ 26,647,542
640,500 Viacom Inc. 6.850% BBB 15,972,469
2,900 Walt Disney Company (CORTS) 6.875% A- 74,530
-----------------------------------------------------------------------------------------------------------------------------
Total Media 44,016,784
----------------------------------------------------------------------------------------------------------------
MULTI-UTILITIES - 0.1%
52,400 Dominion CNG Capital Trust I 7.800% Baa2 1,328,864
-----------------------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 0.9%
679,400 Nexen Inc. 7.350% Baa3 17,528,520
-----------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.1%
49,000 Bristol Myers Squibb Company (CORTS) 6.250% A+ 1,240,925
-----------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 10.8%
30,600 AMB Property Corporation, Series P 6.850% Baa2 787,950
77,100 AvalonBay Communities, Inc., Series H 8.700% BBB 2,071,677
166,283 BRE Properties, Series B 8.080% BBB- 4,244,374
3,900 Developers Diversified Realty Corporation, Series 8.600% BBB- 99,021
F
104,300 Developers Diversified Realty Corporation, Series 8.000% BBB- 2,666,951
G
1,264,845 Developers Diversified Realty Corporation, Series 7.375% BBB- 31,949,985
H
125,600 Duke Realty Corporation, Series L 6.600% BBB 3,166,376
31,700 Duke Realty Corporation, Series N 7.250% BBB 837,080
25,000 Duke-Weeks Realty Corporation, Series B 7.990% BBB 1,235,938
100,400 Duke-Weeks Realty Corporation 6.950% BBB 2,608,392
42
SHARES DESCRIPTION (1) COUPON RATINGS (3) VALUE
-----------------------------------------------------------------------------------------------------------------------------
REAL ESTATE (continued)
96,000 Duke-Weeks Realty Corporation 6.625% BBB $ 2,425,920
196,800 Equity Office Properties Trust, Series G 7.750% BBB- 4,951,488
15,400 Equity Residential Properties Trust, Series D 8.600% BBB 396,550
314,523 Equity Residential Properties Trust, Series N 6.480% BBB 7,941,706
4,900 First Industrial Realty Trust, Inc., Series C 8.625% BBB- 136,955
688,600 HRPT Properties Trust, Series B 8.750% BBB- 17,703,906
532,700 HRPT Properties Trust, Series C 7.125% BBB- 13,924,778
99,800 New Plan Excel Realty Trust, Series E 7.625% BBB- 2,594,800
3,997 Prologis Trust, Series C 8.540% BBB 241,319
96,275 Prologis Trust, Series G 6.750% BBB 2,456,938
2,000 PS Business Parks, Inc., Series F 8.750% BBB- 49,980
4,000 PS Business Parks, Inc., Series I 6.875% BBB- 100,400
700 PS Business Parks, Inc., Series K 7.950% BBB- 18,550
243,000 PS Business Parks, Inc., Series L 7.600% BBB- 6,240,240
130,700 PS Business Parks, Inc., Series O 7.375% BBB- 3,336,941
299,600 PS Business Parks, Inc. 7.000% BBB- 7,624,820
12,500 Public Storage Inc., Series I 7.250% BBB+ 325,625
249,836 Public Storage Inc. 6.750% BBB+ 6,316,179
149,000 Public Storage, Inc., Series E 6.750% BBB+ 3,784,600
18,400 Public Storage, Inc., Series F 6.450% BBB+ 457,240
197,600 Public Storage, Inc., Series H 6.950% BBB+ 5,102,032
32,800 Public Storage, Inc., Series K 7.250% BBB+ 852,800
45,000 Public Storage, Inc., Series T 7.625% BBB+ 1,124,100
174,500 Public Storage, Inc., Series U 7.625% BBB+ 4,359,010
31,500 Public Storage, Inc., Series V 7.500% BBB+ 801,675
15,403 Realty Income Corporation, Series E 6.750% BBB- 388,445
166,100 Regency Centers Corporation 7.450% BBB- 4,248,838
20,650 Simon Property Group, Inc., Series G 7.890% BBB 1,053,150
2,600 United Dominion Realty Trust 8.600% BBB- 66,196
1,200 Vornado Realty Trust, Series F 6.750% BBB- 30,228
165,000 Vornado Realty Trust, Series G 6.625% BBB- 4,100,250
183,000 Vornado Realty Trust, Series H 6.750% BBB- 4,584,150
1,987,734 Wachovia Preferred Funding Corporation 7.250% A2 55,835,448
130,300 Weingarten Realty Trust, Series E 6.950% A- 3,363,695
-----------------------------------------------------------------------------------------------------------------------------
Total Real Estate 216,606,696
----------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE - 1.2%
70,800 Countrywide Capital Trust III (PPLUS) 8.050% BBB+ 1,830,180
733,343 Countrywide Capital Trust IV 6.750% BBB+ 18,340,908
129,000 Countrywide Capital Trust V 7.000% BBB+ 3,253,225
-----------------------------------------------------------------------------------------------------------------------------
Total Thrifts & Mortgage Finance 23,424,313
----------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.5%
60,200 AT&T Wireless (CORTS) 8.000% A 1,568,812
24,200 AT&T Wireless, Series 2002-B (SATURNS) 9.250% A 643,720
50,600 United States Cellular Corporation 8.750% A- 1,308,516
270,291 United States Cellular Corporation 7.500% BBB 6,959,993
-----------------------------------------------------------------------------------------------------------------------------
Total Wireless Telecommunication Services 10,481,041
----------------------------------------------------------------------------------------------------------------
TOTAL $25 PAR (OR SIMILAR) PREFERRED SECURITIES (COST $880,581,061) 879,399,012
================================================================================================================
WEIGHTED
PRINCIPAL AVERAGE
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY (5) RATINGS (3) VALUE
----------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE SENIOR LOAN INTERESTS - 1.4% (1.0% OF TOTAL INVESTMENTS) (4)
BUILDING PRODUCTS - 0.1%
$ 998 TFS Acquisition, Term Loan 8.921% 8/11/13 B+ $ 1,004,981
----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.1%
2,000 Banta Corporation, Term Loan 7.110% 10/31/13 BB 2,005,000
----------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES - 0.3%
5,000 HCA, Inc., Term Loan 8.114% 11/17/13 Ba3 5,061,180
1,500 LifePoint Hospitals Holdings, Inc., Term Loan B 6.975% 4/18/12 Ba3 1,496,156
----------------------------------------------------------------------------------------------------------------------------------
6,500 Total Health Care Providers & Services 6,557,336
----------------------------------------------------------------------------------------------------------------------------------
43
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS December 31, 2006
WEIGHTED
PRINCIPAL AVERAGE
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY (5) RATINGS (3) VALUE
----------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 0.1%
$ 995 Cedar Fair LP, Term Loan 7.850% 8/30/12 BB- $ 1,006,069
----------------------------------------------------------------------------------------------------------------------------------
MACHINERY - 0.1%
2,000 Oshkosh Truck Corporation, Term Loan 7.350% 12/06/13 Ba3 2,004,063
----------------------------------------------------------------------------------------------------------------------------------
MEDIA - 0.3%
1,000 Charter Communications Inc., Term Loan B 8.005% 4/28/13 B 1,007,688
2,000 Neilsen Finance LLC, Term Loan B 8.125% 8/01/13 B+ 2,016,389
1,521 Panamsat Corporation, Term Loan 7.872% 1/03/14 BB 1,538,483
995 Philadelphia Newspapers, Term Loan 8.120% 6/29/13 N/R 990,440
----------------------------------------------------------------------------------------------------------------------------------
5,516 Total Media 5,553,000
----------------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS - 0.1%
345 Bluegrass Container Company, LLC, 1st Lien Term 7.609% 7/31/13 BB- 348,941
Loan
1,152 Bluegrass Container Company, LLC, Term Loan B 7.610% 6/30/13 BB- 1,163,895
995 Georgia-Pacific Corporation, Term Loan B 7.356% 2/13/12 BB- 1,000,779
----------------------------------------------------------------------------------------------------------------------------------
2,492 Total Paper & Forest Products 2,513,615
----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 0.1%
1,000 LNR Property Corporation, Term Loan B 8.120% 7/12/11 B2 1,005,209
----------------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 0.1%
1,333 Advanced Micro Devices, Term Loan B 7.620% 12/31/13 BB- 1,341,239
----------------------------------------------------------------------------------------------------------------------------------
SOFTWARE - 0.1%
2,993 Dealer Computer Service, Term Loan 7.850% 10/26/12 BB- 3,011,469
1,500 Intergraph Corporation, Term Loan 7.870% 5/29/14 B 1,508,438
----------------------------------------------------------------------------------------------------------------------------------
4,493 Total Software 4,519,907
----------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.0%
979 Michaels Stores Inc., Term Loan 8.375% 10/31/13 B- 986,255
----------------------------------------------------------------------------------------------------------------------------------
$ 28,306 TOTAL VARIABLE RATE SENIOR LOAN INTERESTS (COST $28,291,816) 28,496,674
==================================================================================================================================
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
----------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS - 36.1% (24.6% OF TOTAL INVESTMENTS)
AEROSPACE & DEFENSE - 2.2%
$ 5,740 AAR Corporation, 144A 1.750% 2/01/26 BB $ 6,744,500
500 Alliant Techsystems Inc., 144A 2.750% 9/15/11 B+ 513,750
500 Armor Holdings Inc. 2.000% 11/01/24 B+ 605,000
9,425 L-3 Communications Corporation 3.000% 8/01/35 BB+ 9,943,375
4,670 L-3 Communications Corporation, 144A 3.000% 8/01/35 BB+ 4,926,850
11,675 Lockheed Martin Corporation 5.124% 8/15/33 BBB+ 15,551,217
4,445 Triumph Group Inc. 2.625% 10/01/26 N/R 5,156,200
----------------------------------------------------------------------------------------------------------------------------------
36,955 Total Aerospace & Defense 43,440,892
----------------------------------------------------------------------------------------------------------------------------------
AIRLINES - 0.7%
1,700 AMR Corporation 4.500% 2/15/24 CCC+ 2,588,250
1,400 Continental Airlines, Inc. 5.000% 6/15/23 CCC+ 3,087,000
5,715 UAL Corporation, 144A 4.500% 6/30/21 N/R 8,242,116
----------------------------------------------------------------------------------------------------------------------------------
8,815 Total Airlines 13,917,366
----------------------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY - 3.2%
13,570 Amgen Inc., 144A 0.125% 2/01/11 A+ 13,298,600
14,050 Amgen Inc., 144A 0.375% 2/01/13 A+ 13,874,375
6,165 Cephalon, Inc. 0.000% 6/15/33 B- 8,230,275
13,025 Genzyme Corporation 1.250% 12/01/23 BBB 13,611,125
13,450 Gilead Sciences Inc., 144A 0.625% 5/01/13 N/R 13,853,500
2,000 Sepracor Inc. 5.000% 2/15/07 B- 2,000,000
----------------------------------------------------------------------------------------------------------------------------------
62,260 Total Biotechnology 64,867,875
----------------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS - 0.5%
9,300 Goldman Sachs Group, Inc. 0.125% 6/28/11 AA- 10,253,436
----------------------------------------------------------------------------------------------------------------------------------
44
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 0.6%
$ 10,260 U.S. Bancorp, 144A 3.615% 9/20/36 Aa2 $ 10,405,692
1,000 Wells Fargo & Company 5.625% 5/01/33 Aa1 1,008,230
-------------------------------------------------------------------------------------------------------------------------------
11,260 Total Commercial Banks 11,413,922
-------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 2.0%
4,100 Andrew Corporation 3.250% 8/15/13 B+ 4,156,375
3,800 Arris Group Inc. 2.000% 11/15/26 N/R 4,043,200
4,000 Ciena Corporation 3.750% 2/01/08 B 3,890,000
3,590 Fibertower Corporation, 144A 9.000% 11/15/12 N/R 4,303,513
10,665 Lucent Technologies Inc., Series B 2.750% 6/15/25 Ba3 12,104,775
10,800 Lucent Technologies Inc. 2.750% 6/15/23 Ba3 11,664,000
-------------------------------------------------------------------------------------------------------------------------------
36,955 Total Communications Equipment 40,161,863
-------------------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 1.7%
2,950 Electronics for Imaging Inc. 1.500% 6/01/23 N/R 3,274,500
8,710 EMC Corporation, 144A 1.750% 12/01/11 BBB+ 9,069,288
8,610 EMC Corporation, 144A 1.750% 12/01/13 BBB+ 8,965,163
15,485 Sandisk Corporation 1.000% 5/15/13 BB- 13,781,650
-------------------------------------------------------------------------------------------------------------------------------
35,755 Total Computers & Peripherals 35,090,601
-------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION & ENGINEERING - 0.3%
4,545 Quanta Services Inc., 144A 3.750% 4/30/26 N/R 5,141,531
-------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.2%
4,390 Compucredit Corporation 5.875% 11/30/35 N/R 4,483,288
-------------------------------------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING - 0.7%
14,100 Sealed Air Corporation, 144A 3.000% 6/30/33 BBB 14,699,250
-------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 1.6%
14,900 Citigroup Funding Inc. 0.125% 9/07/11 Aa1 14,777,820
13,600 Merrill Lynch & Co. Inc. 0.000% 3/13/32 Aa3 18,111,120
-------------------------------------------------------------------------------------------------------------------------------
28,500 Total Diversified Financial Services 32,888,940
-------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.9%
2,150 Level 3 Communications Inc. 3.500% 6/15/12 Caa2 2,682,125
6,725 Level 3 Communications Inc. 2.875% 7/15/10 Caa2 7,086,469
3,500 Qwest Communications International Inc. 3.500% 11/15/25 B+ 5,490,625
2,105 Time Warner Telecom Inc. 2.375% 4/01/26 CCC+ 2,657,563
-------------------------------------------------------------------------------------------------------------------------------
14,480 Total Diversified Telecommunication Services 17,916,782
-------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.1%
1,015 PPL Energy Supply LLC 2.625% 5/15/23 BBB 1,465,406
-------------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 0.1%
2,600 General Cable Corporation 0.875% 11/15/13 B+ 2,785,250
-------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.1%
2,000 SCI Systems Inc. 3.000% 3/15/07 B1 1,997,500
-------------------------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES - 2.4%
6,500 Cameron International Corporation, 144A 2.500% 6/15/26 BBB+ 7,011,875
4,415 Core Laboratories LP, 144A 0.250% 10/31/11 N/R 4,632,991
500 Halliburton Company 3.125% 7/15/23 BBB+ 848,125
4,025 Hanover Compressor Company 4.750% 1/15/14 B 5,770,844
13,415 Nabors Industries Inc., 144A 0.940% 5/15/11 A- 12,895,169
1,250 Nabors Industries Inc., 144A 0.940% 5/15/11 A- 1,201,563
13,000 Nabors Industries Inc. 0.000% 6/15/23 N/R 13,715,000
500 Pride International Inc. 3.250% 5/01/33 Ba2 630,625
2,160 SESI LLC, Convertible Bond, 144A 1.500% 12/15/26 BB- 2,146,500
-------------------------------------------------------------------------------------------------------------------------------
45,765 Total Energy Equipment & Services 48,852,692
-------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES - 1.8%
500 Advanced Medical Optics 3.250% 8/01/26 N/R 454,375
4,150 CYTYC Corporation 2.250% 3/15/24 N/R 4,482,000
45
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS December 31, 2006
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES (continued)
$ 23,350 Medtronic, Inc. 1.500% 4/15/11 AA- $ 24,867,750
4,800 Medtronic, Inc. 1.625% 4/15/13 AA- 5,142,000
250 Medtronic, Inc. 1.500% 4/15/11 AA- 266,250
-------------------------------------------------------------------------------------------------------------------------------
33,050 Total Health Care Equipment & Supplies 35,212,375
-------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES - 0.9%
500 LifePoint Hospitals Inc. 3.250% 8/15/25 B+ 451,875
3,975 Manor Care Inc. 2.000% 6/01/36 BBB 4,193,625
3,550 PSS World Medical Inc. 2.250% 3/15/24 B+ 4,384,250
8,510 Roche Holdings Inc., 144A 0.000% 7/25/21 N/R 8,197,428
-------------------------------------------------------------------------------------------------------------------------------
16,535 Total Health Care Providers & Services 17,227,178
-------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 1.5%
1,000 Caesars Entertainment Inc. 5.370% 4/15/24 Baa3 1,301,300
3,075 Carnival Corporation 2.000% 4/15/21 A- 3,951,375
19,650 Carnival Corporation 1.132% 4/29/33 A- 14,393,625
500 Hilton Hotels Corporation 3.375% 4/15/23 BB 791,250
4,575 International Game Technology, 144A 2.600% 12/15/36 BBB 4,580,719
4,245 RARE Hospitality International Inc., 144A 2.500% 11/15/26 N/R 4,271,531
-------------------------------------------------------------------------------------------------------------------------------
33,045 Total Hotels, Restaurants & Leisure 29,289,800
-------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 0.0%
500 3M Company 0.000% 11/21/32 Aa1 458,750
-------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 1.4%
15 Alleghany Corporation 5.750% 6/15/09 BBB- 4,879,425
8,015 American Financial Group Inc. 1.486% 6/02/33 BBB 5,059,469
3,740 Berkshire Hathaway Inc., 144A 0.000% 5/15/07 N/R 4,588,082
14,200 Prudential Financial Inc. 2.613% 11/15/35 A 14,502,602
-------------------------------------------------------------------------------------------------------------------------------
25,970 Total Insurance 29,029,578
-------------------------------------------------------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL - 0.1%
2,380 Priceline.com Inc., 144A 0.500% 9/30/11 B 2,844,100
-------------------------------------------------------------------------------------------------------------------------------
IT SERVICES - 0.4%
3,050 Digital River Inc. 1.250% 1/01/24 N/R 4,189,938
3,110 DST Systems Inc. 4.125% 8/15/23 N/R 4,338,450
-------------------------------------------------------------------------------------------------------------------------------
6,160 Total IT Services 8,528,388
-------------------------------------------------------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS - 0.2%
1,165 K2 Corporation, 144A 5.000% 6/15/10 N/R 1,291,694
-------------------------------------------------------------------------------------------------------------------------------
MEDIA - 3.0%
3,800 ELF Special Financing Limited, 144A 5.710% 6/15/09 Ba3 4,633,625
11,800 Liberty Media Corporation 4.000% 11/15/29 BB+ 7,935,500
12,325 Liberty Media Corporation 0.750% 3/30/23 BB+ 15,683,563
10,150 Omnicom Group Inc. 0.000% 7/01/38 A- 11,012,750
975 Playboy Enterprises Inc. 3.000% 3/15/25 N/R 920,156
3,820 Shuffle Master Inc. 1.250% 4/15/24 N/R 4,216,325
12,435 Walt Disney Company 2.125% 4/15/23 A- 15,170,700
-------------------------------------------------------------------------------------------------------------------------------
55,305 Total Media 59,572,619
-------------------------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.3%
1,430 Century Aluminum Company 1.750% 8/01/24 BB- 2,255,825
3,375 Placer Dome Inc. 2.750% 10/15/23 A- 4,636,406
-------------------------------------------------------------------------------------------------------------------------------
4,805 Total Metals & Mining 6,892,231
-------------------------------------------------------------------------------------------------------------------------------
MULTI-UTILITIES - 0.6%
1,700 Centerpoint Energy Inc. 2.875% 1/15/24 BBB- 2,258,875
8,625 Dominion Resources Inc., Series C 2.125% 12/15/23 BBB 9,951,094
-------------------------------------------------------------------------------------------------------------------------------
10,325 Total Multi-Utilities 12,209,969
-------------------------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 1.2%
10,650 Chesapeake Energy Corporation, 144A 2.750% 11/15/35 BB 10,823,063
3,550 Devon Energy Corporation 4.900% 8/15/08 BBB 4,934,500
46
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS (continued)
$ 2,500 Goodrich Petroleum Corporation, 144A 3.250% 12/01/26 N/R $ 2,431,250
5,600 Peabody Energy Corp. 4.375% 12/15/66 Ba2 5,369,000
-------------------------------------------------------------------------------------------------------------------------------
22,300 Total Oil, Gas & Consumable Fuels 23,557,813
-------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 1.2%
7,910 Allergan Inc., 144A 1.500% 4/01/26 A 8,661,450
5,140 Allergan Inc. 1.500% 4/01/26 A 5,628,300
500 Bristol-Myers Squibb Company 4.860% 9/15/23 A+ 502,500
500 Sepracor Inc. 0.000% 10/15/24 B- 540,625
250 Teva Pharmaceutical Finance Company B.V., Series D 1.750% 2/01/26 BBB 231,563
8,500 Wyeth, 144A 1.000% 1/15/24 A 9,270,100
-------------------------------------------------------------------------------------------------------------------------------
22,800 Total Pharmaceuticals 24,834,538
-------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 1.0%
4,060 Archstone-Smith Trust 4.000% 7/15/36 BBB+ 4,349,275
500 Developers Diversified Realty Corporation, 144A 3.500% 8/15/11 BBB 532,500
7,465 Vornado Realty 3.875% 4/15/25 BBB 10,376,350
4,400 Vornado Realty 3.625% 11/15/26 BBB 4,416,500
-------------------------------------------------------------------------------------------------------------------------------
16,425 Total Real Estate 19,674,625
-------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 0.6%
6,520 EOP Operating LP, 144A 4.000% 7/15/26 BBB 7,783,250
3,785 Tanger Properties Limited Partnership 3.750% 8/15/26 BBB- 4,433,181
-------------------------------------------------------------------------------------------------------------------------------
10,305 Total Real Estate Management & Development 12,216,431
-------------------------------------------------------------------------------------------------------------------------------
ROAD & RAIL - 0.2%
2,625 Yellow Roadway Corporation 5.000% 8/08/23 BBB- 3,310,781
-------------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 1.8%
7,150 Cypress Semiconductor Corporation, 144A 1.250% 6/15/08 B- 8,946,438
4,100 Diodes Inc. 2.250% 10/01/26 N/R 3,920,625
5,650 Intel Corporation, 144A 2.950% 12/15/35 A- 5,141,500
10,485 Intel Corporation 2.950% 12/15/35 A- 9,541,350
4,865 ON Semiconductor Corporation 0.000% 4/15/24 B- 4,804,188
3,950 Photronics Inc. 2.250% 4/15/08 B 4,547,438
-------------------------------------------------------------------------------------------------------------------------------
36,200 Total Semiconductors & Equipment 36,901,539
-------------------------------------------------------------------------------------------------------------------------------
SOFTWARE - 1.5%
10,400 Amdocs Limited 0.500% 3/15/24 BBB- 11,089,000
500 Computer Associates International Inc., 144A 1.625% 12/15/09 Ba1 603,125
3,450 Mentor Graphics Corporation 6.250% 3/01/26 N/R 4,510,875
500 Sybase, Inc. 1.750% 2/22/25 N/R 558,750
11,275 Symantec Corporation, 144A 0.750% 6/15/11 N/R 13,642,750
250 Symantec Corporation, 144A 1.000% 6/15/13 N/R 305,313
-------------------------------------------------------------------------------------------------------------------------------
26,375 Total Software 30,709,813
-------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.6%
2,175 Group 1 Automotive Inc. 2.250% 6/15/36 N/R 2,234,813
4,265 Lowes Companies, Inc. 0.861% 10/19/21 A+ 4,638,188
980 Sonic Automotive Inc. 4.250% 11/30/15 B 1,300,950
4,985 TJX Companies, Inc. 0.000% 2/13/21 A- 4,723,288
-------------------------------------------------------------------------------------------------------------------------------
12,405 Total Specialty Retail 12,897,239
-------------------------------------------------------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS - 0.2%
2,304 GATX Corporation 5.000% 8/15/23 Baa1 4,095,360
-------------------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.3%
3,515 NII Holdings Inc., 144A 2.750% 8/15/25 N/R 5,101,144
-------------------------------------------------------------------------------------------------------------------------------
$ 663,189 TOTAL CONVERTIBLE BONDS (COST $682,802,917) 725,232,559
===============================================================================================================================
47
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS December 31, 2006
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 12.3% (8.4% OF TOTAL INVESTMENTS)
AEROSPACE & DEFENSE - 0.2%
$ 1,000 Hexcel Corporation 6.750% 2/01/15 B $ 990,000
2,500 K&F Acquisition Inc. 7.750% 11/15/14 B- 2,587,500
-------------------------------------------------------------------------------------------------------------------------------
3,500 Total Aerospace & Defense 3,577,500
-------------------------------------------------------------------------------------------------------------------------------
AUTO COMPONENTS - 0.1%
1,300 Keystone Automotive Operations Inc. 9.750% 11/01/13 CCC+ 1,293,500
-------------------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS - 0.2%
4,000 Jacuzzi Brands, Inc. 9.625% 7/01/10 B 4,270,000
-------------------------------------------------------------------------------------------------------------------------------
CHEMICALS - 0.7%
3,000 Ineos Group Holdings PLC, 144A 8.500% 2/15/16 B2 2,880,000
2,000 Nell AF Sarl 8.375% 8/15/15 B2 2,065,000
6,500 OM Group Inc. 9.250% 12/15/11 B- 6,833,125
3,000 Rockwood Specialties Group Inc., Series WI 7.500% 11/15/14 B- 3,037,500
-------------------------------------------------------------------------------------------------------------------------------
14,500 Total Chemicals 14,815,625
-------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 0.1%
3,100 Standard Chartered PLC, 144A 6.409% 1/30/57 BBB+ 3,081,037
-------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.0%
900 Williams Scotsman Inc. 8.500% 10/01/15 B+ 943,875
-------------------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.1%
1,000 GSC Holdings Corporation, 144A 8.000% 10/01/12 B+ 1,050,000
-------------------------------------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING - 0.4%
2,450 MDP Acquisitions PLC, Senior Notes 9.625% 10/01/12 B- 2,609,250
3,000 Owens-Brockway Glass Containers, Guaranteed Senior 8.250% 5/15/13 B 3,116,250
Note
3,000 Owens-Illinois Inc. 7.500% 5/15/10 B 3,026,250
-------------------------------------------------------------------------------------------------------------------------------
8,450 Total Containers & Packaging 8,751,750
-------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED CONSUMER SERVICES - 0.1%
2,000 Service Corporation International 7.700% 4/15/09 BB- 2,085,000
-------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.1%
2,000 Intelsat Subsidiary Holding Company Limited 8.500% 1/15/13 B+ 2,040,000
750 Syniverse Technologies Inc., Series B 7.750% 8/15/13 B1 751,875
-------------------------------------------------------------------------------------------------------------------------------
2,750 Total Diversified Telecommunication Services 2,791,875
-------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.2%
2,000 Midwest Generation LLC 8.750% 5/01/34 Ba2 2,180,000
500 Mirant North America LLC 7.375% 12/31/13 B2 510,000
1,000 Sierra Pacific Resources, Series 2006 6.750% 8/15/17 B1 985,810
-------------------------------------------------------------------------------------------------------------------------------
3,500 Total Electric Utilities 3,675,810
-------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.1%
2,000 NXP BV 8.118% 10/15/13 BB+ 2,040,000
-------------------------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES - 0.2%
1,800 Hanover Compressor Company 7.500% 4/15/13 B 1,827,000
2,500 Pride International Inc. 7.375% 7/15/14 Ba2 2,593,750
-------------------------------------------------------------------------------------------------------------------------------
4,300 Total Energy Equipment & Services 4,420,750
-------------------------------------------------------------------------------------------------------------------------------
FOOD & STAPLES RETAILING - 0.1%
2,000 Stater Brothers Holdings Inc. 8.125% 6/15/12 B+ 2,040,000
-------------------------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.4%
4,610 Del Monte Corporation 8.625% 12/15/12 B 4,886,600
1,096 Dole Foods Company 8.625% 5/01/09 B- 1,094,630
2,700 Dole Foods Company 7.875% 7/15/13 B- 2,632,500
-------------------------------------------------------------------------------------------------------------------------------
8,406 Total Food Products 8,613,730
-------------------------------------------------------------------------------------------------------------------------------
48
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES - 0.2%
$ 700 HCA The Health Care Corporation Inc, 144A 9.125% 11/15/14 BB- $ 749,875
700 HCA The Health Care Corporation Inc., 144A 9.250% 11/15/16 BB- 751,625
3,000 US Oncology Inc. 10.750% 8/15/14 B- 3,330,000
-------------------------------------------------------------------------------------------------------------------------------
4,400 Total Health Care Providers & Services 4,831,500
-------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 1.5%
5,190 Aztar Corporation 9.000% 8/15/11 Ba3 5,449,500
2,345 Boyd Gaming Corporation 8.750% 4/15/12 Ba3 2,462,250
4,075 Boyd Gaming Corporation 7.750% 12/15/12 Ba3 4,232,906
1,500 Herbst Gaming Inc. 7.000% 11/15/14 B- 1,440,000
800 Jacobs Entertainment Inc. 9.750% 6/15/14 B- 816,000
2,000 Landry's Restaurants Inc., Series B 7.500% 12/15/14 B1 1,965,000
2,000 MGM Mirage, Inc. 6.750% 8/01/07 BB 2,017,500
1,000 Park Place Entertainment 9.375% 2/15/07 Ba1 1,003,750
1,000 Park Place Entertainment 7.875% 3/15/10 Ba1 1,047,500
2,000 Pinnacle Entertainment Inc. 8.250% 3/15/12 B- 2,030,000
3,000 Pinnacle Entertainment Inc. 8.750% 10/01/13 B- 3,195,000
4,000 Universal City Development Partners 11.750% 4/01/10 B2 4,305,000
-------------------------------------------------------------------------------------------------------------------------------
28,910 Total Hotels, Restaurants & Leisure 29,964,406
-------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.1%
600 NRG Energy Inc. 7.250% 2/01/14 B1 606,000
600 NRG Energy Inc. 7.375% 2/01/16 B1 604,500
-------------------------------------------------------------------------------------------------------------------------------
1,200 Total Independent Power Producers & Energy Traders 1,210,500
-------------------------------------------------------------------------------------------------------------------------------
IT SERVICES - 0.4%
1,950 Global Cash Access LLC 8.750% 3/15/12 B- 2,057,250
4,750 Sungard Data Systems Inc. 9.125% 8/15/13 B- 5,011,250
-------------------------------------------------------------------------------------------------------------------------------
6,700 Total IT Services 7,068,500
-------------------------------------------------------------------------------------------------------------------------------
MACHINERY - 0.3%
3,000 Greenbrier Companies, Inc. 8.375% 5/15/15 B+ 3,067,500
3,000 Terex Corporation, Senior Subordinated Notes 9.250% 7/15/11 B+ 3,140,625
-------------------------------------------------------------------------------------------------------------------------------
6,000 Total Machinery 6,208,125
-------------------------------------------------------------------------------------------------------------------------------
MEDIA - 3.3%
6,900 Allbritton Communications Company, Series B 7.750% 12/15/12 B1 7,003,500
2,000 AMC Entertainment Inc. 8.000% 3/01/14 B3 1,995,000
4,200 American Media Operations Inc., Series B 10.250% 5/01/09 Caa2 4,079,250
1,345 American Media Operations Inc. 8.875% 1/15/11 Caa2 1,234,038
5,000 Cablevision Systems Corporation, Series B 8.125% 8/15/09 B+ 5,206,250
3,000 Cablevision Systems Corporation 7.250% 7/15/08 B+ 3,041,250
2,000 Cablevision Systems Corporation 8.125% 7/15/09 B+ 2,082,500
2,000 Charter Communications Operating LLC, 144A 8.000% 4/30/12 B- 2,087,500
6,000 Cinemark USA Inc. 9.000% 2/01/13 B2 6,390,000
1,000 Dex Media West LLC 8.500% 8/15/10 B1 1,043,750
2,198 Dex Media West LLC 9.875% 8/15/13 B 2,406,810
4,000 Medianews Group Inc. 6.375% 4/01/14 B 3,460,000
1,950 Panamsat Corporation 9.000% 8/15/14 B 2,069,438
6,000 Primedia Inc., Senior Notes 8.875% 5/15/11 B 6,150,000
2,000 R. H. Donnelley Finance Corp 1 10.875% 12/15/12 B 2,190,000
2,000 Sun Media Corporation 7.625% 2/15/13 Ba2 2,037,500
6,200 Vertis Inc. 9.750% 4/01/09 B1 6,417,000
5,500 Young Broadcasting Inc., Senior Subordinated Note 10.000% 3/01/11 Caa1 5,252,500
2,000 Young Broadcasting Inc. 8.750% 1/15/14 Caa1 1,742,500
-------------------------------------------------------------------------------------------------------------------------------
65,293 Total Media 65,888,786
-------------------------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.3%
3,000 Chaparral Steel Company 10.000% 7/15/13 B+ 3,363,750
1,682 United States Steel Corporation 9.750% 5/15/10 Ba1 1,797,638
-------------------------------------------------------------------------------------------------------------------------------
4,682 Total Metals & Mining 5,161,388
-------------------------------------------------------------------------------------------------------------------------------
49
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS December 31, 2006
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
MULTI-UTILITIES - 0.3%
$ 2,600 Bon-Ton Department Stores Inc. 10.250% 3/15/14 B- $ 2,671,500
2,400 Dynegy Holdings Inc. 8.375% 5/01/16 B2 2,532,000
500 Northwestern Corporation 5.875% 11/01/14 BBB- 492,029
-------------------------------------------------------------------------------------------------------------------------------
5,500 Total Multi-Utilities 5,695,529
-------------------------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 0.7%
600 Chaparral Energy Inc. 8.500% 12/01/15 CCC+ 600,000
4,345 Chesapeake Energy Corporation 7.750% 1/15/15 BB 4,545,956
2,000 Hilcorp Energy I LP/Hilcorp Finance Company, 144A 7.750% 11/01/15 B 1,975,000
2,000 Premcor Refining Group Inc. 7.500% 6/15/15 BBB 2,093,518
3,000 SemGroup LP, 144A 8.750% 11/15/15 B1 3,030,000
1,500 Whiting Petroleum Corporation 7.000% 2/01/14 B1 1,503,750
-------------------------------------------------------------------------------------------------------------------------------
13,445 Total Oil, Gas & Consumable Fuels 13,748,224
-------------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS - 0.4%
2,000 Georgia Pacific Corporation, Debentures 7.700% 6/15/15 B 2,047,500
5,000 Georgia Pacific Corporation, Notes 8.125% 5/15/11 B 5,275,000
-------------------------------------------------------------------------------------------------------------------------------
7,000 Total Paper & Forest Products 7,322,500
-------------------------------------------------------------------------------------------------------------------------------
PERSONAL PRODUCTS - 0.1%
1,600 Prestige Brands Inc. 9.250% 4/15/12 B- 1,640,000
-------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.3%
5,300 Wyeth 5.109% 1/15/24 A 5,780,180
-------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.3%
3,000 Felcor Lodging Trust Inc., 144A 7.263% 12/01/11 Ba3 3,030,000
900 Saxon Capital Inc., 144A 12.000% 5/01/14 A1 1,290,537
1,000 Trustreet Properties, Inc. 7.500% 4/01/15 B+ 1,085,000
500 Ventas Realty LP, Series WI 7.125% 6/01/15 BB+ 527,500
-------------------------------------------------------------------------------------------------------------------------------
5,400 Total Real Estate 5,933,037
-------------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 0.1%
2,400 Avago Technologies Finance Pte. Ltd., Floating 10.125% 12/01/13 B 2,574,000
Rate Note, 5.500% plus three-month LIBOR, 144A
-------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.7%
5,000 Asbury Automotive Group Inc. 9.000% 6/15/12 B 5,250,000
1,000 Quiksilver Inc. 6.875% 4/15/15 BB- 987,500
7,000 Warnaco Inc., Senior Notes 8.875% 6/15/13 B+ 7,472,500
-------------------------------------------------------------------------------------------------------------------------------
13,000 Total Specialty Retail 13,710,000
-------------------------------------------------------------------------------------------------------------------------------
TEXTILES, APPAREL & LUXURY GOODS - 0.2%
4,000 Jostens IH Corporation 7.625% 10/01/12 B2 4,070,000
-------------------------------------------------------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS - 0.1%
2,000 United Rentals North America Inc. 6.500% 2/15/12 B+ 1,985,000
-------------------------------------------------------------------------------------------------------------------------------
$ 238,536 TOTAL CORPORATE BONDS (COST $245,677,641) 246,242,127
===============================================================================================================================
PRINCIPAL
AMOUNT
(000)/SHARES DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
CAPITAL PREFERRED SECURITIES - 32.7% (22.3% OF TOTAL INVESTMENTS)
CAPITAL MARKETS - 5.6%
4,900 BankBoston Capital Trust III 6.103% 6/15/27 Aa3 $ 4,860,286
6,273 BT Capital Trust, Series B1 7.900% 1/15/27 A2 6,494,374
1,250 C.A. Preferred Fund Trust II 7.000% 10/30/49 A1 1,283,478
32,750 C.A. Preferred Funding Trust 7.000% 1/30/49 A1 33,581,686
3,000 Compass Trust I, Series A 8.230% 1/15/27 A3 3,127,272
12,400 Dresdner Funding Trust I, 144A 8.151% 6/30/31 A- 14,978,902
2,000 First Hawaiian Capital Trust I, Series B 8.343% 7/01/27 A- 2,102,266
3,500 First Union Capital Trust II, Series A 7.950% 11/15/29 A1 4,242,854
15,500 Mellon Capital Trust I, Series A 7.720% 12/01/26 A2 16,138,910
2,200 MUFG Capital Finance 2 4.850% 7/25/56 BBB 2,840,327
50
PRINCIPAL
AMOUNT
(000)/SHARES DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS (continued)
9,000 State Street Institutional Capital Trust, 144A 8.035% 3/15/27 A1 $ 9,394,245
13,419 Washington Mutual Capital Trust I 8.375% 6/01/27 Baa1 14,080,355
-------------------------------------------------------------------------------------------------------------------------------
Total Capital Markets 113,124,955
----------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 17.5%
2,000 AB Svensk Exportkredit, 144A 6.375% 10/27/49 AA- 1,989,508
8,000 Abbey National Capital Trust I 8.963% 6/30/50 A 10,702,984
43,100 AgFirst Farm Credit Bank 7.300% 12/15/53 N/R 42,451,647
12,120 Bank One Capital III 8.750% 9/01/30 A1 15,945,605
2,600 BankAmerica Institutional Capital Trust, Series B, 7.700% 12/31/26 Aa3 2,700,038
144A
1,000 BanPonce Trust I, Series A 8.327% 2/01/27 Baa1 1,042,915
4,000 Barclays Bank PLC, 144A 8.550% 6/15/49 Aa3 4,480,364
1,400 BOI Capital Funding 3, 144A 6.107% 8/04/56 A2 1,377,494
10,100 DBS Capital Funding Corporation, 144A 7.657% 3/15/49 A1 10,871,721
2,400 Den Norske Bank, 144A 7.729% 6/29/49 A2 2,591,916
4,315 First Chicago NBD Institutional Capital Trust, 7.750% 12/01/26 A1 4,489,002
Series B, 144A
5,000 First Chicago NBD Institutional Capital, 144A 7.950% 12/01/26 A1 5,203,850
5,750 First Empire Capital Trust I 8.234% 2/01/27 Baa1 5,995,347
11,000 First Empire Capital Trust II 8.277% 6/01/27 Baa1 11,541,695
4,250 First Midwest Bancorp Inc. 6.950% 12/01/33 Baa2 4,480,053
27,850 HBOS Capital Funding LP 6.850% 3/23/49 A1 28,209,683
6,000 HBOS PLC, Series 144A 6.413% 9/29/49 A1 5,979,132
12,838 HSBC Capital Funding LP, 144A 9.547% 12/31/49 A1 14,474,832
14,000 HSBC Capital Funding LP 10.176% 6/30/50 A1 20,744,724
19,605 KBC Bank Fund Trust III, 144A 9.860% 5/02/50 A 21,825,913
4,000 KeyCorp Capital III 7.750% 7/15/29 A3 4,725,340
17,000 Lloyds TSB Bank PLC 6.900% 11/22/49 Aa2 17,172,941
2,000 Nationsbank Capital Trust III 5.920% 1/15/27 Aa3 1,942,666
1,000 Nordbanken AB, 144A 8.950% 11/29/49 A 1,086,356
10,000 North Fork Capital Trust II 8.000% 12/15/27 Baa1 10,560,570
6,000 PNC Preferred Funding Trust 6.517% 3/15/49 A- 6,110,964
2,000 Popular North American Capital Trust I 6.564% 9/15/34 Baa1 2,000,764
14,750 RBS Capital Trust B 6.800% 12/31/49 A1 14,937,915
2,000 Reliance Capital Trust I, Series B 8.170% 5/01/28 N/R 2,130,040
1,202 Republic New York Capital II 7.530% 12/04/26 A1 1,248,163
6,200 Royal Bank of Scotland Group PLC 9.118% 3/31/49 A1 6,873,432
4,472 St. George Funding Company LLC, 144A 8.485% 12/31/47 A3 4,698,753
14,700 Swedbank ForeningsSparbanken AB, 144A 9.000% 9/17/50 A2 16,125,386
15,290 Unicredito Italiano Capital Trust, 144A 9.200% 4/05/51 A- 17,170,823
3,800 Union Planters Capital Trust A 8.200% 12/15/26 A2 3,958,308
22,700 Washington Mutual Preferred Funding Cayman, Series 7.250% 3/15/49 BBB 22,652,080
A-1, 144A
-------------------------------------------------------------------------------------------------------------------------------
Total Commercial Banks 350,492,924
----------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 3.0%
6,200 BNP Paribas Capital Trust 7.200% 12/31/49 A+ 6,247,101
1,000 Citigroup Capital III 7.625% 12/01/36 Aa2 1,202,132
4,800 Fulton Capital Trust I 6.290% 2/01/36 A3 4,742,899
3,000 JPM Capital Trust II 7.950% 2/01/27 A1 3,121,947
18,600 JPMorgan Chase Capital Trust XVIII 6.950% 8/17/36 A2 20,185,092
23,600 Old Mutual Capital Funding 8.000% 6/22/53 Baa2 24,603,000
-------------------------------------------------------------------------------------------------------------------------------
Total Diversified Financial Services 60,102,171
----------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.1%
19,080 Centaur Funding Corporation, Series B, 144A 9.080% 4/21/20 BBB 22,311,675
-------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 3.9%
10,000 American General Capital II 8.500% 7/01/30 Aa3 12,990,170
4,980 American General Institutional Capital, 144A 8.125% 3/15/46 Aa3 6,393,284
1,000 Great West Life and Annuity Insurance Company 7.153% 5/16/46 A- 1,061,502
14,250 Mangrove Bay, Class 3, 144A 6.102% 7/15/33 BBB+ 13,944,950
5,000 MetLife Inc. 6.400% 12/15/66 A3 5,039,775
1,550 Nationwide Financial Services Capital Trust 7.899% 3/01/37 Baa1 1,849,023
5,000 Oil Insurance Limited, 144A 7.550% 12/30/49 Baa1 5,189,155
3,750 Prudential PLC 6.500% 6/29/49 A 3,782,779
51
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS December 31, 2006
PRINCIPAL
AMOUNT
(000)/SHARES DESCRIPTION (1) COUPON MATURITY RATINGS (3) VALUE
-------------------------------------------------------------------------------------------------------------------------------
INSURANCE (continued)
8,000 Sun Life Canada Capital Trust, Capital Securities, 8.526% 5/06/47 AA- $ 8,403,216
144A
18,994 Zurich Capital Trust I, 144A 8.376% 6/01/37 A- 19,910,897
-------------------------------------------------------------------------------------------------------------------------------
Total Insurance 78,564,751
----------------------------------------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 0.6%
12,355 KN Capital Trust III 7.630% 4/15/28 Baa3 11,508,831
-------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.0%
3,500 PS Business Parks Inc., Series M 7.200% 3/30/55 BBB- 89,583
-------------------------------------------------------------------------------------------------------------------------------
ROAD & RAIL - 0.4%
7,600 Burlington Northern Santa Fe Funding Trust I 6.613% 12/15/55 BBB 7,577,094
-------------------------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE - 0.6%
2,000 Caisse Nationale Des Caisses d'Epargne et de 6.750% 1/27/49 A+ 2,006,524
Prevoyance
3,365 Great Western Financial Trust II, Series A 8.206% 2/01/27 Baa1 3,508,749
6,800 Washington Mutual Preferred Funding Trust II 6.665% 3/15/57 BBB 6,830,566
-------------------------------------------------------------------------------------------------------------------------------
Total Thrifts & Mortgage Finance 12,345,839
----------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL PREFERRED SECURITIES (COST $676,221,183) 656,117,823
================================================================================================================
SHARES DESCRIPTION (1) VALUE
-------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES - 1.4% (0.9% OF TOTAL
INVESTMENTS)
99,306 Blackrock Preferred and Corporate Income $ 2,192,676
Strategies Fund
450,963 Blackrock Preferred Income Strategies Fund 9,122,981
319,801 Flaherty and Crumrine/Claymore Preferred 6,846,939
Securities Income Fund Inc.
146,733 Flaherty and Crumrine/Claymore Total Return Fund 3,151,825
Inc.
307,548 John Hancock Preferred Income Fund III 6,892,127
-------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES (COST $26,151,816) 28,206,548
================================================================================================================
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY VALUE
-------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 0.6% (0.4% OF TOTAL INVESTMENTS)
$ 12,831 Repurchase Agreement with Fixed Income Clearing 4.580% 1/02/07 $ 12,831,068
Corporation, dated 12/29/06, repurchase price
$12,837,598, collateralized by $9,695,000 U.S.
Treasury Bonds, 7.625%, due 2/15/25, value
$13,088,250
========== ----------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $12,831,068) 12,831,068
================================================================================================================
TOTAL INVESTMENTS (COST $2,899,674,450) - 146.8% 2,948,283,301
================================================================================================================
OTHER ASSETS LESS LIABILITIES - 1.3% 24,870,211
================================================================================================================
PREFERRED SHARES, AT LIQUIDATION VALUE - (48.1)% (965,000,000)
================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES - 100% $2,008,153,512
================================================================================================================
INTEREST RATE SWAPS OUTSTANDING AT DECEMBER 31, 2006:
FUND FIXED RATE UNREALIZED
NOTIONAL PAY/RECEIVE FLOATING RATE FIXED RATE PAYMENT TERMINATION APPRECIATION
COUNTERPARTY AMOUNT FLOATING RATE INDEX (ANNUALIZED) FREQUENCY DATE (DEPRECIATION)
----------------------------------------------------------------------------------------------------------------------------
JPMorgan Chase $97,000,000 Receive 1-Month USD-LIBOR 3.360% Monthly 1/23/09 $ 3,325,985
Morgan Stanley 97,000,000 Receive 1-Month USD-LIBOR 3.048 Monthly 1/23/08 2,257,106
Royal Bank of Canada 97,000,000 Receive 1-Month USD-LIBOR 2.679 Monthly 1/23/07 199,167
----------------------------------------------------------------------------------------------------------------------------
$ 5,782,258
=============================================================================================================================
USD-LIBOR (United States Dollar-London Inter-Bank Offered Rate)
52
(1) All percentages shown in the Portfolio of Investments are based on net assets applicable
to Common shares unless otherwise noted.
(2) Non-income producing.
(3) Ratings (not covered by the report of independent registered public accounting firm):
Using the higher of Standard & Poor's or Moody's rating. Ratings below BBB by Standard &
Poor's Group or Baa by Moody's Investor Service, Inc. are considered to be below
investment grade.
(4) Senior Loans in which the Fund invests generally pay interest at rates which are
periodically adjusted by reference to a base short-term, floating lending rate plus an
assigned fixed rate. These floating lending rates are generally (i) the lending rate
referenced by the London Inter-Bank Offered Rate ('LIBOR'), or (ii) the prime rate offered
by one or more major United States banks.
Senior Loans may be considered restricted in that the Fund ordinarily is contractually
obligated to receive approval from the Agent Bank and/or Borrower prior to the disposition
of a Senior Loan.
(5) Senior Loans generally are subject to mandatory and/or optional prepayment. Because of
these mandatory prepayment conditions and because there may be significant economic
incentives for a Borrower to prepay, prepayments of Senior Loans may occur. As a result,
the actual remaining maturity of Senior Loans held may be substantially less than the
stated maturities shown.
(6) Investment is eligible for the Dividends Received Deduction.
N/R Not rated.
144A Investment is exempt from registration under Rule 144A of the Securities Act of 1933, as
amended. These investments may only be resold in transactions exempt from registration
which are normally those transactions with qualified institutional buyers.
CORTS Corporate Backed Trust Securities.
PCARS Public Credit and Repackaged Securities.
PPLUS PreferredPlus Trust.
SATURNS Structured Asset Trust Unit Repackaging.
See accompanying notes to financial statements.
53
Statement of
ASSETS AND LIABILITIES December 31, 2006
PREFERRED AND PREFERRED AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $2,072,028,787 and
$2,899,674,450, respectively) $2,113,792,476 $2,948,283,301
Unrealized appreciation on interest rate swaps 4,248,539 5,782,258
Receivables:
Dividends 3,548,621 3,456,414
Interest 11,660,743 18,478,882
Investments sold 38,346 653,719
Reclaims -- 69,108
Other assets 119,339 154,216
-------------------------------------------------------------------------------------------------
Total assets 2,133,408,064 2,976,877,898
-------------------------------------------------------------------------------------------------
LIABILITIES
Cash overdraft 1,474,360 953,729
Payable for investments purchased -- 152,448
Accrued expenses:
Management fees 948,530 1,282,497
Other 521,359 664,729
FundPreferred shares dividends payable 512,801 670,983
-------------------------------------------------------------------------------------------------
Total liabilities 3,457,050 3,724,386
-------------------------------------------------------------------------------------------------
FundPreferred shares, at liquidation value 708,000,000 965,000,000
-------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $1,421,951,014 $2,008,153,512
-------------------------------------------------------------------------------------------------
Common shares outstanding 99,690,977 140,495,800
-------------------------------------------------------------------------------------------------
Net asset value per Common share outstanding (net assets
applicable to
Common shares, divided by Common shares outstanding) $ 14.26 $ 14.29
-------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHARES CONSIST OF:
-------------------------------------------------------------------------------------------------
Common shares, $.01 par value per share $ 996,910 $ 1,404,958
Paid-in surplus 1,395,785,216 1,979,517,242
Undistributed (Over-distribution of) net investment income (20,135,888) (26,066,540)
Accumulated net realized gain (loss) from investments and
derivative transactions (708,627) (1,094,881)
Net unrealized appreciation (depreciation) of investments
and derivative transactions 46,013,403 54,392,733
-------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $1,421,951,014 $2,008,153,512
-------------------------------------------------------------------------------------------------
Authorized shares:
Common Unlimited Unlimited
FundPreferred Unlimited Unlimited
-------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
54
Statement of
OPERATIONS Year Ended December 31, 2006
PREFERRED AND PREFERRED AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
---------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 59,383,988 $ 77,312,248
Interest 56,817,054 87,878,692
---------------------------------------------------------------------------------------------
Total investment income 116,201,042 165,190,940
---------------------------------------------------------------------------------------------
EXPENSES
Management fees 17,864,558 24,449,422
FundPreferred shares - auction fees 1,770,002 2,412,500
FundPreferred shares - dividend disbursing agent fees 34,877 55,552
Shareholders' servicing agent fees and expenses 11,160 14,697
Custodian's fees and expenses 475,660 648,057
Trustees' fees and expenses 55,291 73,906
Professional fees 68,512 106,708
Shareholders' reports - printing and mailing expenses 285,470 375,959
Stock exchange listing fees 36,589 51,530
Investor relations expense 219,476 303,942
Other expenses 52,108 66,024
---------------------------------------------------------------------------------------------
Total expenses before custodian fee credit and expense
reimbursement 20,873,703 28,558,297
Custodian fee credit (33,466) (31,345)
Expense reimbursement (6,752,063) (9,428,115)
---------------------------------------------------------------------------------------------
Net expenses 14,088,174 19,098,837
---------------------------------------------------------------------------------------------
Net investment income 102,112,868 146,092,103
---------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) from:
Investments 24,700,838 36,010,475
Interest rate swaps 5,199,947 7,022,965
Change in net unrealized appreciation (depreciation) of:
Investments 22,163,953 28,002,882
Interest rate swaps (3,391,223) (4,572,392)
Foreign currencies 1,175 1,624
---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 48,674,690 66,465,554
---------------------------------------------------------------------------------------------
DISTRIBUTIONS TO FUNDPREFERRED SHAREHOLDERS
From net investment income (30,872,125) (42,096,311)
From accumulated net realized gains (2,714,021) (3,927,167)
---------------------------------------------------------------------------------------------
Decrease in net assets applicable to Common shares from
distributions
to FundPreferred shareholders (33,586,146) (46,023,478)
---------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to Common
shares from operations $117,201,412 $166,534,179
---------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
55
Statement of
CHANGES IN NET ASSETS
PREFERRED AND PREFERRED AND
CONVERTIBLE INCOME (JPC) CONVERTIBLE INCOME 2 (JQC)
-------------------------------- ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/06 12/31/05 12/31/06 12/31/05
---------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 102,112,868 $ 112,807,428 $ 146,092,103 $ 157,318,683
Net realized gain (loss) from:
Investments 24,700,838 19,497,960 36,010,475 12,860,799
Interest rate swaps 5,199,947 1,556,692 7,022,965 2,000,191
Futures -- (425,117) -- 245,100
Change in net unrealized appreciation (depreciation) of:
Investments 22,163,953 (96,969,970) 28,002,882 (119,738,770)
Interest rate swaps (3,391,223) 3,055,918 (4,572,392) 4,331,569
Foreign currencies 1,175 -- 1,624 --
Futures -- 325,875 -- 424,500
Distributions to FundPreferred shareholders:
From net investment income (30,872,125) (21,981,246) (42,096,311) (29,789,687)
From accumulated net realized gains (2,714,021) (482,035) (3,927,167) (944,714)
---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to
Common shares
from operations 117,201,412 17,385,505 166,534,179 26,707,671
---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS
From net investment income (86,742,611) (114,775,658) (131,242,436) (153,140,768)
From accumulated net realized gains (7,661,112) (16,385,704) (12,257,268) (12,048,934)
Tax return of capital (15,334,925) -- (10,571,536) --
---------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets applicable to Common shares
from distributions to Common shareholders (109,738,648) (131,161,362) (154,071,240) (165,189,702)
---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Common shares repurchased (5,457,666) -- (6,388,907) --
FundPreferred shares offering costs adjustments -- -- -- (1,595)
---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to
Common shares
from capital share transactions (5,457,666) -- (6,388,907) (1,595)
---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to
Common shares 2,005,098 (113,775,857) 6,074,032 (138,483,626)
Net assets applicable to Common shares at the beginning
of year 1,419,945,916 1,533,721,773 2,002,079,480 2,140,563,106
---------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares at the end of
year $1,421,951,014 $1,419,945,916 $2,008,153,512 $2,002,079,480
---------------------------------------------------------------------------------------------------------------------------------
Undistributed (Over-distribution of) net investment
income at the
end of year $ (20,135,888) $ (24,775,814) $ (26,066,540) $ (26,435,019)
---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
56
Notes to
FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The funds (the "Funds") covered in this report and their corresponding Common
share New York Stock Exchange symbols are Nuveen Preferred and Convertible
Income Fund (JPC) and Nuveen Preferred and Convertible Income Fund 2 (JQC). The
Funds are registered under the Investment Company Act of 1940, as amended, as
diversified, closed-end management investment companies.
Each Fund seeks to provide high income by investing primarily in a portfolio of
preferred securities, convertible securities, high yield securities and equity
securities.
The following is a summary of significant accounting policies followed by the
Funds in the preparation of their financial statements in accordance with U.S.
generally accepted accounting principles.
Investment Valuation
Exchange-listed securities and instruments, other than futures, are generally
valued at the last sales price on the exchange on which such securities or
instruments are primarily traded. Securities or instruments traded on an
exchange for which there are no transactions on a given day or securities or
instruments not listed on an exchange are valued at the mean of the closing bid
and asked prices. Securities traded on Nasdaq are valued at the Nasdaq Official
Closing Price. Futures contracts are valued using the closing settlement price
or, in the absence of such a price, at the mean of the bid and asked prices.
Prices of other derivative instruments, fixed-income securities and senior loans
are generally provided by an independent pricing service approved by the Funds'
Board of Trustees. When price quotes are not readily available, the pricing
service or, in the absence of a pricing service for a particular investment, the
Board of Trustees of the Funds, or its designee, may establish fair market value
using a wide variety of market data including yields or prices of investments of
comparable quality, type of issue, coupon, maturity and rating, market quotes or
indications of value from security dealers, evaluations of anticipated cash
flows or collateral, general market conditions and other information and
analysis, including the obligor's credit characteristics considered relevant by
the pricing service or the Board of Trustee's designee. If the pricing service
is unable to supply a price for a derivative investment the Fund may use a
market quote provided by a major broker/dealer in such investments. If it is
determined that the market price for an investment is unavailable or
inappropriate, the Board of Trustees of the Funds, or its designee, may
establish fair value in accordance with procedures established in good faith by
the Board of Trustees. Short-term investments are valued at amortized cost,
which approximates market value.
The senior loans in which the Fund invests are not listed on an organized
exchange and the secondary market for such investments may be less liquid
relative to markets for other fixed income securities. Consequently, the value
of senior loans, determined as described above, may differ significantly from
the value that would have been determined had there been an active market for
that senior loan.
Investment Transactions
Investment transactions are recorded on a trade date basis. Trade date for
senior loans purchased in the "primary market" is considered the date on which
the loan allocations are determined. Trade date for senior loans purchased in
the "secondary market" is the date on which the transaction is entered into.
Realized gains and losses from investment transactions are determined on the
specific identification method. Investments purchased on a when-issued/delayed
delivery basis may have extended settlement periods. Any investments so
purchased are subject to market fluctuation during this period. The Funds have
instructed the custodian to segregate assets with a current value at least equal
to the amount of the when-issued/delayed delivery purchase commitments. At
December 31, 2006, there were no such outstanding purchase commitments in either
Fund.
Investment Income
Dividend income on securities purchased and dividend expense on securities sold
short, if any, are recorded on the ex-dividend date or, for foreign securities,
when information is available. Interest income, which includes the amortization
of premiums and accretion of discounts for financial reporting purposes, is
recorded on an accrual basis. Interest income also includes paydown gains and
losses. Fee income, if any, consists primarily of amendment fees. Amendment fees
are earned as compensation for evaluating and accepting changes to the original
loan agreement and are recognized when received.
Federal Income Taxes
Each Fund is a separate taxpayer for Federal income tax purposes. Each Fund
intends to distribute substantially all net investment income and net capital
gains to shareholders and to otherwise comply with the requirements of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies. Therefore, no Federal income tax provision is required.
57
Notes to
FINANCIAL STATEMENTS (continued)
Dividends and Distributions to Common Shareholders
Distributions to Common shareholders are recorded on the ex-dividend date. The
amount and timing of distributions are determined in accordance with Federal
income tax regulations, which may differ from U.S. generally accepted accounting
principles.
The Funds make monthly cash distributions to Common shareholders of a stated
dollar amount per share. Effective with the distribution payable June 1, 2006,
and subject to approval and oversight by the Funds' Board of Trustees, each Fund
began to make distributions that seek to maintain a stable distribution level
designed to deliver the long-term return potential of each Fund's investment
strategy through regular monthly distributions (a "Managed Distribution
Policy"). Total distributions during a calendar year generally will be made from
each Fund's net investment income, net realized capital gains and net unrealized
capital gains in the Fund's portfolio, if any. The portion of distributions paid
from net unrealized gains, if any, would be distributed from the Fund's assets
and would be treated by shareholders as a non-taxable distribution for tax
purposes. If a Fund's total return on net asset value exceeds total
distributions during a calendar year, the excess will be reflected as an
increase in net asset value per share. In the event that total distributions
during a calendar year exceed a Fund's total return on net asset value, the
difference will be treated as a return of capital for tax purposes and will
reduce net asset value per share. The final determination of the source and
character of all distributions for the fiscal year are made after the end of the
fiscal year and are reflected in the financial statements.
Real Estate Investment Trust ("REIT") distributions received by the Funds are
generally comprised of ordinary income, long-term and short-term capital gains,
and a return of REIT capital. The actual character of amounts received during
the period are not known until after the fiscal year-end.
For the fiscal year ended December 31, 2006, the character of distributions to
the Funds from the REITs was as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------------
Ordinary income 76.30% 78.38%
Long-term and short-term capital gains 23.61 21.50
Return of REIT capital 0.09 0.12
-------------------------------------------------------------------------------------------------------
For the fiscal year ended December 31, 2005, the character of distributions to
the Funds from the REITs was as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------------
Ordinary income 66.92% 71.62%
Long-term and short-term capital gains 33.08 28.38
Return of REIT capital -- --
-------------------------------------------------------------------------------------------------------
For the fiscal years ended December 31, 2006 and December 31, 2005, the Funds
applied the actual character of distributions reported by the REITs in which the
Funds invest to their receipts from the REITs. If a REIT held in the portfolio
of investments did not report the actual character of its distributions during
the period, the Funds treated the distributions as ordinary income.
The actual character of distributions made by the Funds during the fiscal years
ended December 31, 2006 and December 31, 2005, are reflected in the accompanying
financial statements.
58
FundPreferred Shares
The Funds have issued and outstanding FundPreferred shares, $25,000 stated value
per share, as a means of effecting financial leverage. Each Fund's FundPreferred
shares are issued in more than one Series. The dividend rate paid by the Funds
on each Series is determined every seven days, pursuant to a dutch auction
process overseen by the auction agent, and is payable at the end of each rate
period. The number of FundPreferred shares outstanding, by Series and in total,
for each Fund is as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------------
Number of shares:
Series M 4,720 3,860
Series M2 -- 3,860
Series T 4,720 3,860
Series T2 -- 3,860
Series W 4,720 3,860
Series W2 -- 3,860
Series TH 4,720 3,860
Series TH2 -- 3,860
Series F 4,720 3,860
Series F2 4,720 3,860
-------------------------------------------------------------------------------------------------------
Total 28,320 38,600
-------------------------------------------------------------------------------------------------------
Foreign Currency Translation
To the extent that the Funds invest in securities that are denominated in a
currency other than U.S. dollars, the Funds will be subject to currency risk,
which is the risk that an increase in the U.S. dollar relative to the foreign
currency will reduce returns or portfolio value. Generally, when the U.S. dollar
rises in value against a foreign currency, the Funds' investments in securities
denominated in that currency will lose value because its currency is worth fewer
U.S. dollars; the opposite effect occurs if the U.S. dollar falls in relative
value. Investments and other assets and liabilities denominated in foreign
currencies are converted into U.S. dollars on a spot (i.e. cash) basis at the
spot rate prevailing in the foreign currency exchange market at the time of
valuation. Purchases and sales of investments and dividend income denominated in
foreign currencies are translated into U.S. dollars on the respective dates of
such transactions. The gains or losses resulting from changes in foreign
exchange rates on investments and derivative transactions, if any, are included
with Net realized gain (loss) from foreign currencies and Change in net
unrealized appreciation (depreciation) of foreign currencies in the Statement of
Operations.
Foreign Currency Transactions
The Funds are authorized to engage in foreign currency exchange transactions.
The Funds may engage in foreign currency forward, swap, options and futures
contracts. To the extent that the Funds invest in contracts that are denominated
in a currency other than U.S. dollars, the Funds will be subject to currency
risk, which is the risk that an increase in the U.S. dollar relative to the
foreign currency will reduce returns or portfolio value. Generally, when the
U.S. dollar rises in value against a foreign currency, the Funds' investments
denominated in that currency will lose value because its currency is worth fewer
U.S. dollars; the opposite effect occurs if the U.S. dollar falls in relative
value. Investments and other assets and liabilities denominated in foreign
currencies are converted into U.S. dollars on a spot (i.e. cash) basis at the
spot rate prevailing in the foreign currency exchange market at the time of
valuation. Purchases and sales of investments and dividend income denominated in
foreign currencies are translated into U.S. dollars on the respective dates of
such transactions.
Interest Rate Swap Transactions
The Funds are authorized to invest in certain derivative financial instruments.
The Funds' use of interest rate swap transactions is intended to mitigate the
negative impact that an increase in short-term interest rates could have on
Common share net earnings as a result of leverage. Interest rate swap
transactions involve each Fund's agreement with the counterparty to pay or
receive a fixed rate payment in exchange for the counterparty paying or
receiving a variable rate payment that is intended to approximate each Fund's
variable rate payment obligation on FundPreferred shares or any variable rate
borrowing. The payment obligation is based on the notional amount of the
interest rate swap contract. Interest rate swaps do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to the swap counterparty on such transactions is limited to
the net amount of interest payments that each Fund is to receive. Interest rate
swap positions are valued daily. Although there are economic advantages of
entering into interest rate swap transactions, there are also additional risks.
The Funds help manage the credit risks associated with interest rate swap
transactions by entering into agreements only with counterparties the Adviser
believes have the financial resources to honor their obligations and by having
the Adviser continually monitor the financial stability of the swap
counterparties.
59
Notes to
FINANCIAL STATEMENTS (continued)
Futures Contracts
Each Fund may use futures contracts to hedge against changes in the values of
securities the Fund owns. Each Fund bears the market risk arising from changes
in the value of these financial instruments. At the time a Fund enters into a
futures contract, the Fund deposits and maintains as collateral an initial
margin as required by the exchange on which the transaction is affected.
Pursuant to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in the value of the contract.
Such receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses on futures contracts. Risk may arise from the
potential inability of the counterparty to meet the terms of the contract. When
a contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
time is was closed. At December 31, 2006, there were no open futures contracts
in either Fund.
Short Sales
The Funds are authorized to make short sales of securities if the Funds own at
least an equal amount of such securities or securities convertible into
securities of the same issuer. To secure its obligation to deliver securities
sold short, the Funds have instructed the custodian to segregate assets in an
equivalent amount of the securities sold short or securities convertible into or
exchangeable for such securities. The Fund is obligated to pay to the party to
which the securities were sold short, dividends declared on the stock by the
issuer and records such amounts as expense in the Statement of Operations. Short
sales are valued daily and the corresponding unrealized gains or losses are
included in "Change in net unrealized appreciation (depreciation) of
investments." At December 31, 2006, there were no outstanding short sales in
either Fund.
Repurchase Agreements
In connection with transactions in repurchase agreements, it is the Funds'
policy that its custodian take possession of the underlying collateral
securities, the fair value of which exceeds the principal amount of the
repurchase transaction, including accrued interest, at all times. If the seller
defaults, and the fair value of the collateral declines, realization of the
collateral may be delayed or limited.
Custodian Fee Credit
Each Fund has an arrangement with the custodian bank whereby certain custodian
fees and expenses are reduced by credits earned on each Fund's cash on deposit
with the bank. Such deposit arrangements are an alternative to overnight
investments.
Indemnifications
Under the Funds' organizational documents, their Officers and Trustees are
indemnified against certain liabilities arising out of the performance of their
duties to the Funds. In addition, in the normal course of business, the Funds
enter into contracts that provide general indemnifications to other parties. The
Funds' maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the Funds that have not yet
occurred. However, the Funds have not had prior claims or losses pursuant to
these contracts and expect the risk of loss to be remote.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets applicable to Common shares from operations during the
reporting period. Actual results may differ from those estimates.
2. FUND SHARES
On February 3, 2006, the Funds' Board of Trustees approved an open market share
repurchase program as part of a broad, ongoing effort designed to support the
market prices of the Funds' common shares. Under the terms of the program, each
Fund may repurchase up to 10% of its outstanding common shares.
60
Transactions in Common shares were as follows:
PREFERRED AND PREFERRED AND
CONVERTIBLE INCOME (JPC) CONVERTIBLE INCOME 2 (JQC)
----------------------------- -----------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/06 12/31/05 12/31/06 12/31/05
---------------------------------------------------------------------------------------------------------------------
Shares repurchased (432,200) -- (511,200) --
---------------------------------------------------------------------------------------------------------------------
Average price per share repurchased $12.63 -- $12.50 --
---------------------------------------------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases and sales (including maturities but excluding short-term investments
and derivative transactions) during the fiscal year ended December 31, 2006,
were as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------------
Purchases $1,533,279,880 $2,159,045,348
Sales and maturities 1,532,871,372 2,143,818,477
-------------------------------------------------------------------------------------------------------
4. INCOME TAX INFORMATION
The following information is presented on an income tax basis based on the
information currently available to the Funds. Differences between amounts for
financial statement and Federal income tax purposes are primarily due to the
treatment of paydown gains and losses, recognition of premium amortization,
recognition of income on REIT investments, timing differences in the recognition
of income and timing differences in recognizing certain gains and losses on
investment transactions. To the extent that differences arise that are permanent
in nature, such amounts are reclassified within the capital accounts on the
Statement of Assets and Liabilities presented in the annual report, based on
their Federal tax basis treatment; temporary differences do not require
reclassification. Temporary and permanent differences do not impact the net
asset values of the Funds.
At December 31, 2006, the cost of investments was as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------------
Cost of investments $2,092,203,111 $2,926,014,566
-------------------------------------------------------------------------------------------------------
Gross unrealized appreciation and gross unrealized depreciation of investments
at December 31, 2006, were as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------------
Gross unrealized:
Appreciation $ 76,415,721 $ 100,209,347
Depreciation (54,826,356) (77,940,612)
-------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments $ 21,589,365 $ 22,268,735
-------------------------------------------------------------------------------------------------------
The tax components of undistributed net ordinary income and net long-term
capital gains at December 31, 2006, the Funds' tax year end, were as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------------
Undistributed net ordinary income * $ -- $ --
Undistributed net long-term capital gains -- --
-------------------------------------------------------------------------------------------------------
* Net ordinary income consists of net taxable income derived from dividends,
interest, and net short-term capital gains, if any.
61
Notes to
FINANCIAL STATEMENTS (continued)
The tax character of distributions paid during the tax years ended December 31,
2006 and December 31, 2005, was designated for purposes of the dividends paid
deduction as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
2006 (JPC) (JQC)
-------------------------------------------------------------------------------------------------------
Distributions from net ordinary income * $118,807,924 $174,646,948
Distributions from net long-term capital gains** 9,007,830 14,650,766
Tax return of capital 15,334,925 10,571,536
-------------------------------------------------------------------------------------------------------
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
2005 (JPC) (JQC)
-------------------------------------------------------------------------------------------------------
Distributions from net ordinary income * $136,580,519 $182,688,579
Distributions from net long-term capital gains 16,867,739 12,933,648
-------------------------------------------------------------------------------------------------------
* Net ordinary income consists of net taxable income derived from dividends,
interest, and net short-term capital gains, if any.
** The Funds designated as a long-term capital gain dividend, pursuant to the
Internal Revenue Code Section 852(b)(3), the amount necessary to reduce the
earnings and profits of the Funds related to net capital gain to zero for the
tax year ended December 31, 2006.
Calculation of certain of the amounts presented above (namely, undistributed net
ordinary income for tax purposes) involves the application of complex aspects of
the Internal Revenue Code to certain securities held by the Funds. In
calculating the amount of taxable income derived from these securities,
management made assumptions as to the correct tax treatment of certain of those
securities and made estimates about the tax characteristics of income received
from those securities, based on information currently available to the Funds.
The use of these assumptions and estimates will not affect the qualification of
the Funds as regulated investment companies under Subchapter M of the Internal
Revenue Code, nor is it expected that these assumptions and estimates will be
used in computing taxable income for purposes of preparing the Federal and state
income and excise tax returns.
5. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Each Fund's management fee is separated into two components -- a complex-level
component, based on the aggregate amount of all fund assets managed by Nuveen
Asset Management (the "Adviser"), a wholly owned subsidiary of Nuveen
Investments, Inc. ("Nuveen"), and a specific fund-level component, based only on
the amount of assets within each individual fund. This pricing structure enables
Nuveen fund shareholders to benefit from growth in the assets within each
individual fund as well as from growth in the amount of complex-wide assets
managed by the Adviser.
The annual fund-level fee, payable monthly, for each Fund is based upon the
average daily Managed Assets of each Fund as follows:
AVERAGE DAILY MANAGED ASSETS FUND-LEVEL FEE RATE
---------------------------------------------------------------------------------------------
For the first $500 million .7000%
For the next $500 million .6750
For the next $500 million .6500
For the next $500 million .6250
For Managed Assets over $2 billion .6000
---------------------------------------------------------------------------------------------
62
The annual complex-level fee, payable monthly, which is additive to the
fund-level fee, for all Nuveen sponsored funds in the U.S., is based on the
aggregate amount of total fund assets managed as stated in the table below. As
of December 31, 2006, the complex-level fee rate was .1845%.
COMPLEX-LEVEL ASSETS(1) COMPLEX-LEVEL FEE RATE
-------------------------------------------------------------------------------
For the first $55 billion .2000%
For the next $1 billion .1800
For the next $1 billion .1600
For the next $3 billion .1425
For the next $3 billion .1325
For the next $3 billion .1250
For the next $5 billion .1200
For the next $5 billion .1175
For the next $15 billion .1150
For Managed Assets over $91 billion(2) .1400
-------------------------------------------------------------------------------
(1) The complex-level fee component of the management fee for the funds is
calculated based upon the aggregate Managed Assets ("Managed Assets" means
the average daily net assets of each fund including assets attributable to
preferred stock issued by or borrowings by the Nuveen funds) of
Nuveen-sponsored funds in the U.S.
(2) With respect to the complex-wide Managed Assets over $91 billion, the fee
rate or rates that will apply to such assets will be determined at a later
date. In the unlikely event that complex-wide Managed Assets reach $91
billion prior to a determination of the complex-level fee rate or rates to
be applied to Managed Assets in excess of $91 billion, the complex-level fee
rate for such complex-wide Managed Assets shall be .1400% until such time as
a different rate or rates is determined.
The management fee compensates the Adviser for overall investment advisory and
administrative services and general office facilities. The Adviser is
responsible for the overall strategy and asset allocation decisions. The Adviser
has entered into Sub-Advisory Agreements with Spectrum Asset Management, Inc.
("Spectrum"), Froley, Revy Investment Co., Inc. ("Froley, Revy") and Symphony
Asset Management, LLC ("Symphony"). Spectrum manages the portion of the Funds'
investment portfolios allocated to preferred securities. Froley, Revy manages
the portion of the Funds' investment portfolios allocated to convertible
securities. Symphony manages the portion of the Funds' investment portfolios
allocated to debt securities. Spectrum, Froley, Revy and Symphony are
compensated for their services to the Funds from the management fees paid to the
Adviser. Spectrum also receives compensation on certain portfolio transactions
for providing brokerage services to the Funds.
The Funds pay no compensation directly to those of their Trustees who are
affiliated with the Adviser or to its Officers, all of whom receive remuneration
for their services to the Funds from the Adviser or its affiliates. The Board of
Trustees has adopted a deferred compensation plan for independent Trustees that
enables Trustees to elect to defer receipt of all or a portion of the annual
compensation they are entitled to receive from certain Nuveen advised Funds.
Under the plan, deferred amounts are treated as though equal dollar amounts had
been invested in shares of select Nuveen advised Funds.
For the first eight years of Preferred and Convertible Income's (JPC)
operations, the Adviser has agreed to reimburse the Fund, as a percentage of
average daily Managed Assets, for fees and expenses in the amounts and for the
time periods set forth below:
YEAR ENDING YEAR ENDING
MARCH 31, MARCH 31,
--------------------------------------------------------------------------------
2003 * .32% 2008 .32%
2004 .32 2009 .24
2005 .32 2010 .16
2006 .32 2011 .08
2007 .32
--------------------------------------------------------------------------------
* From the commencement of operations.
The Adviser has not agreed to reimburse Preferred and Convertible Income (JPC)
for any portion of its fees and expenses beyond March 31, 2011.
For the first eight years of Preferred and Convertible Income 2's (JQC)
operations, the Adviser has agreed to reimburse the Fund, as a percentage of
average daily Managed Assets, for fees and expenses in the amounts and for the
time periods set forth below:
YEAR ENDING YEAR ENDING
JUNE 30, JUNE 30,
--------------------------------------------------------------------------------
2003 * .32% 2008 .32%
2004 .32 2009 .24
2005 .32 2010 .16
2006 .32 2011 .08
2007 .32
--------------------------------------------------------------------------------
* From the commencement of operations.
The Adviser has not agreed to reimburse Preferred and Convertible Income 2 (JQC)
for any portion of its fees and expenses beyond June 30, 2011.
63
Notes to
FINANCIAL STATEMENTS (continued)
6. NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Interpretation No. 48
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Recent SEC guidance allows Funds
to delay implementing FIN 48 into NAV calculations until the fund's last NAV
calculation in the first required financial statement reporting period. As a
result, the Funds must begin to incorporate FIN 48 into their NAV calculations
on June 29, 2007. At this time, management is continuing to evaluate the
implications of FIN 48 and does not expect the adoption of FIN 48 will have a
significant impact on the net assets or results of operations of the Funds.
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 157
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
The changes to current generally accepted accounting principles from the
application of this standard relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about fair value
measurements. As of December 31, 2006, the Funds do not believe the adoption of
SFAS No. 157 will impact the financial statement amounts; however, additional
disclosures may be required about the inputs used to develop the measurements
and the effect of certain of the measurements included within the Statement of
Operations for the period.
7. SUBSEQUENT EVENTS
Distributions to Common Shareholders
The Funds declared Common share distributions which were paid on February 1,
2007, to shareholders of record on January 15, 2007, as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------------
Distribution per share $.0950 $.0950
-------------------------------------------------------------------------------------------------------
64
Financial
HIGHLIGHTS
65
Financial
HIGHLIGHTS
Selected data for a Common share outstanding throughout each period:
Investment Operations
-----------------------------------------------------------------
Distributions
from Net Distributions
Beginning Investment from Capital
Common Net Income to Gains to
Share Net Realized/ FundPreferred FundPreferred
Net Asset Investment Unrealized Share- Share-
Value Income(a) Gain (Loss) holders+ holders+ Total
------------------------------------------------------------------------------------------------------
PREFERRED AND CONVERTIBLE INCOME (JPC)
------------------------------------------------------------------------------------------------------
Year Ended 12/31:
2006 $ 14.18 $ 1.02 $ .50 $ (.31) $ (.03) $ 1.18
2005 15.32 1.13 (.74) (.22) -- .17
8/01/04-12/31/04 14.73 .52 .85 (.04) (.01) 1.32
Year Ended 7/31:
2004 14.12 1.25 .71 (.08) -- 1.88
2003(b) 14.33 .30 (.02) (.02) -- .26
PREFERRED AND CONVERTIBLE INCOME 2 (JQC)
------------------------------------------------------------------------------------------------------
Year Ended 12/31:
2006 14.20 1.04 .48 (.30) (.03) 1.19
2005 15.18 1.12 (.70) (.21) (.01) .20
8/01/04-12/31/04 14.33 .51 .90 (.05) -- 1.36
Year Ended 7/31:
2004 13.83 1.16 .73 (.08) -- 1.81
2003(c) 14.33 .04 (.53) -- -- (.49)
------------------------------------------------------------------------------------------------------
Less Distributions
--------------------------------------------
Net Tax Offering
Investment Capital Return of Costs and Ending
Income to Gains to Capital to FundPreferred Common
Common Common Common Share Share Ending
Share- Share- Share- Underwriting Net Asset Market
holders holders holders Total Discounts Value Value
-----------------------------------------------------------------------------------------------------------
PREFERRED AND CONVERTIBLE INCOME (JPC)
-----------------------------------------------------------------------------------------------------------
Year Ended 12/31:
2006 $ (.87) $ (.08) $ (.15) $(1.10) $ -- $ 14.26 $ 14.29
2005 (1.15) (.16) -- (1.31) -- 14.18 11.97
8/01/04-12/31/04 (.50) (.23) -- (.73) -- 15.32 14.33
Year Ended 7/31:
2004 (1.22) (.05) -- (1.27) -- 14.73 13.95
2003(b) (.30) -- -- (.30) (.17) 14.12 14.57
PREFERRED AND CONVERTIBLE INCOME 2 (JQC)
-----------------------------------------------------------------------------------------------------------
Year Ended 12/31:
2006 (.93) (.09) (.08) (1.10) -- 14.29 14.11
2005 (1.09) (.09) -- (1.18) -- 14.20 12.11
8/01/04-12/31/04 (.49) (.02) -- (.51) -- 15.18 13.87
Year Ended 7/31:
2004 (1.17) -- -- (1.17) (.14) 14.33 13.54
2003(c) -- -- -- -- (.01) 13.83 14.69
-----------------------------------------------------------------------------------------------------------
* Annualized.
** Total Return on Market Value is the combination of changes in the market
price per share and the effect of reinvested dividend income and reinvested
capital gains distributions, if any, at the average price paid per share at
the time of reinvestment. Total Return on Common Share Net Asset Value is
the combination of changes in Common share net asset value, reinvested
dividend income at net asset value and reinvested capital gains
distributions at net asset value, if any. Total returns are not annualized.
*** After custodian fee credit and expense reimbursement, where applicable.
+ The amounts shown are based on Common share equivalents.
++ - Ratios do not reflect the effect of dividend payments to FundPreferred
shareholders.
- Income ratios reflect income earned on assets attributable to
FundPreferred shares.
- Each ratio includes the effect of the dividend expense on securities sold
short as follows:
Ratio of Dividend Expense on Securities
Sold Short to Average Net Assets
Applicable to Common Shares
--------------------------------------------------
PREFERRED AND CONVERTIBLE INCOME (JPC)
Year Ended 12/31:
2006 --%
2005 .01
8/01/04-12/31/04 .04*
Year Ended 7/31:
2004 .03
2003(b) --
PREFERRED AND CONVERTIBLE INCOME 2 (JQC)
Year Ended 12/31:
2006 --%
2005 .01
8/01/04-12/31/04 .05*
Year Ended 7/31:
2004 .03
2003(c) --
(a) Per share Net Investment Income is calculated using the average daily
shares method.
(b) For the period March 26, 2003 (commencement of operations) through July
31, 2003.
(c) For the period June 25, 2003 (commencement of operations) through July 31,
2003.
66
Ratios/Supplemental Data
----------------------------------------------------------------------------------------
Ratios to Average Net Assets Ratios to Average Net Assets
Applicable to Common Applicable to Common
Shares Before Shares After
Total Returns Credit/Reimbursement Credit/Reimbursement***
------------------- ----------------------------- -----------------------------
Based
on
Common Ending Net
Based Share Assets
on Net Applicable Net Net Portfolio
Market Asset to Common Investment Investment Turnover
Value** Value** Shares (000) Expenses++ Income++ Expenses++ Income++ Rate
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
29.81% 8.71% $ 1,421,951 1.49% 6.80% 1.00% 7.28% 72%
(7.63) 1.32 1,419,946 1.50 7.25 1.03 7.72 37
8.06 9.07 1,533,722 1.51* 7.66* 1.04* 8.13* 13
4.34 13.44 1,474,983 1.53 7.90 1.05 8.37 19
(.89) .58 1,412,983 1.29* 5.67* .87* 6.09* 21
-------------------------------------------------------------------------------------------------------------------
26.71 8.73 2,008,154 1.44 6.90 .96 7.37 77
(4.40) 1.41 2,002,079 1.46 7.25 .99 7.72 34
6.20 9.59 2,140,563 1.47* 7.81* 1.00* 8.28* 13
.10 12.25 2,021,258 1.47 7.51 1.00 7.98 27
(2.07) (3.49) 1,950,622 .97* 2.86* .65* 3.18* 5
-------------------------------------------------------------------------------------------------------------------
FundPreferred Shares at End of Period
---------------------------------------
Aggregate Liquidation
Amount and Market Asset
Outstanding Value Per Coverage
(000) Share Per Share
--- ---------------------------------------
--------------------------------------------
$ 708,000 $ 25,000 $ 75,210
708,000 25,000 75,139
708,000 25,000 79,157
708,000 25,000 77,083
708,000 25,000 74,893
--------------------------------------------
965,000 25,000 77,025
965,000 25,000 76,867
965,000 25,000 80,455
965,000 25,000 77,364
-- -- --
--------------------------------------------
See accompanying notes to financial statements.
67
Board Members
AND OFFICERS
The management of the Funds, including general supervision of the duties
performed for the Funds by the Adviser, is the responsibility of the Board
Members of the Funds. The number of board members of the Fund is currently set
at ten. None of the board members who are not "interested" persons of the Funds
has ever been a director or employee of, or consultant to, Nuveen or its
affiliates. The names and business addresses of the board members and officers
of the Funds, their principal occupations and other affiliations during the past
five years, the number of portfolios each oversees and other directorships they
hold are set forth below.
NUMBER OF PORTFOLIOS
PRINCIPAL OCCUPATION(S) IN FUND COMPLEX
NAME, BIRTHDATE POSITION(S) HELD YEAR FIRST ELECTED INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS WITH THE FUNDS OR APPOINTED(2) DURING PAST 5 YEARS BOARD MEMBER
-------------------------------------------------------------------------------------------------------------------------------
BOARD MEMBER WHO IS AN INTERESTED PERSON OF THE FUNDS:
-------------------------------------------------------------------------------------------------------------------------------
Timothy R. Chairman of the 1994 Chairman (since 1996) and Director 172
Schwertfeger(1) Board and Board of Nuveen Investments, Inc., Nuveen
3/28/49 Member Investments, LLC; Chairman and
333 W. Wacker Drive Director (since 1997) of Nuveen
Chicago, IL 60606 Asset Management; Chairman and
Director of Rittenhouse Asset
Management, Inc. (since 1999);
Chairman of Nuveen Investments
Advisers Inc. (since 2002);
formerly, Chairman and Director
(1996-2004) Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp.(3); formerly, Director
(1996-2006) of Institutional
Capital Corporation.
BOARD MEMBERS WHO ARE NOT INTERESTED PERSONS OF THE FUNDS:
-------------------------------------------------------------------------------------------------------------------------------
Robert P. Bremner Lead Independent 1997 Private Investor and Management 172
8/22/40 Board member Consultant.
333 W. Wacker Drive
Chicago, IL 60606
-------------------------------------------------------------------------------------------------------------------------------
Lawrence H. Brown Board member 1993 Retired (since 1989) as Senior Vice 172
7/29/34 President of The Northern Trust
333 W. Wacker Drive Company; Director (since 2002)
Chicago, IL 60606 Community Advisory Board for
Highland Park and Highwood, United
Way of the North Shore; Director
(since 2006) of the Michael Rolfe
Pancreatic Cancer Foundation.
-------------------------------------------------------------------------------------------------------------------------------
Jack B. Evans Board member 1999 President, The Hall-Perrine 172
10/22/48 Foundation, a private philanthropic
333 W. Wacker Drive corporation (since 1996); Director
Chicago, IL 60606 and Vice Chairman, United Fire
Group, a publicly held company;
Adjunct Faculty Member, University
of Iowa; Director, Gazette
Companies; Life Trustee of Coe
College and Iowa College
Foundation; formerly, Director,
Alliant Energy; formerly, Director,
Federal Reserve Bank of Chicago;
formerly, President and Chief
Operating Officer, SCI Financial
Group, Inc., a regional financial
services firm.
-------------------------------------------------------------------------------------------------------------------------------
William C. Hunter Board member 2004 Dean, Tippie College of Business, 172
3/6/48 University of Iowa (since July
333 W. Wacker Drive 2006); formerly, Dean and
Chicago, IL 60606 Distinguished Professor of Finance,
School of Business at the
University of Connecticut
(2003-2006); previously, Senior
Vice President and Director of
Research at the Federal Reserve
Bank of Chicago (1995-2003);
Director (since 1997), Credit
Research Center at Georgetown
University; Director (since 2004)
of Xerox Corporation; Director,
SS&C Technologies, Inc. (May 2005-
October 2005).
-------------------------------------------------------------------------------------------------------------------------------
David J. Kundert Board member 2005 Director, Northwestern Mutual 170
10/28/42 Wealth Management Company; Retired
333 W. Wacker Drive (since 2004) as Chairman, JPMorgan
Chicago, IL 60606 Fleming Asset Management, President
and CEO, Banc One Investment
Advisors Corporation, and
President, One Group Mutual Funds;
prior thereto, Executive Vice
President, Banc One Corporation and
Chairman and CEO, Banc One
Investment Management Group; Board
of Regents, Luther College; member
of the Wisconsin Bar Association;
member of Board of Directors,
Friends of Boerner Botanical
Gardens; member of Board of
Directors, Milwaukee Repertory
Theater.
68
NUMBER OF PORTFOLIOS
PRINCIPAL OCCUPATION(S) IN FUND COMPLEX
NAME, BIRTHDATE POSITION(S) HELD YEAR FIRST ELECTED INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS WITH THE FUNDS OR APPOINTED(2) DURING PAST 5 YEARS BOARD MEMBER
-------------------------------------------------------------------------------------------------------------------------------
BOARD MEMBERS WHO ARE NOT INTERESTED PERSONS OF THE FUNDS (CONTINUED):
-------------------------------------------------------------------------------------------------------------------------------
William J. Schneider Board member 1997 Chairman of Miller-Valentine 172
9/24/44 Partners Ltd., a real estate
333 W. Wacker Drive investment company; formerly,
Chicago, IL 60606 Senior Partner and Chief Operating
Officer (retired, 2004) of
Miller-Valentine Group; formerly,
Vice President, Miller-Valentine
Realty; Board Member, Chair of the
Finance Committee and member of the
Audit Committee of Premier Health
Partners, the not-for-profit
company of Miami Valley Hospital;
Vice President, Dayton Philharmonic
Orchestra Association; Board
Member, Regional Leaders Forum,
which promotes cooperation on
economic development issues;
Director, Dayton Development
Coalition; formerly, Member,
Community Advisory Board, National
City Bank, Dayton, Ohio and
Business Advisory Council,
Cleveland Federal Reserve Bank.
-------------------------------------------------------------------------------------------------------------------------------
Judith M. Stockdale Board member 1997 Executive Director, Gaylord and 172
12/29/47 Dorothy Donnelley Foundation (since
333 W. Wacker Drive 1994); prior thereto, Executive
Chicago, IL 60606 Director, Great Lakes Protection
Fund (from 1990 to 1994).
-------------------------------------------------------------------------------------------------------------------------------
Carole E. Stone Board Member 2007 Director, Chicago Board Options 172
6/28/47 Exchange (since 2006); Chair New
333 West Wacker Drive York Racing Association Oversight
Chicago, IL 60606 Board (since 2005); Commissioner,
New York State Commission on Public
Authority Reform (since 2005);
formerly Director, New York State
Division of the Budget (2000-2004),
Chair, Public Authorities Control
Board (2000-2004) and Director,
Local Government Assistance
Corporation (2000-2004).
-------------------------------------------------------------------------------------------------------------------------------
Eugene S. Sunshine Board member 2005 Senior Vice President for Business 172
1/22/50 and Finance, Northwestern
333 W. Wacker Drive University (since 1997); Director
Chicago, IL 60606 (since 2003), Chicago Board Options
Exchange; Chairman (since 1997),
Board of Directors, Rubicon, a pure
captive insurance company owned by
Northwestern University; Director
(since 1997), Evanston Chamber of
Commerce and Evanston Inventure, a
business development organization;
Director (since 2006), Pathways, a
provider of therapy and related
information for physically disabled
infants and young children;
formerly, Director (2003-2006),
National Mentor Holdings, a
privately-held, national provider
of home and community-based
services.
69
Board Members
AND OFFICERS (CONTINUED)
NUMBER OF PORTFOLIOS
NAME, BIRTHDATE POSITION(S) HELD YEAR FIRST ELECTED PRINCIPAL OCCUPATION(S) IN FUND COMPLEX
AND ADDRESS WITH THE FUNDS OR APPOINTED(4) DURING PAST 5 YEARS OVERSEEN BY OFFICER
-------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUND:
-------------------------------------------------------------------------------------------------------------------------------
Gifford R. Zimmerman Chief 1988 Managing Director (since 2002), 172
9/9/56 Administrative Assistant Secretary and Associate
333 W. Wacker Drive Officer General Counsel, formerly, Vice
Chicago, IL 60606 President and Assistant General
Counsel, of Nuveen Investments,
LLC; Managing Director (2002-2004),
General Counsel (1998-2004) and
Assistant Secretary, formerly, Vice
President of Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp.(3); Managing Director (since
2002) and Assistant Secretary and
Associate General Counsel,
formerly, Vice President (since
1997), of Nuveen Asset Management;
Managing Director (since 2004) and
Assistant Secretary (since 1994) of
Nuveen Investments, Inc.; Assistant
Secretary of NWQ Investment
Management Company, LLC. (since
2002); Vice President and Assistant
Secretary of Nuveen Investments
Advisers Inc. (since 2002);
Managing Director, Associate
General Counsel and Assistant
Secretary of Rittenhouse Asset
Management, Inc.; Assistant
Secretary of Symphony Asset
Management LLC (since 2003),
Tradewinds NWQ Global Investors,
LLC and Santa Barbara Asset
Management, LLC; (since 2006);
Chartered Financial Analyst.
-------------------------------------------------------------------------------------------------------------------------------
Julia L. Antonatos Vice President 2004 Managing Director (since 2005), 172
9/22/63 formerly, Vice President (since
333 W. Wacker Drive 2002); formerly, Assistant Vice
Chicago, IL 60606 President (since 2000) of Nuveen
Investments, LLC; Chartered
Financial Analyst.
-------------------------------------------------------------------------------------------------------------------------------
Michael T. Atkinson Vice President 2000 Vice President (since 2002), 172
2/3/66 and Assistant formerly, Assistant Vice President
333 W. Wacker Drive Secretary (since 2000) of Nuveen Investments,
Chicago, IL 60606 LLC.
-------------------------------------------------------------------------------------------------------------------------------
Peter H. D'Arrigo Vice President 1999 Vice President and Treasurer of 172
11/28/67 Nuveen Investments, LLC and of
333 W. Wacker Drive Nuveen Investments, Inc. (since
Chicago, IL 60606 1999); Vice President and Treasurer
of Nuveen Asset Management (since
2002) and of Nuveen Investments
Advisers Inc. (since 2002);
Assistant Treasurer of NWQ
Investment Management Company, LLC.
(since 2002); Vice President and
Treasurer of Nuveen Rittenhouse
Asset Management, Inc. (since
2003); Treasurer of Symphony Asset
Management LLC (since 2003) and
Santa Barbara Asset Management, LLC
(since 2006); Assistant Treasurer,
Tradewinds NWQ Global Investors,
LLC (since 2006); formerly, Vice
President and Treasurer (1999-2004)
of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.(3);
Chartered Financial Analyst.
-------------------------------------------------------------------------------------------------------------------------------
John N. Desmond Vice President 2005 Vice President, Director of 172
8/24/61 Investment Operations, Nuveen
333 W. Wacker Drive Investments, LLC (since January
Chicago, IL 60606 2005); formerly, Director, Business
Manager, Deutsche Asset Management
(2003- 2004), Director, Business
Development and Transformation,
Deutsche Trust Bank Japan
(2002-2003); previously, Senior
Vice President, Head of Investment
Operations and Systems, Scudder
Investments Japan, (2000-2002),
Senior Vice President, Head of Plan
Administration and Participant
Services, Scudder Investments
(1995-2002).
70
NUMBER OF PORTFOLIOS
NAME, BIRTHDATE POSITION(S) HELD YEAR FIRST ELECTED PRINCIPAL OCCUPATION(S) IN FUND COMPLEX
AND ADDRESS WITH THE FUNDS OR APPOINTED(4) DURING PAST 5 YEARS OVERSEEN BY OFFICER
-------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUNDS (CONTINUED)
-------------------------------------------------------------------------------------------------------------------------------
Jessica R. Droeger Vice President 1998 Vice President (since 2002), 172
9/24/64 and Secretary Assistant Secretary and Assistant
333 W. Wacker Drive General Counsel (since 1998)
Chicago, IL 60606 formerly, Assistant Vice President
(since 1998) of Nuveen Investments,
LLC; Vice President (2002-2004) and
Assistant Secretary (1998-2004)
formerly, Assistant Vice President
of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.(3);
Vice President and Assistant
Secretary (since 2005) of Nuveen
Asset Management.
-------------------------------------------------------------------------------------------------------------------------------
Lorna C. Ferguson Vice President 1998 Managing Director (since 2004), 172
10/24/45 formerly, Vice President of Nuveen
333 W. Wacker Drive Investments, LLC, Managing Director
Chicago, IL 60606 (2004) formerly, Vice President
(1998-2004) of Nuveen Advisory
Corp. and Nuveen Institutional
Advisory Corp.(3); Managing
Director (since 2005) of Nuveen
Asset Management.
-------------------------------------------------------------------------------------------------------------------------------
William M. Fitzgerald Vice President 1995 Managing Director (since 2002), 172
3/2/64 formerly, Vice President of Nuveen
333 W. Wacker Drive Investments, LLC; Managing Director
Chicago, IL 60606 (1997-2004) of Nuveen Advisory
Corp. and Nuveen Institutional
Advisory Corp.(3); Managing
Director (since 2001) of Nuveen
Asset Management; Vice President
(since 2002) of Nuveen Investments
Advisers Inc.; Chartered Financial
Analyst.
-------------------------------------------------------------------------------------------------------------------------------
Stephen D. Foy Vice President 1998 Vice President (since 1993) and 172
5/31/54 and Controller Funds Controller (since 1998) of
333 W. Wacker Drive Nuveen Investments, LLC; formerly,
Chicago, IL 60606 Vice President and Funds Controller
(1998-2004) of Nuveen Investments,
Inc.; Certified Public Accountant.
-------------------------------------------------------------------------------------------------------------------------------
Walter M. Kelly Chief Compliance 2003 Vice President and Assistant 172
2/24/70 Officer and Vice Secretary (since 2006) formerly,
333 West Wacker Drive President Assistant Vice President and
Chicago, IL 60606 Assistant General Counsel (since
2003) of Nuveen Investments, LLC;
Vice President (since 2006) and
Assistant Secretary (since 2003)
formerly, Assistant Vice President
of Nuveen Asset Management;
previously, Associate (2001-2003)
at the law firm of Vedder, Price,
Kaufman & Kammholz.
-------------------------------------------------------------------------------------------------------------------------------
David J. Lamb Vice President 2000 Vice President (since 2000) of 172
3/22/63 Nuveen Investments, LLC; Certified
333 W. Wacker Drive Public Accountant.
Chicago, IL 60606
-------------------------------------------------------------------------------------------------------------------------------
Tina M. Lazar Vice President 2002 Vice President of Nuveen 172
8/27/61 Investments, LLC (since 1999).
333 W. Wacker Drive
Chicago, IL 60606
71
Board Members
AND OFFICERS (CONTINUED)
NUMBER OF PORTFOLIOS
NAME, BIRTHDATE POSITION(S) HELD YEAR FIRST ELECTED PRINCIPAL OCCUPATION(S) IN FUND COMPLEX
AND ADDRESS WITH THE FUNDS OR APPOINTED(4) DURING PAST 5 YEARS OVERSEEN BY OFFICER
-------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUNDS (CONTINUED)
-------------------------------------------------------------------------------------------------------------------------------
Larry W. Martin Vice President 1988 Vice President, Assistant Secretary 172
7/27/51 and Assistant and Assistant General Counsel of
333 W. Wacker Drive Secretary Nuveen Investments, LLC; formerly,
Chicago, IL 60606 Vice President and Assistant
Secretary of Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp.(3); Vice President (since
2005) and Assistant Secretary of
Nuveen Investments, Inc.; Vice
President (since 2005) and
Assistant Secretary (since 1997) of
Nuveen Asset Management; Vice
President (since 2000), Assistant
Secretary and Assistant General
Counsel (since 1998) of Rittenhouse
Asset Management, Inc.; Vice
President and Assistant Secretary
of Nuveen Investments Advisers Inc.
(since 2002); Assistant Secretary
of NWQ Investment Management
Company, LLC (since 2002), Symphony
Asset Management LLC (since 2003)
and Tradewinds NWQ Global
Investors, LLC and Santa Barbara
Asset Management, LLC (since 2006).
(1) Mr. Schwertfeger is an "interested person" of the Funds, as defined in the
Investment Company Act of 1940, because he is an officer and board member of
the Adviser.
(2) Board members serve a three year term until his/her successor is elected.
The year first elected or appointed represents the year in which the board
member was first elected or appointed to any fund in the Nuveen Complex.
(3) Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp. were
reorganized into Nuveen Asset Management, effective January 1, 2005.
(4) Officers serve one year terms through July of each year. The year first
elected or appointed represents the year in which the Officer was first
elected or appointed to any fund in the Nuveen Complex.
72
Disclosure for NUVEEN
PREFERRED AND CONVERTIBLE INCOME FUNDS
PROCESS FOR APPROVAL OF A SUB-ADVISORY AGREEMENT WITH TRADEWINDS GLOBAL
INVESTORS AND AN AMENDED SUB-ADVISORY AGREEMENT WITH SYMPHONY ASSET MANAGEMENT
The Board of Trustees is responsible for overseeing the performance of the
investment adviser to the Funds and determining whether to approve the advisory
arrangements, including sub-advisory arrangements. At a meeting held on November
14, 2006 (the "November Meeting"), the Board of Trustees of the Funds, including
the independent Trustees, unanimously approved on behalf of each Fund the new
Tradewinds Sub-Advisory Agreement between NAM and Tradewinds and the Amended
Symphony Sub-Advisory Agreement between NAM and Symphony. Tradewinds and
Symphony are each a "Sub-Advisor."
THE APPROVAL PROCESS
During the course of the fall of 2006, the Board received a wide variety of
materials relating to proposed changes to the investment mandates for the Funds
as well as the proposed managers for the assets allocated pursuant to these
revised mandates. In this regard, NAM recommended Symphony and Tradewinds. To
assist the Board in its evaluation of the sub-advisory contract with the
respective Sub-Advisor at the November Meeting or at prior meetings, the
independent Trustees received extensive materials which outlined, among other
things:
- the nature, extent and quality of services to be provided by the
Sub-Advisor;
- the organization and business operations of the Sub-Advisor;
- hypothetical performance of the Fund's modified investment strategies as
well as certain hypothetical and actual performance of the respective
Sub-Adviser;
- the profitability of Nuveen (which included its wholly-owned affiliated
sub-advisors such as Symphony and Tradewinds);
- the sub-advisory fee schedule for each Sub-Advisor as well as a
description of the fees received by the Sub-Advisor from other funds
and/or clients; and
- the soft dollar practices of the Sub-Advisor, if any.
At the November Meeting, Symphony made a presentation to and responded to
questions from the Board. After the presentations and after reviewing the
written materials, the independent Trustees met privately with their legal
counsel to review the Board's duties under the Investment Company Act of 1940,
as amended and the general principals of state law in reviewing and approving
advisory contracts, the standards used by courts in determining whether
investment company boards of directors have fulfilled their duties and factors
to be considered by the Board in voting on advisory contracts. It is with this
background that the Trustees considered the Amended Symphony Sub-Advisory
Agreement and the Tradewinds Sub-Advisory Agreement. The independent Trustees,
in consultation with independent counsel, reviewed the factors set out in
judicial decisions and SEC directives relating to the approval of advisory
contracts. As outlined in more detail below, the Trustees considered all factors
they believed relevant with respect to each Fund, including the following: (a)
the nature, extent and quality of the services to be provided by the
Sub-Advisor; (b) performance information of the Fund and the Sub-Advisor (as
described below); (c) the profitability of Nuveen and its affiliates; (d) the
extent to which economies of scale would be realized as the Fund grows; and (e)
whether fee levels reflect these economies of scale for the benefit of Fund
investors.
A. NATURE, EXTENT AND QUALITY OF SERVICES
In reviewing the Sub-Advisors, the Trustees considered the nature, extent and
quality of the respective Sub-Advisor's services. As Symphony already serves as
a sub-advisor to the Funds and Tradewinds serves as sub-advisor to other Nuveen
funds overseen by the Trustees, the Board has a good understanding of each
Sub-Advisor's organization, operations and personnel. In this regard, the
Trustees are familiar with and have evaluated the professional experience,
qualifications and credentials of the Fund Advisor's personnel. At the November
Meeting or at prior meetings, the Trustees have reviewed materials outlining,
among other things, the Sub-Advisor's organization and business; the types of
services that the respective Sub-Advisor will provide to the Funds under the
revised investment mandates; the experience of the Sub-Advisor with respect to
the investment strategies; and hypothetical as well as actual performance of the
Sub-Advisor with respect to its investment strategies (as described in further
detail below). The Trustees noted that NAM recommended the Sub-Advisors and
considered the basis for such recommendation. At prior meetings, the Board has
also reviewed an evaluation from NAM of each Sub-Advisor which outlined, among
other things, the Sub-Advisor's organizational history, client base, product
mix, investment team and any changes thereto, investment process, and
performance (as applicable). Given the Trustees' experience with the Funds
(including any other Nuveen funds advised by the Sub-Advisor) and each
Sub-Advisor, the Trustees recognized and considered the quality of their
investment processes in making portfolio management decisions.
73
Disclosure for NUVEEN
PREFERRED AND CONVERTIBLE INCOME FUNDS (continued)
In addition to advisory services, the independent Trustees considered the
quality of any administrative or non-advisory services provided. With respect to
each Sub-Advisor, the independent Trustees noted that each respective
Sub-Advisory Agreement was essentially an agreement for portfolio management
services only and the Sub-Advisor was not expected to supply other significant
administrative services to the Funds.
Based on their review, the Trustees found that, overall, the nature, extent and
quality of services expected to be provided to the Funds under the Tradewinds
Sub-Advisory Agreement and Amended Symphony Sub-Advisory Agreement, as
applicable, were satisfactory.
B. THE INVESTMENT PERFORMANCE OF THE FUND AND SUB-ADVISORS
The Trustees recognized that the changes to the investment mandates are seeking,
in part, to enhance portfolio returns thus limiting some of the usefulness of
reviewing the Fund's past performance record. Accordingly, the Trustees have
reviewed hypothetical model performance of the investment strategies as well as
hypothetical and more recent actual performance of the respective Sub-Adviser
with respect to its investment strategies. The Trustees are also familiar with
the performance records of the respective Sub-Adviser with respect to other
funds it advises.
C. FEES, EXPENSES AND PROFITABILITY
1. FEES AND EXPENSES
In evaluating the advisory fees, the Board recognized that the overall
advisory fee paid by the Funds will not change as a result of the addition of
Tradewinds as a Sub-Advisor and the increased fee for Symphony. Rather, NAM
will pay the sub-advisory fees out of the management fees it receives from
the Funds. With respect to the overall advisory fees and expenses of the
Fund, the Trustees have previously reviewed, among other things, the
respective Fund's advisory fees (net and gross management fees) and total
expense ratios (before and after expense reimbursements and/or waivers) in
absolute terms as well as comparisons to the gross management fees (before
waivers), net management fees (after waivers) and total expense ratios
(before and after waivers) of comparable funds. With respect to the
sub-advisory fees, the Trustees reviewed the proposed sub-advisory fee for
Tradewinds, the revised sub-advisory fee schedule for Symphony and the fees
received by each from other funds they advise. At prior meetings, the
Trustees have also reviewed the pricing schedule that the Sub-Advisor (or its
predecessor) charges for similar investment management services for other
client accounts or fund sponsors.
Based on their review of the fee and service information provided, the
Trustees determined that the proposed sub-advisory fees for the respective
Sub-Advisor was acceptable.
2. PROFITABILITY
In conjunction with its review of fees at prior meetings, the Trustees have
considered the profitability of Nuveen for advisory activities (which
incorporated Nuveen's wholly-owned affiliated sub-advisors including
Tradewinds and Symphony). As noted, the overall advisory fees paid by the
Funds will not change as a result of the proposed changes to the Funds'
sub-advisory arrangements. At prior meetings, the Trustees have reviewed data
comparing Nuveen's profitability with other fund sponsors prepared by three
independent third party service providers as well as comparisons of the
revenues, expenses and profits margins of various unaffiliated management
firms with similar amounts of assets under management prepared by Nuveen. In
considering profitability, the Trustees have recognized the inherent
limitations in determining profitability as well as the difficulties in
comparing the profitability of other unaffiliated advisers. Based on their
review, the Trustees recognized that the Sub-Advisors are wholly-owned
subsidiaries of Nuveen, the advisory fees paid to NAM are not changing, and
therefore the level of profitability to Nuveen should remain the same and
appears reasonable in light of the services provided.
In evaluating the reasonableness of the compensation, the Trustees also
considered any other revenues paid to the Sub-Advisor and its affiliates
(including NAM) as well as any indirect benefits (such as soft dollar
arrangements, if any) they expect to receive that are directly attributable to
their management of the Funds, if any. See Section E below for additional
information.
D. ECONOMIES OF SCALE AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE
With respect to economies of scale, the Trustees have recognized the potential
benefits resulting from the costs of a fund being spread over a larger asset
base as a fund grows. To help ensure the shareholders share in these benefits,
the Trustees have previously reviewed and considered the breakpoints in the
Fund's advisory fee schedules that reduce advisory fees as the applicable Fund's
assets grow. In addition to advisory fee breakpoints as assets in a respective
Fund rise, the Board had also approved a complex-wide fee arrangement that was
introduced on August 1, 2004. Pursuant to the complex-wide fee arrangement, the
fees of the funds in the Nuveen complex, including the Funds, are reduced as the
assets in the fund complex reach certain
74
levels. As noted, each Fund's overall advisory fee schedule including the
breakpoints applicable to the fees paid by the Fund will not change as a result
of the proposed changes to the Funds' sub-advisory arrangements. The Trustees
had concluded that such breakpoint schedule and complex-wide fee arrangement
continues to be acceptable and desirable in providing benefits from economies of
scale to shareholders.
E. INDIRECT BENEFITS
In evaluating fees, the Trustees also considered any indirect benefits or
profits the Sub-Advisor or its affiliates may receive as a result of its
relationship with each Fund. In this regard, the Trustees recognized revenues
received by affiliates of NAM and the Sub-Advisors for serving as agent at
Nuveen's preferred trading desk.
In addition to the above, the Trustees considered whether the Sub-Advisor
received any benefits from soft dollar arrangements. The Trustees recognized
that Tradewinds may engage in soft dollar arrangements and that such Sub-Advisor
may benefit from its soft dollar arrangements pursuant to which it receives
research from brokers that execute the respective Fund's portfolio transactions.
The Trustees noted that such Sub-Advisor's profitability may be lower if it was
required to pay for this research with hard dollars. With respect to Symphony,
Symphony currently does not enter into soft dollar arrangements; however, it has
adopted a soft dollar policy in the event it does so in the future.
F. OTHER CONSIDERATIONS
In addition to the above, the Trustees recognized that the modifications in the
Funds' investment strategies would result in changes to the Funds' portfolio
management. As noted above, the Trustees considered the Sub-Advisers' experience
in light of the Funds' new investment mandates. However, the Trustees recognized
that the Sub-Advisers are affiliated with Nuveen and will be managing assets
that were formerly managed by a sub-adviser unaffiliated with Nuveen. As Nuveen
pays the Sub-Advisers out of the management fee it receives from the Funds, the
Trustees considered the benefit to Nuveen that it will be retaining more of the
management fees through its affiliated Sub-Advisers when the Board evaluated the
sub-advisory arrangements and fee structures.
The Trustees did not identify any single factor discussed previously as
all-important or controlling. The Trustees, including a majority of independent
Trustees, concluded that the terms of the Tradewinds Sub-Advisory Agreement and
Symphony's Amended Sub-Advisory Agreement were fair and reasonable, that the
respective Sub-Advisor's fees are reasonable in light of the services provided
to each Fund, and that the Trustees recommend that shareholders approve such
Sub-Advisory Agreements.
75
Reinvest Automatically
EASILY AND CONVENIENTLY
NUVEEN EXCHANGE-TRADED CLOSED-END FUNDS
DIVIDEND REINVESTMENT PLAN
Your Nuveen Exchange-Traded Closed-End Fund allows you to conveniently reinvest
dividends and/or capital gains distributions in additional fund shares
By choosing to reinvest, you'll be able to invest money regularly and
automatically, and watch your investment grow through the power of compounding.
It is important to note that an automatic reinvestment plan does not ensure a
profit, nor does it protect you against loss in a declining market.
EASY AND CONVENIENT
To make recordkeeping easy and convenient, each month you'll receive a statement
showing your total dividends and distributions, the date of investment, the
shares acquired and the price per share, and the total number of shares you own.
HOW SHARES ARE PURCHASED
NUVEEN MAKES REINVESTING EASY. A PHONE CALL IS ALL IT TAKES TO
SET UP YOUR REINVESTMENT ACCOUNT.
The shares you acquire by reinvesting will either be purchased on the open
market or newly issued by the Fund. If the shares are trading at or above net
asset value at the time of valuation, the Fund will issue new shares at the
greater of the net asset value or 95% of the then-current market price. If the
shares are trading at less than net asset value, shares for your account will be
purchased on the open market. Dividends and distributions received to purchase
shares in the open market will normally be invested shortly after the dividend
payment date. No interest will be paid on dividends and distributions awaiting
reinvestment. Because the market price of the shares may increase before
purchases are completed, the average purchase price per share may exceed the
market price at the time of valuation, resulting in the acquisition of fewer
shares than if the dividend or distribution had been paid in shares issued by
the Fund. A pro rata portion of any applicable brokerage commissions on open
market purchases will be paid by Plan participants. These commissions usually
will be lower than those charged on individual transactions.
FLEXIBLE
You may change your distribution option or withdraw from the Plan at any time,
should your needs or situation change. Should you withdraw, you can receive a
certificate for all whole shares credited to your reinvestment account and cash
payment for fractional shares, or cash payment for all reinvestment account
shares, less brokerage commissions and a $2.50 service fee.
You can reinvest whether your shares are registered in your name, or in the name
of a brokerage firm, bank, or other nominee. Ask your investment advisor if his
or her firm will participate on your behalf. Participants whose shares are
registered in the name of one firm may not be able to transfer the shares to
another firm and continue to participate in the Plan.
The Fund reserves the right to amend or terminate the Plan at any time. Although
the Fund reserves the right to amend the Plan to include a service charge
payable by the participants, there is no direct service charge to participants
in the Plan at this time.
CALL TODAY TO START REINVESTING DIVIDENDS AND/OR DISTRIBUTIONS
For more information on the Nuveen Automatic Reinvestment Plan or to enroll in
or withdraw from the Plan, speak with your financial advisor or call us at (800)
257-8787.
76
AUTOMATIC DIVIDEND
REINVESTMENT PLAN
NOTICE OF AMENDMENT TO THE TERMS AND CONDITIONS
The Fund is amending the terms and conditions of its Automatic Dividend
Reinvestment Plan (the "Plan") as further described below effective with the
close of business on December 1, 2006. THESE CHANGES ARE INTENDED TO ENABLE PLAN
PARTICIPANTS UNDER CERTAIN CIRCUMSTANCES TO REINVEST FUND DISTRIBUTIONS AT A
LOWER AGGREGATE COST THAN IS POSSIBLE UNDER THE EXISTING PLAN. Shareholders who
do not wish to continue as participants under the amended Plan may withdraw from
the Plan by notifying the Plan Agent prior to the effective date of the
amendments. Participants should refer to their Plan document for notification
instructions, or may simply call Nuveen at (800) 257-8787.
Fund shareholders who elect to participate in the Plan are able to have Fund
distributions consisting of income dividends, realized capital gains and returns
of capital automatically reinvested in additional Fund shares. Under the Plan's
existing terms, the Plan Agent purchases Fund shares in the open market if the
Fund's shares are trading at a discount to their net asset value on the payable
date for the distribution. If the Fund's shares are trading at or above their
net asset value on the payable date for the distribution, the Plan Agent
purchases newly-issued Fund shares directly from the Fund at a price equal to
the greater of the shares' net asset value or 95% of the shares' market value.
Under the Plan's amended terms, if the Plan Agent begins purchasing Fund shares
on the open market while shares are trading below net asset value, but the
Fund's shares subsequently trade at or above their net asset value before the
Plan Agent is able to complete its purchases, the Plan Agent may cease
open-market purchases and may invest the uninvested portion of the distribution
in newly-issued Fund shares at a price equal to the greater of the shares' net
asset value or 95% of the shares' market value. This change will permit Plan
participants under these circumstances to reinvest Fund distributions at a lower
aggregate cost than is possible under the existing Plan.
77
Notes
78
OTHER USEFUL
INFORMATION
QUARTERLY PORTFOLIO OF INVESTMENTS AND PROXY VOTING INFORMATION
The Fund's (i) quarterly portfolio of investments, (ii) information regarding
how the Funds voted proxies relating to portfolio securities held during the
most recent 12-month period ended June 30, 2006, and (iii) a description of the
policies and procedures that the Fund used to determine how to vote proxies
relating to portfolio securities are available without charge, upon request, by
calling Nuveen Investments toll-free at (800) 257-8787 or on Nuveen's website at
www.nuveen.com.
You may also obtain this and other Fund information directly from the Securities
and Exchange Commission ("SEC"). The SEC may charge a copying fee for this
information. Visit the SEC on-line at http://www.sec.gov or in person at the
SEC's Public Reference Room in Washington, D.C. Call the SEC at 1-202-942-8090
for room hours and operation. You may also request Fund information by sending
an e-mail request to publicinfo@sec.gov or by writing to the SEC's Public
Reference Section at 450 Fifth Street NW, Washington, D.C. 20549.
DISTRIBUTION INFORMATION
Nuveen Preferred and Convertible Income Fund (JPC) and Nuveen Preferred and
Convertible Income Fund 2 (JQC) designate 21.23% and 17.79%, respectively, of
dividends declared from net investment income as dividends qualifying for the
70% dividends received deduction for corporations and 25.58% and 21.97%,
respectively, as qualified dividend income for individuals under the Jobs and
Growth Tax Relief Reconciliation Act of 2003.
CEO CERTIFICATION DISCLOSURE
Each Fund's Chief Executive Officer has submitted to the New York Stock Exchange
the annual CEO certification as required by Section 303A.12(a) of the NYSE
Listed Company Manual.
Each Fund has filed with the Securities and Exchange Commission the
certification of its Chief Executive Officer and Chief Financial Officer
required by Section 302 of the Sarbanes-Oxley Act.
GLOSSARY OF TERMS USED IN THIS REPORT
AVERAGE ANNUAL TOTAL RETURN: This is a commonly used method to express an
investment's performance over a particular, usually multi-year time period. It
expresses the return that would have been necessary each year to equal the
investment's actual cumulative performance (including change in NAV or market
price and reinvested dividends and capital gains distributions, if any) over the
time period being considered.
MARKET YIELD: Market yield is based on the Fund's current annualized monthly
distribution divided by the Fund's current market price. The Fund's monthly
distributions to its shareholders may be comprised of ordinary income, net
realized capital gains and, if at the end of the calendar year the Funds'
cumulative net ordinary income and net realized gains are less than the amount
of the Fund's distributions, a tax return of capital.
NET ASSET VALUE (NAV): A Fund's common share NAV per share is calculated by
subtracting the liabilities of the Fund (including any Preferred shares issued
in order to leverage the Fund) from its total assets and then dividing the
remainder by the number of shares outstanding. Fund NAVs are calculated at the
end of each business day.
BOARD OF TRUSTEES
Robert P. Bremner
Lawrence H. Brown
Jack B. Evans
William C. Hunter
David J. Kundert
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
Carole E. Stone
Eugene S. Sunshine
FUND MANAGER
Nuveen Asset Management
333 West Wacker Drive
Chicago, IL 60606
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
TRANSFER AGENT AND
SHAREHOLDER SERVICES
State Street Bank & Trust Company
Nuveen Funds
P.O. Box 43071
Providence, RI 02940-3071
(800) 257-8787
LEGAL COUNSEL
Chapman and Cutler LLP
Chicago, IL
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Chicago, IL
The Fund intends to repurchase shares of its own common or preferred stock in
the future at such times and in such amounts as is deemed advisable. During the
period covered by this report, JPC and JQC repurchased 432,200 and 511,200
common shares, respectively. Any future repurchases will be reported to
shareholders in the next annual or semiannual report.
79
(BACK COVER PHOTO)
NUVEEN INVESTMENTS:
SERVING INVESTORS
FOR GENERATIONS
Since 1898, financial advisors and their clients have relied on Nuveen
Investments to provide dependable investment solutions. For the past
century, Nuveen Investments has adhered to the belief that the best
approach to investing is to apply conservative risk-management principles
to help minimize volatility.
Building on this tradition, we today offer a range of high quality equity
and fixed-income solutions that are integral to a well-diversified core
portfolio. Our clients have come to appreciate this diversity, as well as
our continued adherence to proven, long-term investing principles.
WE OFFER MANY DIFFERENT INVESTING SOLUTIONS FOR OUR CLIENTS' DIFFERENT
NEEDS.
Managing $162 billion in assets, as of December 31, 2006, Nuveen
Investments offers access to a number of different asset classes and
investing solutions through a variety of products. Nuveen Investments
markets its capabilities under six distinct brands: Nuveen, a leader in
fixed-income investments; NWQ, a leader in value-style equities;
Rittenhouse, a leader in growth-style equities; Symphony, a leading
institutional manager of market-neutral alternative investment
portfolios; Santa Barbara, a leader in growth equities; and Tradewinds,
NWQ a leader in global equities.
FIND OUT HOW WE CAN HELP YOU REACH YOUR FINANCIAL GOALS.
To learn more about the products and services Nuveen Investments offers,
talk to your financial advisor, or call us at (800) 257-8787. Please read
the information provided carefully before you invest.
Be sure to obtain a prospectus, where applicable. Investors should
consider the investment objective and policies, risk considerations,
charges and expenses of the Fund carefully before investing. The
prospectus contains this and other information relevant to an investment
in the Fund. For a prospectus, please contact your securities
representative or Nuveen Investments, 333 W. Wacker Dr., Chicago, IL
60606. Please read the prospectus carefully before you invest or send
money.
LEARN MORE
ABOUT NUVEEN FUNDS AT
WWW.NUVEEN.COM/CEF
- Share prices
- Fund details
- Daily financial news
- Investor education
- Interactive planning tools
EAN-F-1206D
NUVEEN LOGO
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the registrant has adopted a
code of ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. [There were no amendments to or waivers
from the Code during the period covered by this report.] The registrant has
posted the code of ethics on its website at www.nuveen.com/etf. (To view the
code, click on the Investor Resources drop down menu box, click on Fund
Governance and then click on Code of Conduct.)
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Board of Directors or Trustees determined that the registrant
has at least one "audit committee financial expert" (as defined in Item 3 of
Form N-CSR) serving on its Audit Committee. The registrant's audit committee
financial expert is Jack B. Evans, Chairman of the Audit Committee, who is
"independent" for purposes of Item 3 of Form N-CSR.
Mr. Evans was formerly President and Chief Operating Officer of SCI Financial
Group, Inc., a full service registered broker-dealer and registered investment
adviser ("SCI"). As part of his role as President and Chief Operating Officer,
Mr. Evans actively supervised the Chief Financial Officer (the "CFO") and
actively supervised the CFO's preparation of financial statements and other
filings with various regulatory authorities. In such capacity, Mr. Evans was
actively involved in the preparation of SCI's financial statements and the
resolution of issues raised in connection therewith. Mr. Evans has also served
on the audit committee of various reporting companies. At such companies, Mr.
Evans was involved in the oversight of audits, audit plans, and the preparation
of financial statements. Mr. Evans also formerly chaired the audit committee of
the Federal Reserve Bank of Chicago.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Nuveen Preferred and Convertible Income Fund 2
The following tables show the amount of fees that Ernst & Young LLP, the Fund's
auditor, billed to the Fund during the Fund's last two full fiscal years. For
engagements with Ernst & Young LLP the Audit Committee approved in advance all
audit services and non-audit services that Ernst & Young LLP provided to the
Fund, except for those non-audit services that were subject to the pre-approval
exception under Rule 2-01 of Regulation S-X (the "pre-approval exception"). The
pre-approval exception for services provided directly to the Fund waives the
pre-approval requirement for services other than audit, review or attest
services if: (A) the aggregate amount of all such services provided constitutes
no more than 5% of the total amount of revenues paid by the Fund to its
accountant during the fiscal year in which the services are provided; (B) the
Fund did not recognize the services as non-audit services at the time of the
engagement; and (C) the services are promptly brought to the Audit Committee's
attention, and the Committee (or its delegate) approves the services before the
audit is completed.
The Audit Committee has delegated certain pre-approval responsibilities to its
Chairman (or, in his absence, any other member of the Audit Committee).
SERVICES THAT THE FUND'S AUDITOR BILLED TO THE FUND
AUDIT FEES BILLED AUDIT-RELATED FEES TAX FEES ALL OTHER FEES
FISCAL YEAR ENDED TO FUND (1) BILLED TO FUND (2) BILLED TO FUND (3) BILLED TO FUND (4)
----------------------------------------------------------------------------------------------------------------------
December 31, 2006 $ 25,269 $ 0 $ 800 $ 3,950
----------------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0% 0%
pursuant to
pre-approval
exception
----------------------------------------------------------------------------------------------------------------------
December 31, 2005 $ 23,698 $ 0 $ 4,307 $ 3,750
----------------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0% 0%
pursuant to
pre-approval
exception
----------------------------------------------------------------------------------------------------------------------
(1) "Audit Fees" are the aggregate fees billed for professional services for the
audit of the Fund's annual financial statements and services provided in
connection with statutory and regulatory filings or engagements.
(2) "Audit Related Fees" are the aggregate fees billed for assurance and related
services reasonably related to the performance of the audit or review of
financial statements and are not reported under "Audit Fees".
(3) "Tax Fees" are the aggregate fees billed for professional services for tax
advice, tax compliance, and tax planning.
(4) "All Other Fees" are the aggregate fees billed for products and services
other than "Audit Fees", "Audit Related Fees", and "Tax Fees".
SERVICES THAT THE FUND'S AUDITOR BILLED TO THE
ADVISER AND AFFILIATED FUND SERVICE PROVIDERS
The following tables show the amount of fees billed by Ernst & Young LLP to
Nuveen Asset Management ("NAM" or the "Adviser"), and any entity controlling,
controlled by or under common control with NAM ("Control Affiliate") that
provides ongoing services to the Fund ("Affiliated Fund Service Provider"), for
engagements directly related to the Fund's operations and financial reporting,
during the Fund's last two full fiscal years.
The tables also show the percentage of fees subject to the pre-approval
exception. The pre-approval exception for services provided to the Adviser and
any Affiliated Fund Service Provider (other than audit, review or attest
services) waives the pre-approval requirement if: (A) the aggregate amount of
all such services provided constitutes no more than 5% of the total amount of
revenues paid to Ernst & Young LLP by the Fund, the Adviser and Affiliated Fund
Service Providers during the fiscal year in which the services are provided that
would have to be pre-approved by the Audit Committee; (B) the Fund did not
recognize the services as non-audit services at the time of the engagement; and
(C) the services are promptly brought to the Audit Committee's attention, and
the Committee (or its delegate) approves the services before the Fund's audit is
completed.
FISCAL YEAR ENDED AUDIT-RELATED FEES TAX FEES BILLED TO ALL OTHER FEES
BILLED TO ADVISER AND ADVISER AND BILLED TO ADVISER
AFFILIATED FUND AFFILIATED FUND AND AFFILIATED FUND
SERVICE PROVIDERS SERVICE PROVIDERS (1) SERVICE PROVIDERS
-----------------------------------------------------------------------------------------------------------
December 31, 2006 $ 0 $ 5,400 $ 0
-----------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0%
pursuant to
pre-approval
exception
-----------------------------------------------------------------------------------------------------------
December 31, 2005 $ 0 $ 4,950 $ 0
-----------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0%
pursuant to
pre-approval
exception
-----------------------------------------------------------------------------------------------------------
(1) The amounts reported for the Fund under the column heading "Tax Fees"
represents amounts billed to the Adviser exclusively for the preparation for the
Fund's tax return, the cost of which is borne by the Adviser. In the aggregate,
for all Nuveen funds for which Ernst & Young LLP serves as independent
registered public accounting firm, these fees amounted to $288,000 in 2006 and
$282,575 in 2005.
NON-AUDIT SERVICES
The following table shows the amount of fees that Ernst & Young LLP billed
during the Fund's last two full fiscal years for non-audit services. For
engagements entered into on or after May 6, 2003, the Audit Committee is
required to pre-approve non-audit services that Ernst & Young LLP provides to
the Adviser and any Affiliated Fund Services Provider, if the engagement related
directly to the Fund's operations and financial reporting (except for those
subject to the de minimis exception described above). The Audit Committee
requested and received information from Ernst & Young LLP about any non-audit
services that Ernst & Young LLP rendered during the Fund's last fiscal year to
the Adviser and any Affiliated Fund Service Provider. The Committee considered
this information in evaluating Ernst & Young LLP's independence.
FISCAL YEAR ENDED TOTAL NON-AUDIT FEES
BILLED TO ADVISER AND
AFFILIATED FUND SERVICE TOTAL NON-AUDIT FEES
PROVIDERS (ENGAGEMENTS BILLED TO ADVISER AND
RELATED DIRECTLY TO THE AFFILIATED FUND SERVICE
TOTAL NON-AUDIT FEES OPERATIONS AND FINANCIAL PROVIDERS (ALL OTHER
BILLED TO FUND REPORTING OF THE FUND) ENGAGEMENTS) TOTAL
-------------------------------------------------------------------------------------------------------------------------------
December 31, 2006 $ 4,750 $ 5,400 $ 0 $ 10,150
December 31, 2005 $ 8,057 $ 4,950 $ 0 $ 13,007
"Non-Audit Fees billed to Adviser" for both fiscal year ends represent "Tax
Fees" billed to Adviser in their respective amounts from the previous table.
Audit Committee Pre-Approval Policies and Procedures. Generally, the Audit
Committee must approve (i) all non-audit services to be performed for the Fund
by the Fund's independent accountants and (ii) all audit and non-audit services
to be performed by the Fund's independent accountants for the Affiliated Fund
Service Providers with respect to operations and financial reporting of the
Fund. Regarding tax and research projects conducted by the independent
accountants for the Fund and Affiliated Fund Service Providers (with respect to
operations and financial reports of the Fund) such engagements will be (i)
pre-approved by the Audit Committee if they are expected to be for amounts
greater than $10,000; (ii) reported to the Audit Committee chairman for his
verbal approval prior to engagement if they are expected to be for amounts under
$10,000 but greater than $5,000; and (iii) reported to the Audit Committee at
the next Audit Committee meeting if they are expected to be for an amount under
$5,000.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant's Board of Directors or Trustees has a separately designated
Audit Committee established in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended (15 U.S.C. 78c(a)(58)(A)). The
members of the audit committee are Robert P. Bremner, Lawrence H. Brown, Jack B.
Evans, William J. Schneider and Eugene S. Sunshine.
ITEM 6. SCHEDULE OF INVESTMENTS.
See Portfolio of Investments in Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Adviser has engaged Spectrum Asset Management, Inc. ("Spectrum"), Froley,
Revy Investment Company Inc. ("Froley, Revy") and Symphony Asset Management, LLC
("Symphony") (Spectrum, Froley, Revy and Symphony are also collectively referred
to as "Sub-Advisers") as Sub-Advisers to provide discretionary investment
advisory services. As part of these services, the Adviser has also delegated to
each Sub-Adviser the full responsibility for proxy voting and related duties in
accordance with the Sub-Adviser's policy and procedures. The Adviser
periodically will monitor each Sub-Adviser's voting to ensure that they are
carrying out their duties. The Sub-Advisers' proxy voting policies and
procedures are summarized as follows:
SYMPHONY
Symphony uses the proxy voting services of Institutional Shareholder Services
("ISS"). The ISS Proxy Voting Services provide Symphony and its clients with an
independent source of proxy voting research and services. The use of ISS is
designed to offer client-centered proxy voting which minimizes conflicts of
interests between Symphony's interests and those of its clients.
In order to monitor how ISS votes client proxies, Symphony has established a
Proxy Voting Review Committee (the "Committee"). The Committee is composed of
Symphony's Chief Operating Officer and its Chief Investment Officer. Each year,
the Committee reviews ISS proxy voting policies and practices to determine
whether such policies and practices are consistent with Symphony's fiduciary
duty to the clients for whom Symphony is responsible for voting proxies. During
the year, the Committee review how ISS votes on specific issues. From time to
time, the Committee discusses the proxy voting process with representatives of
ISS in order to ensure that Symphony's client interests are being protected.
When Symphony disagrees with ISS' policies with respect to certain issues,
Symphony will direct the voting of its clients' proxies according to what
Symphony believes is the best interests of its clients.
Clients who have questions about how particular proxies are voted for their
account may request such information from Symphony by calling (415) 676-4000.
FROLEY, REVY
Froley, Revy will vote proxies upon a client's request as set forth in the
Investment Management contract. Proxies will be voted in the best interests of
the account's participants and beneficiaries. Thus, the primary consideration in
voting a proxy is the ultimate economic value of the stock based on Froley,
Revy's independent analysis of the stock's investment potential. Froley, Revy
utilizes a proxy committee. With respect to each proxy issue, the committee will
analyze the economic impact on the company of voting in favor or against the
proposal. The committee will vote based on the best ultimate long-term economic
interest of the plan. Froley, Revy may determine not to vote proxies relating to
certain securities if Froley, Revy determines it would be in its clients'
overall best interest not to vote. If Froley, Revy manages the assets of a
company or its pension plan and any of Froley, Revy's clients hold any
securities of that company, to avoid conflicts of interest, the client will be
asked to vote the proxy.
Clients that would like to obtain a copy of Froley, Revy's proxy policies and
procedures and/or the voting history for their account may do so by writing to
the offices of Froley, Revy Investment Co., Inc. at 10900 Wilshire Blvd. Suite
900, Los Angeles, CA 90024, Attn: Compliance Department.
SPECTRUM
Spectrum has adopted a Policy on Proxy Voting for Investment Advisory Clients
(the "Voting Policy"), which provides that Spectrum aims to ensure that, when
delegated proxy voting authority by a client, Spectrum act (1) solely in the
interest of the client in providing for ultimate long-term stockholder value,
and (2) without undue influence from individuals or groups who may have an
economic interest in the outcome of a proxy vote. Spectrum relies on the
custodian bank to deliver proxies to Spectrum for voting.
Spectrum has selected Institutional Shareholder Services, Inc. ("ISS") to assist
with Spectrum's proxy voting responsibilities. Spectrum generally follows ISS
standard proxy voting guidelines which embody the positions and factors Spectrum
considers important in casting proxy votes. In connection with each proxy vote,
ISS prepares a written analysis and recommendation based on its guidelines. In
order to avoid any conflict of interest for ISS, the CCO will require ISS to
deliver additional information or certify that ISS has adopted policies and
procedures to detect and mitigate such conflicts of interest in issuing voting
recommendations. Spectrum also may obtain voting recommendations from two proxy
voting services as an additional check on the independence of ISS' voting
recommendations.
Spectrum may, on any particular proxy vote, diverge from ISS' guidelines or
recommendations. In such a case, Spectrum's Voting Policy requires that: (i) the
requesting party document the reason for the request; (ii) the approval of the
Chief Investment Officer; (iii) notification to appropriate compliance
personnel; (iv) a determination that the decision is not influenced by any
conflict of interest; and (v) a written record of the process.
When Spectrum determines not to follow ISS' guidelines or recommendations,
Spectrum classifies proxy voting issues into three broad categories: (1) Routine
Administrative Items; (2) Special Interest Issues; and (3) Issues having the
Potential for Significant Economic Impact, and casts proxy votes in accordance
with the philosophy and decision guidelines developed for that category in the
Voting Policy.
- Routine Administrative Items. Spectrum is willing to defer
to management on matters a routine administrative nature. Examples
of issues on which Spectrum will normally defer to management's
recommendation include selection of auditors, increasing the
authorized number of common shares and the election of unopposed
directors.
- Special Interest Issues. In general, Spectrum will abstain
from voting on shareholder social, political, environmental
proposals because their long-term impact on share value cannot be
calculated with any reasonable degree of confidence.
- Issues Having the Potential for Significant Economic Impact.
Spectrum is not willing to defer to management on proposals which
have the potential for major economic impact on the corporation and
value of its shares and believes such issues should be carefully
analyzed and decided by shareholders. Examples of such issues are
classification of board of directors' cumulative voting and
supermajority provisions, defensive strategies (e.g., greenmail
prevention), business combinations and restructurings and executive
and director compensation.
Conflicts of Interest. There may be a material conflict of interest when
Spectrum votes, on behalf of a client, a proxy that is solicited by an
affiliated person of Spectrum or another Spectrum client. To avoid such
conflicts, Spectrum has established procedures under its Voting Policy to seek
to ensure that voting decisions are based on a client's best interests and are
not the product of a material conflict. In addition to employee monitoring for
potential conflicts, the CCO reviews Spectrum's and its affiliates' material
business relationships and personal and financial relationships of senior
personnel of Spectrum and its affiliates to monitor for conflicts of interest.
If a conflict of interest is identified, Spectrum considers both financial and
non-financial materiality to determine if a conflict of interest is material. If
a material conflict of interest is found to exist, the CCO discloses the
conflict to affected clients and obtains consent from each client in the manner
in which Spectrum proposed to vote.
Spectrum clients can obtain a copy of the Voting Policy or information on how
Spectrum voted their proxies by calling Spectrum's Compliance Department at
(203) 322-0189.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
The Adviser has engaged Spectrum Asset Management, Inc. ("Spectrum") for the
registrant's preferred securities investments, Froley Revy Investment Co.
(Froley Revy) for the registrant's convertible securities and Symphony Asset
Management, LLC ("Symphony") for the registrant's high yield, fixed income
investments (Spectrum, Froley Revy and Symphony are also collectively referred
to as "Sub-Advisers") as Sub-Advisers to provide discretionary investment
advisory services. The following section provides information on the portfolio
managers at each Sub-Adviser:
SPECTRUM
Item 8 (a)(1). PORTFOLIO MANAGER BIOGRAPHIES:
MARK A. LIEB - Mr. Lieb is Chief Financial Officer and is responsible for
business development. Prior to founding Spectrum in 1987, Mr. Lieb was a
Founder, Director and Partner of DBL Preferred Management, Inc., a wholly owned
corporate cash management subsidiary of Drexel Burnham Lambert, Inc. Mr. Lieb
was instrumental in the formation and development of all aspects of DBL
Preferred Management, Inc., including the daily management of preferred stock
portfolios for institutional clients, hedging strategies, and marketing
strategies. Mr. Lieb's prior employment included the development of the
preferred stock trading desk at Mosley Hallgarten & Estabrook. BA Economics,
Central Connecticut State College; MBA Finance, University of Hartford.
L. PHILLIP JACOBY, IV -- Managing Director and Senior Portfolio Manager. Mr.
Jacoby joined Spectrum in 1995 as Portfolio Manager. Previously, Mr. Jacoby was
a Senior Investment Officer at USL Capital Corporation (a subsidiary of Ford
Motor Corporation) and was a co-manager of a the preferred stock portfolio of
its US Corporate Financing Division for six years. Mr. Jacoby began his career
in 1981 with The Northern Trust Company, Chicago and then moved to Los Angeles
to join E.F. Hutton & Co. as a Vice President and Institutional Salesman,
Generalist Fixed Income Sales through most of the 1980s. BSBA (Finance), Boston
University School of Management.
BERNARD M. SUSSMAN - Mr. Sussman is Chief Investment Officer and Chairman of
Spectrum's Investment Committee. Prior to joining Spectrum in 1995, Mr. Sussman
was with Goldman Sachs & Co. for nearly 18 years. A General Partner and head of
the Preferred Stock Department, he was in charge of sales, trading and
underwriting for all preferred products and was instrumental in the development
of the hybrid (MIPS) market. He was a Limited Partner at Goldman Sachs from
December 1994 through November 1996. BS Industrial Relations and MBA Finance,
Cornell University. NASD Series 55 "Equity Trader Limited Representative".
Item 8 (a)(2). Other Accounts Managed
TYPE OF ACCOUNT NUMBER OF
PORTFOLIO MANAGER MANAGED ACCOUNTS ASSETS*
----------------------- -------------------------------- --------- --------------
Phillip Jacoby Separately Managed accounts 32 $2,482,964,695
Pooled Accounts 16 $2,254,008,805
Registered Investment Vehicles 10 $7,981,784,022
Mark Lieb Separately Managed accounts 41 $2,491,238,774
Pooled Accounts 16 $2,254,008,805
Registered Investment Vehicles 10 $7,981,784,022
Bernard Sussman Separately Managed accounts 37 $2,488,012,550
Pooled Accounts 16 $2,254,008,805
Registered Investment Vehicles 10 $7,981,784,022
POTENTIAL MATERIAL CONFLICTS OF INTEREST
There are no material conflicts of interest to report.
ITEM 8 (a)(3). Fund Manager Compensation
All employees of Spectrum Asset Management are paid a base salary and
discretionary bonus. The bonus is paid quarterly and may represent a significant
proportion of an individual's total annual compensation. Discretionary bonuses
are determined by management after consideration of several factors including
but not necessarily limited to:
- Changes in overall firm assets under management (employees have no
direct incentive to increase assets)
- Portfolio performance relative to benchmarks
- Contribution to client servicing
- Compliance with firm and/or regulatory policies and procedures
- Work ethic
- Seniority and length of service
- Contribution to overall functioning of organization
ITEM 8 (a)(4). OWNERSHIP OF JQC SECURITIES AS OF DECEMBER 31, 2006
-----------------------------------------------------------------------
NAME OF
PORTFOLIO DOLLAR RANGE OF EQUITY SECURITIES
MANAGER BENEFICIALLY OWNED IN FUND
-----------------------------------------------------------------------
Phillip Jacoby $0
-----------------------------------------------------------------------
Mark Lieb $0
-----------------------------------------------------------------------
Bernard Sussman $100,001-$500,000
-----------------------------------------------------------------------
FROLEY REVY
Item 8 (a)(1). PORTFOLIO MANAGER BIOGRAPHY:
ANDREA REVY O'CONNELL, CFA, CIC, Senior Portfolio Manager, President and Chief
Executive Officer of Froley, Revy Investment Co., Inc. since 2000.
Item 8 (a)(2). Other Accounts Managed
--------------------------------------------------------------------------------------------------------------------
(a)(1) Identify (a)(2) For each person identified in column (a)(1), provide number of
portfolio manager(s) accounts other than the Funds managed by the person within each category below
and the total assets in the accounts managed within each category below
--------------------------------------------------------------------------------------------------------------------
Other Pooled
Registered Investment Investment
Companies Vehicles Other Accounts*
--------------------------------------------------------------------------------------------------------------------
Total Total Total
Number of Assets Number of Assets Number of Assets
Accounts ($billions) Accounts ($billions) Accounts ($millions)
--------------------------------------------------------------------------------------------------------------------
Andrea Revy O'Connell 2 $1.5 0 0 3 $927
--------------------------------------------------------------------------------------------------------------------
*No accounts pay fees
based on performance.
--------------------------------------------------------------------------------------------------------------------
POTENTIAL MATERIAL CONFLICTS OF INTEREST
As described above, the portfolio manager may manage other accounts with
investment strategies similar to the Fund, including other investment companies
and separately managed accounts. Fees earned by the sub-advisers may vary among
these accounts and the portfolio managers may personally invest in some but not
all of these accounts. These factors could create conflicts of interest because
a portfolio manager may have incentives to favor certain accounts over others,
resulting in other accounts outperforming the Fund. A conflict may also exist if
a portfolio manager identified a limited investment opportunity that may be
appropriate for more than one account, but the Fund is not able to take full
advantage of that opportunity due to the need to allocate that opportunity among
multiple accounts. In addition, the portfolio manager may execute transactions
for another account that may adversely impact the value of securities held by
the Fund. However, the sub-advisers believe that these risks are mitigated by
the fact that accounts with like investment strategies managed by a particular
portfolio manager are generally managed in a similar fashion, subject to
exceptions to account for particular investment restrictions or policies
applicable only to certain accounts, differences in cash flows and account
sizes, and other factors. In addition, each sub-adviser has adopted trade
allocation procedures that require equitable allocation of trade orders for a
particular security among participating accounts.
ITEM 8 (a)(3). Fund Manager Compensation
Froley, Revy's portfolio managers receive base compensation and benefits, which
are competitive with the industry standards. Bonuses are a reflection of both
the individual's contribution and firm wide profitability. Ms. O'Connell's
compensation is not based on the performance of her portfolios and is not
directly tied to the gathering of assets. Rather any increases in assets are
reflected through overall firm profitability. Ms. O'Connell is a profit
participant in the firm and her bonus is based on a percentage of net
profitability (including all bonuses paid to employees).
Due to the complex and varying natures of the portfolios managed, there is no
simple comparison to an index, nor is compensation tied to performance against
an index in the short term. Over a longer cycle, however, actual over and under
performance is evaluated.
ITEM 8 (a)(4). OWNERSHIP OF JQC SECURITIES AS OF DECEMBER 31, 2006.
-------------------------------------------------------------------------------------------------------------
NAME OF
PORTFOLIO $1 - $10,001- $ 50,001- $100,001- $500,001- OVER
MANAGER NONE $10,000 $50,000 $100,000 $500,000 $1,000,000 $1,000,000
-------------------------------------------------------------------------------------------------------------
Andrea Revy O'Connell X
-------------------------------------------------------------------------------------------------------------
SYMPHONY
Item 8 (a)(1). PORTFOLIO MANAGER BIOGRAPHIES:
GUNTHER STEIN, Director of Fixed Income Strategies, Portfolio Manager
Gunther Stein is the lead portfolio manager for High Yield strategies at
Symphony and is the lead portfolio manager of Symphony's senior loan asset
management team. Prior to joining Symphony in 1999, Stein was a high yield
portfolio manager at Wells Fargo Bank, where he was responsible for investing in
public high yield bonds and bank loans and also managed a team of credit
analysts. Stein joined Wells Fargo in 1993 as an Associate in its Loan
Syndications/Leveraged Finance Group. Previously, Stein worked for four years as
a euro-currency deposit trader with First Interstate Bank. He has also worked
for Standard Chartered Bank, Mexico City and Citibank Investment Bank, London.
He completed Wells Fargo's Credit Management Training program and holds an
M.B.A. from the University of Texas, Austin. He graduated from the University of
California at Berkeley with a B.A. in Economics.
LENNY MASON, Fixed-Income Portfolio Manager
Lenny Mason is a Fixed-Income Portfolio Manager for Symphony Asset Management
LLC. His responsibilities include portfolio management for Symphony's high yield
and bank loan strategies and credit research for its fixed income strategies.
Prior to joining Symphony in 2001, Lenny was a Managing Director in
FleetBoston's Technology & Communications Group where he headed its five-member
Structuring and Advisory Team. He joined FleetBoston in 1995 as an Assistant
Vice President in its Media & Communications Group. Before joining Fleet, Lenny
worked for Wells Fargo Bank's Corporate Banking Group dealing primarily with
leveraged transactions and for Coopers & Lybrand as an auditor. Lenny has an MBA
in Finance from the University of Chicago, a BS in Accounting from Babson
College. Lenny is a Certified Public Accountant.
DAVID T. WANG, Equity Portfolio Manager
David's responsibilities include design, research and implementation of
Symphony's long-only strategies. David joined Symphony in 1994 from Barra, Inc.
where he was a member of the Active Strategies Group. At Barra he was
responsible for investment-strategy research, portfolio construction and
rebalancing for several domestic and global equity funds. David received his MBA
from the University of Illinois at Urbana-Champaign and holds a BS degree in
Chemical Engineering from Tamkang University in Taipei.
IGOR LOTSVIN, EQUITY PORTFOLIO MANAGER
Igor is an Equity Portfolio Manager focusing on qualitative analysis. Igor
joined Symphony from Franklin Templeton Investments where he served as a
High-Yield/Distressed Securities Analyst specializing in the domestic and
international cable sector, satellite television, financial services and real
estate sectors. Prior to receiving his MBA from Harvard Business School in 2001,
Igor was in the Business Advisory Group at Arthur Andersen. He co-authored The
Capital Book, and has authored or co-authored over 80 explanatory memos on new
accounting and technical developments. Igor received a BS in Accounting,
graduating magna cum laude from San Francisco State University. He is a
Certified Public Accountant and holds the Chartered Financial Analyst
designation.
Item 8 (a)(2). Other Accounts Managed
Gunther Stein Lenny Mason David Wang Igor Lotsvin
(a) RICs
Number of accts 7 7 2 2
Assets ($000s) $ 1,420 $ 1,420 $ 155 $ 192
(b) Other pooled accts
Non-performance fee accts
Number of accts 3 3 0 -
Assets ($000s) $ 432 $ 432 $ - $ -
Performance fee accts
Number of accts 8 2 2
Assets ($000s) $ 1,175 $ 66 $ 28 $ -
(c) Other
Non-performance fee accts
Number of accts 2 1 6 1
Assets ($000s) $ 30 $ 37 $ 965 $ 3
Performance fee accts
Number of accts 2 - - -
Assets ($000s) $ 295.3 $ - $ - $ -
Dollar amounts are in millions
POTENTIAL MATERIAL CONFLICTS OF INTEREST
As described above, the portfolio manager may manage other accounts with
investment strategies similar to the Fund, including other investment companies
and separately managed accounts. Fees earned by the sub-advisers may vary among
these accounts and the portfolio managers may personally invest in some but not
all of these accounts. In addition, certain accounts may be subject to
performance-based fees. These factors could create conflicts of interest because
a portfolio manager may have incentives to favor certain accounts over others,
resulting in other accounts outperforming the Fund. A conflict may also exist if
a portfolio manager identified a limited investment opportunity that may be
appropriate for more than one account, but the Fund is not able to take full
advantage of that opportunity due to the need to allocate that opportunity among
multiple accounts. In addition, the portfolio manger may execute transactions
for another account that may adversely impact the value of securities held by
the Fund. However, the sub-advisers believe that these risks are mitigated by
the fact that accounts with like investment strategies managed by a particular
portfolio manager are generally managed in a similar fashion, subject to
exceptions to account for particular investment restrictions or policies
applicable only to certain accounts, differences in cash flows and account
sizes, and other factors. In addition, each sub-adviser has adopted trade
allocation procedures that require equitable allocation of trade orders for a
particular security among participating accounts.
ITEM 8 (a)(3). Fund Manager Compensation
Symphony investment professionals receive competitive base salaries and
participate in a bonus pool which is tied directly to the firm's operating
income with a disproportionate amount paid to the managers responsible for
generating the alpha. The bonus paid to investment personnel is based on acumen,
overall contribution and strategy performance. However, there is no fixed
formula which guides bonus allocations. Bonuses are paid on an annual basis. In
addition, investment professionals may participate in an equity-based
compensation pool.
ITEM 8 (a)(4). OWNERSHIP OF JQC SECURITIES AS OF DECEMBER 31, 2006.
-----------------------------------------------------------------------------------------------------
NAME OF
PORTFOLIO $1 - $10,001- $50,001- $100,001- $500,001- OVER
MANAGER NONE $10,000 $50,000 $100,000 $500,000 $1,000,000 $1,000,000
-----------------------------------------------------------------------------------------------------
Gunther Stein X
-----------------------------------------------------------------------------------------------------
Lenny Mason X
-----------------------------------------------------------------------------------------------------
<<<< TO BE COMPLETED >>>
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's Board implemented after the registrant
last provided disclosure in response to this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, 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") (17 CFR 270.30a-3(c))) 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 controls and procedures required by Rule 30a-3(b)
under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or
15d-15(b) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(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
(17 CFR 270.30a-3(d)) that occurred during the second fiscal quarter
of the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit: Not applicable
because the code is posted on registrant's website at www.nuveen.com/etf and
there were no amendments during the period covered by this report. (To view the
code, click on the Investor Resources drop down menu box, click on Fund
Governance and then Code of Conduct.)
(a)(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2(a) under
the 1940 Act (17 CFR 270.30a-2(a)) in the exact form set forth below: Ex-99.CERT
Attached hereto.
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under
the 1940 Act (17 CFR 270.23c-1) sent or given during the period covered by the
report by or on behalf of the registrant to 10 or more persons. Not applicable.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the 1940 Act (17 CFR
270.30a-2(b)); Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR
240.13a-14(b) or 240.15d-14(b)), and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished
pursuant to this paragraph will not be deemed "filed" for purposes of Section 18
of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of
that section. Such certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the Exchange Act,
except to the extent that the registrant specifically incorporates it by
reference. Ex-99.906 CERT attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Nuveen Preferred and Convertible Income Fund 2
-------------------------------------------------------
By (Signature and Title)* /s/ Jessica R. Droeger
------------------------------------------
Jessica R. Droeger
Vice President and Secretary
Date: March 9, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Gifford R. Zimmerman
------------------------------------------
Gifford R. Zimmerman
Chief Administrative Officer
(principal executive officer)
Date: March 9, 2007
By (Signature and Title)* /s/ Stephen D. Foy
------------------------------------------
Stephen D. Foy
Vice President and Controller
(principal financial officer)
Date: March 9, 2007
* Print the name and title of each signing officer under his or her signature.