F&C/CLAYMORE PREFERRED SECURITIES INCOME FUND INCORPORATED
Dear Shareholder:
The F&C/Claymore Preferred Securities Income Fund came through its third
fiscal quarter in good shape despite an extremely difficult market for fixed
income securities. The return on net asset value ("NAV") for the period was
-0.3%. Since the inception of the Fund on January 29, 2003 through the end of
the fiscal quarter, the return on NAV was a very respectable 9.7%.
The extraordinary jump in intermediate and long-term interest rates during
the quarter provided a textbook case for why we hedge against a substantial rise
in interest rates. The yields on 10-year and 30-year U.S. Treasuries rose 1.10%
and 0.86%, respectively, during the period. An investor in these securities
would have suffered total return LOSSES of 7.8% on the 10-year and 10.9% on the
30-year.
Given the magnitude of the weakness in the fixed-income markets, the
performance of the Fund's market price was even more impressive. For the
quarter, the return on market was +1.7%. Since the Fund's inception through
August 31st, the market return was +4.2%.
This was clearly one of the worst three months the bond market has ever
experienced, and, without the Fund's hedging strategy, the results would have
been much worse. In some ways, hedging is a lot like buying an insurance policy
- you pay a premium, but don't expect to collect very often. When you need it,
however, you are awfully glad you have it! During the past quarter we certainly
needed the hedge; WITHOUT IT, THE RETURN ON NAV WOULD HAVE BEEN 6.4 PERCENTAGE
POINTS LOWER.
Interest in preferred securities remains high, but on balance there has not
been a lot of new supply. As you would expect, these conditions have resulted in
the yields on preferreds narrowing versus the yields on Treasury notes and
bonds. Despite this, when compared to historical relationships, preferred
securities still appear attractively priced at present.
The Fund's investment portfolio is in good shape. The portion of the
portfolio in preferred securities is slightly below our 80% target, but only
because the recent gains from the hedge means there is money to invest.
Low short-term interest rates have kept the rates paid by the Fund on its
Auction Market Preferred Stock close to 1%. Of course, low short-term rates are
a double-edged sword in that the cost of our hedging strategy is higher due to
the current steepness of the yield curve.
We encourage you to read the enclosed letter. In it, we discuss a very
important subject - reinvesting distributions of capital gains. Keep in mind
that this is different from the decision to reinvest monthly income dividends.
In fact, the best way to maximize your monthly distribution over time is to
reinvest any capital gain distribution.
Sincerely,
/S/ Donald F. Crumrine /S/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
September 30, 2003
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F&C/Claymore Preferred Securities Income Fund Incorporated
SUMMARY OF INVESTMENTS
AUGUST 31, 2003 (UNAUDITED)
---------------------------
PERCENT
VALUE OF TOTAL
(000'S) NET ASSETS
-------- ------------
PREFERRED SECURITIES
Utilities ..................................................................... $ 170,958 10.8 %
Banking ....................................................................... 513,398 32.6
Financial Services ............................................................ 263,848 16.7
Insurance ..................................................................... 196,883 12.5
Oil and Gas ................................................................... 25,196 1.6
Miscellaneous Industries ...................................................... 11,653 0.7
---------- -----
TOTAL PREFERRED SECURITIES ................................................ 1,181,936 74.9
CORPORATE DEBT SECURITIES
Utilities ..................................................................... 147,361 9.4
Financial Services ............................................................ 38,007 2.4
Insurance ..................................................................... 47,041 3.0
Other ......................................................................... 33,787 2.1
---------- -----
TOTAL CORPORATE DEBT SECURITIES ........................................... 266,196 16.9
COMMON STOCKS AND CONVERTIBLE SECURITIES
Utilities ..................................................................... 55,221 3.5
Other ......................................................................... 4,835 0.3
---------- -----
TOTAL COMMON STOCKS AND CONVERTIBLE SECURITIES ............................ 60,056 3.8
U.S. GOVERNMENT AND AGENCY DEBT SECURITIES ......................................... 34,433 2.2
PURCHASED PUT OPTIONS .............................................................. 25,397 1.6
MONEY MARKET FUNDS ................................................................. 821 0.0
---------- -----
TOTAL INVESTMENTS .................................................................. 1,568,839 99.4
OTHER ASSETS AND LIABILITIES (NET) ................................................. 8,970 0.6
---------- -----
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK .................. $1,577,809 100.0 %
========== =====
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
-------------------------------------
MONTH END MONTHLY DIVIDEND DATA
--------- ---------------------
TOTAL DIVIDEND
NET ASSET NYSE DIVIDEND REINVESTMENT
VALUE CLOSING PRICE PAID (1) PRICE (2)
----------- ------------- --------- ------------
January, 2003 .................................... $23.82 $25.00 $ -- $ --
February, 2003 ................................... 23.96 25.03 -- --
March, 2003 ...................................... 23.93 24.96 -- --
April, 2003 ...................................... 24.39 24.75 0.1725 23.81
May, 2003 ........................................ 25.85 25.25 0.1725 24.97
June, 2003 ....................................... 25.64 25.48 0.1725 25.33
July, 2003 ....................................... 25.03 24.89 0.1725 25.25
August, 2003 ..................................... 25.24 25.17 0.1725 24.95
--------------------
(1) The Fund's monthly dividend to common Shareholders is paid on the 15th day
of each month or the next succeeding business day if the 15th is not a
business day.
(2) Whenever the net asset value per share of the Fund's common stock is less
than or equal to the market price per share on the payment date, new shares
issued will be valued at the higher of net asset value or 95% of the then
current market price. Otherwise, the reinvestment shares of common stock
will be purchased in the open market.
3
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STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK
FOR THE PERIOD FROM JANUARY 31, 2003* THROUGH AUGUST 31, 2003 (UNAUDITED)
-------------------------------------------------------------------------
VALUE
(000'S)
-------
OPERATIONS:
Net investment income ........................................................................... $ 37,383
Net realized gain on investments sold during the period ......................................... 70,576
Change in net unrealized depreciation of investments held during the period ..................... (6,275)
Distributions to Auction Money Market Preferred Stock (AMPS**) Shareholders from net investment
income, including changes in accumulated undeclared distributions ........................... (2,345)
-------------
Net increase in net assets from operations .................................................. 99,339
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders ..................... (35,296)
Distributions paid from net realized capital gains to Common Stock Shareholders ................. 0
-------------
Total Distributions ......................................................................... (35,296)
FUND SHARES TRANSACTIONS:
Increase from Common Stock Transactions ......................................................... 979,604
Decrease due to Cost of Common Stock offering ................................................... (2,043)
Decrease due to Cost of AMPS** issuance ......................................................... (5,895)
-------------
Net increase in net assets available to Common Stock resulting from Fund share transactions . 971,666
-------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD .................................. 1,035,709
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ............................................................................. 100
-------------
End of period ................................................................................... $ 1,035,809
=============
FINANCIAL HIGHLIGHTS
FOR THE PERIOD FROM JANUARY 31, 2003* THROUGH AUGUST 31, 2003 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............................................................ $ 23.82(1)
-------------
INVESTMENT OPERATIONS:
Net investment income ........................................................................... 0.86
Net realized gain and unrealized appreciation on investments .................................... 1.62
DISTRIBUTIONS TO AMPS** SHAREHOLDERS:
From net investment income ...................................................................... (0.06)
From net realized capital gains ................................................................. 0.00
-------------
Total from investment operations ................................................................ 2.42
-------------
COST OF ISSUANCE OF AMPS** .......................................................................... (0.14)
-------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ...................................................................... (0.86)
From net realized capital gains ................................................................. 0.00
-------------
Total distributions to Common Stock Shareholders ................................................ (0.86)
-------------
Net asset value, end of period .................................................................. $ 25.24
=============
Market value, end of period ..................................................................... $ 25.17
=============
Common shares outstanding, end of period ........................................................ 41,029,606
=============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income *** ....................................................................... 6.07%(2)
Operating expenses .............................................................................. 1.02%(2)
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SUPPLEMENTAL DATA:+
Portfolio turnover rate fiscal year to date ..................................................... 106%(3)
Total net assets available to Common and Preferred Stock, end of period (in 000's) .............. $ 1,577,809
Ratio of operating expenses to total average net assets available to Common and Preferred Stock . 0.76%(2)
* Commencement of operations.
** Auction Market Preferred Stock.
*** The net investment income ratios reflect income net of operating expenses
and payments to AMPS** Shareholders.
+ Information presented under heading Supplemental Data includes AMPS**.
(1) Net asset value at beginning of period reflects the deduction of the sales
load of $1.125 per share and offering costs of $0.05 per share paid by the
shareholder from the $25.00 offering price.
(2) Annualized.
(3) Not annualized.
4
DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Nicholas Dalmaso
David Gale
Morgan Gust
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chairman of the Board
and Chief Executive Officer
Robert M. Ettinger, CFA
President
Peter C. Stimes, CFA
Chief Financial and Accounting
Officer, Vice President and
Treasurer
Nicholas Dalmaso
Vice President
Robert E. Chadwick, CFA
Vice President and Secretary
Bradford S. Stone
Vice President
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@fin-mail.com
QUESTIONS CONCERNING YOUR SHARES OF F&C/
CLAYMORE PREFERRED SECURITIES INCOME FUND?
o If your shares are held in a Brokerage
Account, contact your Broker.
o If you have physical possession of your shares
in certificate form, contact the Fund's Transfer
Agent & Shareholder Servicing Agent --
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF F&C/CLAYMORE PREFERRED SECURITIES INCOME
FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.
[GRAPHIC]
F&C/CLAYMORE
PREFERRED SECURITIES
INCOME FUND
QUARTERLY
REPORT
AUGUST 31, 2003
web site: www.fcclaymore.com