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 811-21102
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
(Exact name of registrant as specified in charter)
THREE WORLD FINANCIAL CENTER
200 VESEY STREET, 10TH FLOOR
NEW YORK, NEW YORK 10281-1010
(Address of principal executive offices) (Zip code)
CLIFFORD E. LAI, PRESIDENT
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
THREE WORLD FINANCIAL CENTER
200 VESEY STREET, 10TH FLOOR
NEW YORK, NEW YORK 10281-1010
(Name and address of agent for service)
Registrants telephone number, including area code: 1 (800) Hyperion
Date of fiscal year end: November 30
Date of reporting period: November 30, 2006
* | As a percentage of total investments. |
1
2
3
-s- CLIFFORD E. LAI | |
CLIFFORD E. LAI President, The Hyperion Strategic Mortgage Income Fund, Inc. Chief Executive Officer, Hyperion Brookfield Asset Management, Inc. |
|
-s- JOHN H. DOLAN | |
JOHN H. DOLAN Vice President, The Hyperion Strategic Mortgage Income Fund, Inc. Chief Investment Officer, Hyperion Brookfield Asset Management, Inc. |
4
THE
HYPERION STRATEGIC MORTGAGE INCOME FUND, INC. | |||||||||||||||||
Portfolio
of Investments | |||||||||||||||||
Principal | |||||||||||||||||
November 30, 2006 |
Interest | Amount | Value | ||||||||||||||
Rate | Maturity | (000s) | (Note 2) | ||||||||||||||
U.S. GOVERNMENT & AGENCY OBLIGATIONS 70.9% | |||||||||||||||||
U.S. Government Agency Pass-Through Certificates 51.5% | |||||||||||||||||
Federal Home Loan Mortgage Corporation
|
|||||||||||||||||
Pool A14559
|
6.50 | % | 09/01/33 | $ | 1,797 | $ | 1,838,598 | ||||||||||
Pool C68878
|
7.00 | 06/01/32 | 385 | 397,082 | |||||||||||||
Pool C69047
|
7.00 | 06/01/32 | 985 | 1,014,907 | |||||||||||||
Pool G01466
|
9.50 | 12/01/22 | 1,034 | 1,121,290 | |||||||||||||
Pool 555559
|
10.00 | 03/01/21 | 1,098 | 1,222,490 | |||||||||||||
5,594,367 | |||||||||||||||||
Federal National Mortgage Association
|
|||||||||||||||||
TBA
|
5.50 | 04/01/33 | 5,000 | 4,981,250 | |||||||||||||
TBA
|
6.00 | 12/01/35 | 5,000 | 5,053,125 | |||||||||||||
Pool 694391
|
5.50 | 03/01/33 | 3,331 | 3,326,614 | |||||||||||||
Pool 753914
|
5.50 | 12/01/33 | 7,451 | @ | 7,439,663 | ||||||||||||
Pool 754355
|
6.00 | 12/01/33 | 3,243 | 3,285,209 | |||||||||||||
Pool 761836
|
6.00 | 06/01/33 | 2,852 | 2,892,440 | |||||||||||||
Pool 763643
|
6.00 | 01/01/34 | 6,328 | @ | 6,405,774 | ||||||||||||
Pool 255413
|
6.50 | 10/01/34 | 7,162 | @ | 7,318,290 | ||||||||||||
Pool 795367
|
6.50 | 09/01/34 | 2,780 | @ | 2,841,328 | ||||||||||||
Pool 809989
|
6.50 | 03/01/35 | 3,208 | 3,274,718 | |||||||||||||
Pool 626299
|
7.00 | 06/01/32 | 356 | 366,359 | |||||||||||||
Pool 635095
|
7.00 | 06/01/32 | 764 | 787,668 | |||||||||||||
Pool 641575
|
7.00 | 04/01/32 | 170 | 174,891 | |||||||||||||
Pool 645399
|
7.00 | 05/01/32 | 2,021 | 2,082,623 | |||||||||||||
Pool 645466
|
7.00 | 05/01/32 | 2,217 | 2,284,468 | |||||||||||||
Pool 650131
|
7.00 | 07/01/32 | 1,197 | 1,234,340 | |||||||||||||
Pool 819251
|
7.50 | 05/01/35 | 3,185 | 3,306,190 | |||||||||||||
Pool 887431
|
7.50 | 08/01/36 | 1,738 | 1,791,414 | |||||||||||||
Pool 398800
|
8.00 | 06/01/12 | 509 | 526,555 | |||||||||||||
Pool 827854
|
8.00 | 10/01/29 | 1,991 | 2,113,130 | |||||||||||||
Pool 636449
|
8.50 | 04/01/32 | 1,823 | 1,964,177 | |||||||||||||
Pool 823757
|
8.50 | 10/01/29 | 3,027 | 3,259,428 | |||||||||||||
Pool 458132
|
9.47 | 03/15/31 | 1,447 | 1,585,777 | |||||||||||||
68,295,431 | |||||||||||||||||
Total U.S. Government Agency Pass-Through Certificates | |||||||||||||||||
(Cost $74,547,992)
|
73,889,798 | ||||||||||||||||
U.S. Treasury Obligations 19.4% | |||||||||||||||||
United States Treasury Notes
|
4.50 | 02/15/16 | 3,000 | 3,008,436 | |||||||||||||
United States Treasury Notes
|
4.63 | 11/15/16 | 24,500 | @ | 24,821,685 | ||||||||||||
Total U.S. Treasury Obligations | |||||||||||||||||
(Cost $27,669,695)
|
27,830,121 | ||||||||||||||||
Total U.S. Government & Agency Obligations | |||||||||||||||||
(Cost $102,217,687)
|
101,719,919 | ||||||||||||||||
5
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC. | |||||||||||||||||
Portfolio of Investments | |||||||||||||||||
Principal | |||||||||||||||||
November 30, 2006 |
Interest | Amount | Value | ||||||||||||||
Rate | Maturity | (000s) | (Note 2) | ||||||||||||||
U.S. GOVERNMENT & AGENCY OBLIGATIONS (continued) | |||||||||||||||||
ASSET-BACKED SECURITIES 10.2% | |||||||||||||||||
Housing Related Asset-Backed Securities 8.7% | |||||||||||||||||
Asset Backed Funding Certificates
|
|||||||||||||||||
Series 2005-AQ1, Class B1*(b)
|
5.75/6.25 | % | 06/25/35 | $ | 993 | $ | 861,004 | ||||||||||
Series 2005-AQ1, Class B2*(b)
|
5.75/6.25 | 06/25/35 | 1,050 | 898,221 | |||||||||||||
1,759,225 | |||||||||||||||||
First Franklin Mortgage Loan Asset Backed Certificates
|
|||||||||||||||||
Series 2004-FFH2C, Class B1*(a)
|
8.82 | 06/25/34 | 1,250 | 1,000,000 | |||||||||||||
Green Tree Financial Corp.
|
|||||||||||||||||
Series 1997-3, Class M1
|
7.53 | 03/15/28 | 2,000 | 1,490,000 | |||||||||||||
Series 1995-6, Class M1
|
8.10 | 09/15/26 | 4,325 | 4,527,929 | |||||||||||||
6,017,929 | |||||||||||||||||
Mid-State Trust
|
|||||||||||||||||
Series 2004-1, Class M2
|
8.11 | 08/15/37 | 1,363 | 1,437,910 | |||||||||||||
Structured Asset Investment Loan Trust
|
|||||||||||||||||
Series 2004-4, Class B*(b)
|
5.00/5.50 | 04/25/34 | 1,500 | 1,284,668 | |||||||||||||
Series 2004-8, Class B1(a)
|
7.82 | 09/25/34 | 1,000 | 944,800 | |||||||||||||
2,229,468 | |||||||||||||||||
Total Housing Related Asset-Backed Securities (Cost $12,783,718) 12,444,532 |
|||||||||||||||||
Non-Housing Related Asset-Backed Securities 1.5% | |||||||||||||||||
Airplanes Pass Through Trust
|
|||||||||||||||||
Series 1R, Class A8
|
|||||||||||||||||
(Cost $1,890,728)
|
5.70 | 03/15/19 | 2,297 | 2,205,083 | |||||||||||||
Total Asset-Backed Securities | |||||||||||||||||
(Cost $14,674,446)
|
14,649,615 | ||||||||||||||||
COMMERCIAL MORTGAGE BACKED SECURITIES 28.8% | |||||||||||||||||
Banc America Commercial Mortgage, Inc.
|
|||||||||||||||||
Series 2006-1, Class J*
|
5.78 | 09/10/45 | 1,000 | 994,121 | |||||||||||||
Bear Stearns Commercial Mortgage Securities
|
|||||||||||||||||
Series 2006-PWR13, Class K
|
5.26 | 09/11/41 | 347 | 297,057 | |||||||||||||
Series 2006-PWR11, Class H*
|
5.63 | 03/11/39 | 1,100 | 1,079,486 | |||||||||||||
Series 2006-PWR13, Class H
|
6.03 | 09/11/41 | 2,450 | 2,502,156 | |||||||||||||
Series 1999-C1, Class D
|
6.53 | 02/14/31 | 2,500 | 2,694,590 | |||||||||||||
Series 2000-WF1, Class E
|
7.90 | 02/15/32 | 2,000 | 2,168,380 | |||||||||||||
8,741,669 | |||||||||||||||||
CD 2006 CD2
|
|||||||||||||||||
Series 2006-CD2, Class K*
|
5.09 | 01/11/46 | 1,016 | 935,778 | |||||||||||||
Series 2006-CD2, Class L*
|
5.09 | 01/15/46 | 991 | 868,654 | |||||||||||||
Series 2006-CD2, Class J*
|
5.48 | 01/11/46 | 1,000 | 978,308 | |||||||||||||
2,782,740 | |||||||||||||||||
6
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC. | |||||||||||||||||
Portfolio of Investments | |||||||||||||||||
Principal | |||||||||||||||||
November 30, 2006 |
Interest | Amount | Value | ||||||||||||||
Rate | Maturity | (000s) | (Note 2) | ||||||||||||||
COMMERCIAL MORTGAGE BACKED SECURITIES (continued) | |||||||||||||||||
Credit Suisse Mortgage Capital Certificates
|
|||||||||||||||||
Series 2006-C4, Class L*
|
5.15 | % | 09/15/39 | $ | 513 | $ | 445,855 | ||||||||||
Series 2006-C4, Class M*
|
5.15 | 09/15/39 | 565 | 478,655 | |||||||||||||
Series 2006-C1, Class K*
|
5.56 | | 02/15/16 | 2,358 | 2,319,998 | ||||||||||||
Series 2006-C4, Class K*
|
6.30 | 09/15/36 | 2,970 | 3,020,915 | |||||||||||||
6,265,423 | |||||||||||||||||
GE Capital Commercial Mortgage Corp.
|
|||||||||||||||||
Series 2002-2A, Class G*
|
6.04 | 08/11/36 | 3,000 | 3,129,975 | |||||||||||||
Series 2000-1, Class G*
|
6.13 | 01/15/33 | 1,000 | 604,900 | |||||||||||||
Series 2002-2A, Class H*
|
6.31 | 08/11/36 | 2,000 | 2,110,632 | |||||||||||||
5,845,507 | |||||||||||||||||
GMAC Commercial Mortgage Securities
|
|||||||||||||||||
Series 2006-C1, Class G*
|
5.61 | 11/10/45 | 2,500 | 2,489,665 | |||||||||||||
JP Morgan Chase Commercial Mortgage Securities
|
|||||||||||||||||
Series 2003-LN1, Class G*
|
5.43 | | 10/15/37 | 1,600 | 1,613,384 | ||||||||||||
Series 2006-CIBC14, Class H*
|
5.54 | | 12/12/44 | 1,211 | 1,193,200 | ||||||||||||
2,806,584 | |||||||||||||||||
Morgan Stanley Capital I
|
|||||||||||||||||
Series 2004-HQ4, Class G*
|
5.53 | 09/14/14 | 1,000 | 992,378 | |||||||||||||
Series 1999-FNV1, Class E
|
7.44 | | 03/15/31 | 2,000 | 2,097,460 | ||||||||||||
3,089,838 | |||||||||||||||||
Nationslink Funding Corp.
|
|||||||||||||||||
Series 1998-2, Class E
|
7.11 | 08/20/30 | 4,000 | 4,170,808 | |||||||||||||
UBS 400 Atlantic Street Mortgage Trust
|
|||||||||||||||||
Series 2002-C1A, Class B3*
|
7.19 | 01/11/22 | 2,000 | 2,128,800 | |||||||||||||
Wachovia Bank Commercial Mortgage Trust
|
|||||||||||||||||
Series 2005-C16, Class H*
|
5.30 | | 10/15/41 | 2,000 | 1,969,532 | ||||||||||||
Total Commercial Mortgage Backed Securities | |||||||||||||||||
(Cost $40,313,051)
|
41,284,687 | ||||||||||||||||
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES 28.6% | |||||||||||||||||
Subordinated Collateralized Mortgage Obligations 28.6% | |||||||||||||||||
Banc of America Funding Corp.
|
|||||||||||||||||
Series 2005-2, Class B4
|
5.66 | | 04/25/35 | 862 | 724,071 | ||||||||||||
Series 2005-2, Class B5
|
5.66 | | 04/25/35 | 690 | 446,855 | ||||||||||||
Series 2005-2, Class B6
|
5.66 | | 04/25/35 | 519 | 169,825 | ||||||||||||
1,340,751 | |||||||||||||||||
Bank of America Alternative Loan Trust
|
|||||||||||||||||
Series 2004-3, Class 30B4
|
5.50 | 04/25/34 | 982 | 798,079 | |||||||||||||
Series 2004-3, Class 30B5
|
5.50 | 04/25/34 | 688 | 355,639 | |||||||||||||
1,153,718 | |||||||||||||||||
Bank of America Mortgage Securities, Inc.
|
|||||||||||||||||
Series 2004-A, Class B4
|
3.91 | | 02/25/34 | 1,965 | 1,874,914 | ||||||||||||
Series 2003-10, Class 1B4
|
5.50 | 01/25/34 | 549 | 456,775 | |||||||||||||
Series 2002-10, Class 1B3
|
6.00 | 11/25/32 | 1,419 | 1,413,398 | |||||||||||||
3,745,087 | |||||||||||||||||
7
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC. | ||||||||||||||||
Portfolio of Investments | ||||||||||||||||
Principal | ||||||||||||||||
November 30, 2006 | Interest | Amount | Value | |||||||||||||
Rate | Maturity | (000s) | (Note 2) | |||||||||||||
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES (continued) | ||||||||||||||||
Cendant Mortgage Corp.
|
||||||||||||||||
Series 2002-4, Class B1
|
6.50 | % | 07/25/32 | $ | 2,543 | $ | 2,531,982 | |||||||||
Series 2002-4, Class B2
|
6.50 | 07/25/32 | 1,017 | 1,012,793 | ||||||||||||
Series 2002-4, Class B3
|
6.50 | 07/25/32 | 593 | 604,671 | ||||||||||||
Series 2002-4, Class B4
|
6.50 | 07/25/32 | 339 | 343,948 | ||||||||||||
Series 2002-4, Class B5
|
6.50 | 07/25/32 | 254 | 238,199 | ||||||||||||
Series 2002-4, Class B6*
|
6.50 | 07/25/32 | 339 | 288,217 | ||||||||||||
5,019,810 | ||||||||||||||||
First Horizon Alternative Mortgage Securities
|
||||||||||||||||
Series 2005-AA6, Class B4
|
5.45 | | 08/25/35 | 847 | 767,746 | |||||||||||
Series 2005-AA6, Class B5
|
5.45 | | 08/25/35 | 797 | 626,076 | |||||||||||
Series 2005-AA6, Class B6
|
5.45 | | 08/25/35 | 498 | 141,955 | |||||||||||
1,535,777 | ||||||||||||||||
First Horizon Mortgage Pass-Through Trust
|
||||||||||||||||
Series 2005-4, Class B4*
|
5.45 | | 07/25/35 | 419 | 354,343 | |||||||||||
Series 2005-5, Class B4*
|
5.46 | | 10/25/35 | 718 | 604,878 | |||||||||||
Series 2005-5, Class B5*
|
5.46 | | 10/25/35 | 538 | 353,857 | |||||||||||
Series 2005-5, Class B6*
|
5.46 | | 10/25/35 | 539 | 159,098 | |||||||||||
1,472,176 | ||||||||||||||||
G3 Mortgage Reinsurance Ltd.
|
||||||||||||||||
Series 1, Class E*
|
25.32 | | 05/25/08 | 4,114 | 4,376,833 | |||||||||||
Harborview Mortgage Loan Trust
|
||||||||||||||||
Series 2005-14, Class B4*
|
5.58 | | 12/19/35 | 394 | 338,752 | |||||||||||
Series 2005-1, Class B4*(a)
|
7.07 | | 03/19/35 | 629 | 572,820 | |||||||||||
Series 2005-1, Class B5*(a)
|
7.07 | | 03/19/35 | 914 | 737,829 | |||||||||||
Series 2005-1, Class B6*(a)
|
7.07 | | 03/19/35 | 1,144 | 285,911 | |||||||||||
Series 2005-2, Class B4*(a)
|
7.07 | | 05/19/35 | 1,488 | 1,330,991 | |||||||||||
3,266,303 | ||||||||||||||||
JP Morgan Mortgage Trust
|
||||||||||||||||
Series 2003-A1, Class B4
|
4.47 | | 10/25/33 | 533 | 481,781 | |||||||||||
Series 2006-A6, Class B5
|
6.03 | 10/25/36 | 915 | 678,673 | ||||||||||||
Series 2006-A6, Class B6
|
6.03 | 10/25/36 | 1,145 | 429,427 | ||||||||||||
1,589,881 | ||||||||||||||||
Residential Funding Mortgage Securities I, Inc.
|
||||||||||||||||
Series 2004-S1, Class B2
|
5.25 | 02/25/34 | 445 | 303,769 | ||||||||||||
Series 2003-S7, Class B2
|
5.50 | 05/25/33 | 518 | 207,312 | ||||||||||||
Series 2003-S7, Class B3
|
5.50 | 05/25/33 | 314 | 217,519 | ||||||||||||
Series 2006-SA1, Class B2*
|
5.67 | 02/25/36 | 824 | 638,712 | ||||||||||||
Series 2006-SA1, Class B3*
|
5.67 | 02/25/36 | 686 | 250,520 | ||||||||||||
1,617,832 | ||||||||||||||||
8
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC. | |||||||||||||||||
Portfolio of Investments | |||||||||||||||||
Principal | |||||||||||||||||
November 30, 2006 |
Interest | Amount | Value | ||||||||||||||
Rate | Maturity | (000s) | (Note 2) | ||||||||||||||
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES (continued) | |||||||||||||||||
Resix Finance Limited Credit-Linked Note
|
|||||||||||||||||
Series 2005-C, Class B7*
|
8.42 | % | 09/10/37 | $ | 1,968 | $ | 1,967,684 | ||||||||||
Series 2004-C, Class B7*
|
8.82 | | 09/10/36 | 969 | 969,188 | ||||||||||||
Series 2006-C, Class B9*
|
9.47 | | 07/15/38 | 1,499 | 1,499,465 | ||||||||||||
Series 2004-B, Class B8*
|
10.07 | | 02/10/36 | 784 | 792,285 | ||||||||||||
Series 2003-CB1, Class B8*
|
12.07 | | 06/10/35 | 941 | 979,146 | ||||||||||||
Series 2004-B, Class B9*
|
13.57 | | 02/10/36 | 1,202 | 1,221,182 | ||||||||||||
Series 2004-A, Class B10*
|
16.82 | | 02/10/36 | 480 | 499,155 | ||||||||||||
7,928,105 | |||||||||||||||||
Structured Asset Mortgage Investments, Inc.
|
|||||||||||||||||
Series 2002-AR1, Class B4
|
6.99 | | 03/25/32 | 343 | 340,932 | ||||||||||||
Structured Asset Securities Corporation
|
|||||||||||||||||
Series 2005-6, Class B5
|
5.34 | | 05/25/35 | 490 | 398,820 | ||||||||||||
Series 2005-6, Class B6
|
5.34 | | 05/25/35 | 490 | 314,463 | ||||||||||||
Series 2005-6, Class B7
|
5.34 | | 05/25/35 | 343 | 102,871 | ||||||||||||
816,154 | |||||||||||||||||
Washington Mutual Mortgage Securities Corp.
|
|||||||||||||||||
Series 2002-AR12, Class B4
|
4.66 | | 10/25/32 | 749 | 740,730 | ||||||||||||
Series 2002-AR12, Class B5
|
4.66 | | 10/25/32 | 562 | 556,995 | ||||||||||||
Series 2002-AR12, Class B6
|
4.66 | | 10/25/32 | 937 | 731,145 | ||||||||||||
Series 2002-AR10, Class B4*
|
4.92 | | 10/25/32 | 686 | 676,247 | ||||||||||||
Series 2002-AR10, Class B5*
|
4.92 | | 10/25/32 | 514 | 503,259 | ||||||||||||
Series 2002-AR10, Class B6*
|
4.92 | | 10/25/32 | 858 | 729,562 | ||||||||||||
Series 2002-AR11, Class B5
|
5.11 | | 10/25/32 | 428 | 421,500 | ||||||||||||
Series 2002-AR11, Class B6
|
5.11 | | 10/25/32 | 575 | 491,427 | ||||||||||||
Series 2005-AR2, Class B10*(a)
|
6.52 | | 01/25/45 | 1,788 | 1,607,292 | ||||||||||||
6,458,157 | |||||||||||||||||
Wells Fargo Mortgage Backed Securities Trust
|
|||||||||||||||||
Series 2002, Class B5
|
6.00 | 06/25/32 | 353 | 350,366 | |||||||||||||
Total Subordinated Collateralized Mortgage Obligations | |||||||||||||||||
(Cost $40,161,785)
|
41,011,882 | ||||||||||||||||
Total Non-Agency Residential Mortgage Backed Securities | |||||||||||||||||
(Cost $40,161,785)
|
41,011,882 | ||||||||||||||||
SHORT TERM INVESTMENTS 1.4% | |||||||||||||||||
United States Treasury Bill
|
5.15 | 12/14/06 | 50 | # | 49,907 | ||||||||||||
Federal Home Loan Bank Discount Notes
|
5.18 | 12/06/06 | 2,000 | 1,998,561 | |||||||||||||
Total Short Term Investments | |||||||||||||||||
(Cost $2,048,475)
|
2,048,468 | ||||||||||||||||
9
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC. | |||||||||||||||
Portfolio of Investments | |||||||||||||||
Principal | |||||||||||||||
November 30, 2006 |
Interest | Amount | Value | ||||||||||||
Rate | Maturity | (000s) | (Note 2) | ||||||||||||
Total Investments 139.9% | |||||||||||||||
(Cost $199,415,444)
|
$ | 200,714,571 | |||||||||||||
Liabilities in Excess of Other Assets (39.9)%
|
(57,216,372 | ) | |||||||||||||
NET ASSETS 100.0%
|
$ | 143,498,199 | |||||||||||||
@
|
| Portion or entire principal amount delivered as collateral for reverse repurchase agreements. (Note 5) | ||
|
| Variable Rate Security: Interest rate is the rate in effect as of November 30, 2006 | ||
*
|
| Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may only be resold in transactions exempt from registration, normally to qualified institutional buyers | ||
(a)
|
| Security is a step up bond where coupon increases or steps up at a predetermined date. At that date these coupons increase to LIBOR plus a predetermined margin | ||
(b)
|
| Security is a step up bond where coupon increases or steps up at a predetermined date. Rates shown are current coupon and next coupon rate when security steps up | ||
#
|
| Portion or entire principal amount is held as collateral for open futures contracts | ||
TBA
|
| Settlement is on a delayed delivery or when-issued basis with a final maturity To Be Announced |
10
Assets:
|
||||||
Investments in securities, at market (cost $199,415,444)
(Note 2)
|
$ | 200,714,571 | ||||
Cash
|
583,857 | |||||
Interest receivable
|
953,574 | |||||
Principal paydowns receivable
|
51,830 | |||||
Unrealized appreciation on swap contracts (Note 7)
|
253,600 | |||||
Receivable for variation margin
|
45,422 | |||||
Total assets
|
202,602,854 | |||||
Liabilities:
|
||||||
Reverse repurchase agreements (Note 5)
|
47,760,625 | |||||
Interest payable for reverse repurchase agreements (Note 5)
|
54,936 | |||||
Payable for investments purchased
|
11,097,560 | |||||
Investment advisory fee payable (Note 3)
|
76,231 | |||||
Administration fee payable (Note 3)
|
24,125 | |||||
Accrued expenses and other liabilities
|
91,178 | |||||
Total liabilities
|
59,104,655 | |||||
Net Assets (equivalent to $14.15 per share based on
10,144,106 shares issued and outstanding)
|
$ | 143,498,199 | ||||
Composition of Net Assets:
|
||||||
Capital stock, at par value ($.01) (Note 6)
|
$ | 101,441 | ||||
Additional paid-in capital (Note 6)
|
144,150,201 | |||||
Accumulated undistributed net investment income
|
799,245 | |||||
Accumulated net realized loss
|
(3,162,914 | ) | ||||
Net unrealized appreciation on investments, swap contracts
and futures
|
1,610,226 | |||||
Net assets applicable to capital stock outstanding
|
$ | 143,498,199 | ||||
11
Investment Income (Note 2):
|
|||||||
Interest
|
$ | 13,626,988 | |||||
Expenses:
|
|||||||
Investment advisory fee (Note 3)
|
918,215 | ||||||
Administration fee (Note 3)
|
294,525 | ||||||
Insurance
|
118,694 | ||||||
Directors fees
|
79,241 | ||||||
Custodian
|
77,520 | ||||||
Accounting and tax services
|
75,133 | ||||||
Transfer agency
|
28,713 | ||||||
Registration fees
|
26,958 | ||||||
Legal
|
18,289 | ||||||
Reports to shareholders
|
6,537 | ||||||
Miscellaneous
|
23,325 | ||||||
Total operating expenses
|
1,667,150 | ||||||
Interest expense on reverse repurchase agreements (Note 5)
|
2,636,159 | ||||||
Total expenses
|
4,303,309 | ||||||
Net investment income
|
9,323,679 | ||||||
Realized and Unrealized Gain (Loss) on Investments
(Notes 2 and 7):
|
|||||||
Net realized gain on:
|
|||||||
Investment transactions
|
12,442 | ||||||
Futures transactions
|
44,226 | ||||||
Swap contracts
|
48,849 | ||||||
Net realized gain on investment transactions, futures
transactions and swap contracts
|
105,517 | ||||||
Net change in unrealized appreciation/depreciation on:
|
|||||||
Investments
|
2,567,216 | ||||||
Futures
|
57,499 | ||||||
Swap contracts
|
(132,248 | ) | |||||
Net change in unrealized appreciation/depreciation on
investments, futures and swap contracts
|
2,492,467 | ||||||
Net realized and unrealized gain on investments, futures and
swap contracts
|
2,597,984 | ||||||
Net increase in net assets resulting from operations
|
$ | 11,921,663 | |||||
12
For the Year | For the Year | |||||||||
Ended | Ended | |||||||||
November 30, 2006 | November 30, 2005 | |||||||||
Increase (Decrease) in Net Assets Resulting from
Operations:
|
||||||||||
Net investment income
|
$ | 9,323,679 | $ | 11,748,542 | ||||||
Net realized gain (loss) on investment transactions,
futures transactions and swap contracts
|
105,517 | (290,021 | ) | |||||||
Net change in unrealized appreciation/depreciation on
investments, futures and swap contracts
|
2,492,467 | (4,359,745 | ) | |||||||
Net increase in net assets resulting from operations
|
11,921,663 | 7,098,776 | ||||||||
Dividends to Shareholders (Note 2):
|
||||||||||
Net investment income
|
(10,955,522 | ) | (12,233,207 | ) | ||||||
Capital Stock Transactions (Note 6):
|
||||||||||
Net asset value of shares issued through dividend reinvestment
(104 and 1,366 shares, respectively)
|
1,465 | 19,808 | ||||||||
Net increase from capital stock transactions
|
1,465 | 19,808 | ||||||||
Total increase/(decrease) in net assets
|
967,606 | (5,114,623 | ) | |||||||
Net Assets:
|
||||||||||
Beginning of year
|
142,530,593 | 147,645,216 | ||||||||
End of year (including undistributed net investment income of
$799,245 and $1,739,109, respectively)
|
$ | 143,498,199 | $ | 142,530,593 | ||||||
13
Increase (Decrease) in Cash:
|
||||||
Cash flows provided by (used for) operating activities:
|
||||||
Net increase in net assets resulting from operations
|
$ | 11,921,663 | ||||
Adjustments to reconcile net increase in net assets from
operations to net cash provided by operating activities:
|
||||||
Purchases of long-term portfolio investments
|
(187,374,385 | ) | ||||
Proceeds from disposition of long-term portfolio investments and
principal paydowns
|
198,055,148 | |||||
Sales of short-term portfolio investments, net
|
(1,917,697 | ) | ||||
Decrease in interest receivable
|
1,457 | |||||
Decrease in receivable for principal paydowns
|
1,691,667 | |||||
Decrease in prepaid expenses and other assets
|
14,427 | |||||
Increase in variation margin receivable
|
(45,422 | ) | ||||
Decrease in interest payable for reverse
repurchase agreements
|
(17,335 | ) | ||||
Increase in payable for investments purchased
|
6,140,932 | |||||
Increase in investment advisory fee payable
|
42 | |||||
Increase in administration fee payable
|
5,342 | |||||
Decrease in accrued expenses and other liabilities
|
(62,615 | ) | ||||
Net accretion and paydown losses on investments
|
(54,844 | ) | ||||
Unrealized appreciation on investments
|
(2,567,216 | ) | ||||
Unrealized depreciation on swaps
|
132,248 | |||||
Net realized gain on investment transactions
|
(12,442 | ) | ||||
Net cash provided by operating activities
|
25,910,970 | |||||
Cash flows used for financing activities:
|
||||||
Net cash used for reverse repurchase agreements
|
(15,044,375 | ) | ||||
Dividends paid to shareholders, net of reinvestments
|
(10,954,057 | ) | ||||
Net cash used for financing activities
|
(25,998,432 | ) | ||||
Net decrease in cash
|
(87,462 | ) | ||||
Cash at beginning of year
|
671,319 | |||||
Cash at end of year
|
$ | 583,857 | ||||
14
For the Year | For the Year | For the Year | For the Year | For the Period | |||||||||||||||||
Ended | Ended | Ended | Ended | Ended | |||||||||||||||||
November 30, 2006 | November 30, 2005 | November 30, 2004 | November 30, 2003 | November 30, 2002@ | |||||||||||||||||
Per Share Operating Performance:
|
|||||||||||||||||||||
Net asset value, beginning of period
|
$ | 14.05 | $ | 14.56 | $ | 14.41 | $ | 14.10 | $ | 14.25 | * | ||||||||||
Net investment income
|
0.92 | 1.16 | 1.20 | 1.22 | 0.37 | ||||||||||||||||
Net realized and unrealized gain (loss) on investments,
short sales, futures transactions and swap contracts
|
0.26 | (0.46 | ) | 0.25 | 0.39 | (0.17 | ) | ||||||||||||||
Net increase in net asset value resulting from operations
|
1.18 | 0.70 | 1.45 | 1.61 | 0.20 | ||||||||||||||||
Dividends from net investment income
|
(1.08 | ) | (1.21 | ) | (1.30 | ) | (1.30 | ) | (0.32 | ) | |||||||||||
Offering costs charged to additional paid-in-capital
|
| | | | (0.03 | ) | |||||||||||||||
Net asset value, end of period
|
$ | 14.15 | $ | 14.05 | $ | 14.56 | $ | 14.41 | $ | 14.10 | |||||||||||
Market price, end of period
|
$ | 14.0800 | $ | 12.7000 | $ | 14.6100 | $ | 14.6700 | $ | 13.6800 | |||||||||||
Total Investment Return+
|
20.36% | (5.20% | ) | 9.10% | 17.55% | (6.66% | )(1) | ||||||||||||||
Ratios to Average Net Assets/ Supplementary Data:
|
|||||||||||||||||||||
Net assets, end of period (000s)
|
$ | 143,498 | $ | 142,531 | $ | 147,645 | $ | 146,180 | $ | 142,921 | |||||||||||
Operating expenses
|
1.18% | 1.24% | 1.25% | 1.28% | 1.23% | (2) | |||||||||||||||
Interest expense
|
1.87% | 1.45% | 0.58% | 0.51% | 0.99% | (2) | |||||||||||||||
Total expenses
|
3.05% | 2.69% | 1.83% | 1.79% | 2.22% | (2) | |||||||||||||||
Net expenses
|
3.05% | 2.69% | 1.83% | 1.79% | 2.19% | (2) | |||||||||||||||
Net investment income
|
6.60% | 8.05% | 8.23% | 8.54% | 7.48% | (2) | |||||||||||||||
Portfolio turnover rate
|
93% | 46% | 65% | 78% | 70% | (1) |
+ | Total investment return is calculated assuming a purchase of common stock at the current market price on the first day and a sale at the current market price on the last day of the period reported. For the period ended November 30, 2002, total investment return is based on a beginning period price of $15.00 (initial offering price). Total investment return for subsequent periods is computed based upon the New York Stock Exchange market price of the Funds shares. Dividends and distributions, if any, are assumed for purposes of this calculation, to be reinvested at the prices obtained under the Funds dividend reinvestment plan. Total investment return does not reflect brokerage commissions and is not annualized. |
(1) | Not Annualized |
(2) | Annualized |
@ | Commenced operations on July 26, 2002 |
* | Initial public offering of $15.00 per share less underwriting discount of $0.75 per share. |
15
16
17
18
Maturity | |||||||||
Face Value | Description | Amount | |||||||
$ | 7,099,000 | Goldman Sachs 5.30%, dated 11/27/06, maturity date 12/14/06 | $ | 7,116,767 | |||||
24,530,625 | Lehman Brothers 3.15%, dated 11/29/06, maturity date 12/06/06 | 24,545,650 | |||||||
7,148,000 | Lehman Brothers 5.30%, dated 11/20/06, maturity date 12/12/06 | 7,171,152 | |||||||
2,751,000 | Merrill Lynch 5.31%, dated 11/29/06, maturity date 12/06/06 | 2,753,840 | |||||||
6,232,000 | Morgan Stanley 5.32%, dated 10/25/06, maturity date 12/13/06 | 6,277,127 | |||||||
$ | 47,760,625 | ||||||||
Maturity Amount, Including Interest Payable | $ | 47,864,536 | |||||||
Market Value of Assets Sold Under Agreements | $ | 48,826,740 | |||||||
Weighted Average Interest Rate | 4.20% | ||||||||
19
Net | ||||||||||||
Expiration | Unrealized | |||||||||||
Notional Amount | Date | Description | Appreciation | |||||||||
$ | 20,000,000 | 10/11/10 | Agreement with Morgan Stanley Capital Services, Inc., dated 10/07/05 to pay semi-annually the notional amount multiplied by 4.716% and to receive quarterly the notional amount multiplied by 3 month USD-LIBOR-BBA. | $ | 107,525 | |||||||
5,000,000 | 10/15/48 | Agreement with Bear Stearns, dated 11/28/06 to receive monthly the notional amount multiplied by 0.750% and to pay only in the event of a write down or failure to pay a principal payment on Wachovia Bank Commercial Mortgage Trust, 5.97%, 10/15/48. | 945 | |||||||||
11,000,000 | 12/15/14 | Agreement with Morgan Stanley Capital Services, Inc., dated 12/13/04 to pay semi-annually the notional amount multiplied by 4.555% and to receive quarterly the notional amount multiplied by 3 month USD-LIBOR-BBA. | 145,130 | |||||||||
$ | 253,600 | |||||||||||
Notional | Expiration | Cost at | Value at | Unrealized | ||||||||||||||||
Amount | Type | Date | Trade Date | November 30, 2006 | Appreciation | |||||||||||||||
$ | 17,100,000 | 5 Yr. U.S. Treasury Note | March 2007 | $ | 18,095,220 | $ | 18,152,719 | $ | 57,499 |
20
Undistributed Tax ordinary income
|
$ | 716,168 | |||
Capital loss carryforward
|
(3,089,802 | ) | |||
Post October capital loss deferrals
|
(15,613 | ) | |||
Book basis unrealized appreciation
|
1,610,226 | ||||
Plus: Cumulative timing differences
|
25,578 | ||||
Net unrealized appreciation on investments and swap contracts
|
1,635,804 | ||||
Total tax basis net accumulated losses
|
$ | (753,443 | ) | ||
Dividend | Record | Payable | ||||||||
Per Share | Date | Date | ||||||||
$ | 0.060 | 12/12/06 | 12/28/06 | |||||||
$ | 0.090 | 12/27/06 | 01/26/07 |
21
22
23
24
25
Position(s) Held with | Number of | |||||||
Fund and Term of | Principal Occupation(s) During Past 5 Years | Portfolios in Fund | ||||||
Name, Address | Office and Length of | and | Complex Overseen | |||||
and Age | Time Served | Other Directorships Held by Director | by Director | |||||
Disinterested Director | ||||||||
Class II Director to serve until 2007 Annual Meeting of Stockholders: | ||||||||
Rodman L. Drake
c/o Three World Financial Center, 200 Vesey Street, 10th Floor, New York, New York 10281-1010 Age 64 |
Chairman Elected December 2003 Director since June 2002, Member of the Audit Committee, Chairman of Nominating and Compensation Committee Elected for Three Year Term |
Chairman (since 2003) and Director of several investment companies advised by the Advisor or by its affiliates (1989-Present); Director, and/or Lead Director of Crystal River Capital, Inc. (CRZ) (2005-Present); Director of Celgene Corporation (CELG) (April 2006- Present); Director of Student Loan Corporation (STU) (2005-Present); General Partner of Resource Capital Fund II & III CIP L.P. (1998-Present); Co-founder, Baringo Capital LLC (2002-Present); Director, of Jackson Hewitt Tax Services Inc. (JTX) (2004- Present); Director of Animal Medical Center (2002-Present); Director and/or Lead Director of Parsons Brinckerhoff, Inc. (1995-Present); Chairman of Excelsior Funds (33) (1994-Present) and Laudus Funds (2006-Present). | 4 | |||||
Disinterested Directors | ||||||||
Class I Directors to serve until 2009 Annual Meeting of Stockholders: | ||||||||
Robert F. Birch
c/o Three World Financial Center, 200 Vesey Street, 10th Floor, New York, New York 10281-1010 Age 70 |
Director since June 2002, Member of the Audit Committee, Member of Nominating and Compensation Committee, Member of Executive Committee Elected for Three Year Term |
Director of several investment companies advised by the Advisor or by its affiliates (1998- Present); President of New America High Income Fund (1992-Present); Director of Brandywine Funds (3) (2001-Present). | 4 | |||||
Stuart A. McFarland
c/o Three World Financial Center, 200 Vesey Street, 10th Floor, New York, New York 10281-1010 Age 59 |
Director Since April 2006, Member of the Audit Committee, Member of Nominating and Compensation Committee Elected for Three Year Term |
Director of several investment companies advised by the Advisor or by its affiliates (2006- Present); Director of Brandywine Funds (2003- Present); Director of New Castle Investment Corp. (2000-Present); Chairman and Chief Executive Officer of Federal City Bancorp, Inc. (2005-Present); Managing Partner of Federal City Capital Advisors (1997-Present). | 3 |
26
Position(s) Held with | Number of | |||||||
Fund and Term of | Principal Occupation(s) During Past 5 Years | Portfolios in Fund | ||||||
Name, Address | Office and Length of | and | Complex Overseen | |||||
and Age | Time Served | Other Directorships Held by Director | by Director | |||||
Interested Director | ||||||||
Class III Director to serve until 2008 Annual Meeting of Stockholders: | ||||||||
Clifford E. Lai*
c/o Three World Financial Center, 200 Vesey Street, 10th Floor, New York, New York 10281-1010 Age 53 |
Director since December 2003, Member of Executive Committee Elected for Three Year Term |
Managing Partner of Brookfield Asset Management, Inc. (2006-Present); Managing Partner (2005-Present), Chief Executive Officer (1998-Present); President (1998-2006) and Chief Investment Officer (1993-2002) of the Advisor; President, Chief Executive Officer and Director of Crystal River Capital, Inc., (CRZ) (2005-Present); President and Director of several investment companies advised by the Advisor or by its affiliates (1995-Present); and Co-Chairman (2003-2006) and Board of Managers (1995-2006) of Hyperion GMAC Capital Advisors, LLC (formerly Lend Lease Hyperion Capital, LLC). | 4 | |||||
Disinterested Director | ||||||||
Class III Director to serve until 2008 Annual Meeting of Stockholders: | ||||||||
Louis P. Salvatore
c/o Three World Financial Center, 200 Vesey Street, 10th Floor, New York, New York 10281-1010 Age 60 |
Director since September 2005, Chairman of the Audit Committee,
Member of Compensation and Nominating Committee Elected for Two Year Term |
Director of several investment companies advised by the Advisor or by its affiliates (2005- Present); Director of Crystal River Capital, Inc. (CRZ) (2005-Present); Director of Turner Corp. (2003-Present); Director of Jackson Hewitt Tax Services, Inc. (JTX) (2004- Present); Employee of Arthur Andersen LLP (2002-Present); Partner of Arthur Andersen LLP (1977-2002). | 3 |
27
Position(s) | Term of Office and | Principal Occupation(s) | ||||
Name, Address and Age | Held with Fund | Length of Time Served | During Past 5 Years | |||
Clifford E. Lai*
c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 53 |
President | Elected Annually Since June 2002 | Please see Information Concerning Nominees/Directors. | |||
John Dolan*
c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 52 |
Vice President | Elected Annually Since June 2002 | Managing Partner (2005-Present), Chief Investment Strategist (1998-Present) and Chief Investment Officer (2002-Present) of the Advisor; Chief Investment Officer of Crystal River Capital, Inc. (CRZ) (2005-Present); Board of Managers (1995-2006) of Hyperion GMAC Capital Advisors, LLC (formerly Lend Lease Hyperion Capital, LLC). | |||
Thomas F. Doodian*
c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 47 |
Treasurer | Elected Annually Since June 2002 | Managing Director of Brookfield Operations and Management Services, LCC (2007-Present); Managing Director, Chief Operating Officer (1998-2006) and Chief Financial Officer (2002- 2006) of the Advisor (1995-2006); Treasurer of several investment companies advised by the Advisor or by its affiliates (1996-Present); Treasurer of Hyperion GMAC Capital Advisors, LLC (formerly, Lend Lease Hyperion Capital Advisors, LLC) (1996-2006). | |||
Jonathan C. Tyras*
c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 38 |
Secretary | Elected since November 2006** | Director, General Counsel and Secretary (October 2006-Present) of the Advisor; Vice President, General Counsel and Assistant Secretary of Crystal River Capital, Inc. (November 2006-Present); Secretary of several investment companies advised by the Advisor or by its affiliates (November 2006-Present); Attorney at Paul, Hastings, Janofsky & Walker LLP (1998-October 2006). | |||
Josielyne K. Pacifico*
c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 34 |
Chief Compliance Officer (CCO) | Elected August 2006** | Vice President, Compliance Officer (July 2005- August 2006), Assistant General Counsel (July 2006-Present) and CCO (September 2006- Present) of the Advisor; CCO of several investment companies advised by the Advisor or by its affiliates (November 2006-Present); Compliance Manager of Marsh & McLennan Companies (2004-2005); Staff Attorney at the United States Securities and Exchange Commission (2001-2004). |
* | Interested person as defined by the Investment Company Act of 1940 (the 1940 Act) because of affiliations with Hyperion Brookfield Asset Management, Inc., the Funds Advisor. |
** | Daniel S. Kim served as the Secretary and CCO of the Fund and the Advisor until August 2006. |
28
29
Rodman L. Drake* Chairman Robert F. Birch* Director Stuart A. McFarland* Director Louis P. Salvatore* Director Clifford E. Lai Director and President John Dolan Vice President Thomas F. Doodian Treasurer Jonathan C. Tyras Secretary Josielyne K. Pacifico Chief Compliance Officer |
||
* Audit Committee Members | ||
|
||
|
||
This report is for shareholder information. This is not a prospectus intended for use in the purchase or sale of Fund shares. |
Item 2. Code of Ethics.
As of the end of the period covered by this report, the Registrant had adopted a Code of Ethics for Principal Executive and Principal Financial Officers (the Code). There were no amendments to or waivers from the Code during the period covered by this report. A copy of the Registrants Code will be provided upon request to any person without charge by contacting Jonathan Tyras at 1-800-HYPERION or by writing to Mr. Tyras at Three World Financial Center, 200 Vesey Street, 10th Floor, New York, NY 10281-1010.
Item 3. Audit Committee Financial Expert.
The Registrants Board of Directors has determined that three members serving on the Registrants audit committee are audit committee financial experts. Their names are Rodman L. Drake, Stuart A. McFarland and Louis P. Salvatore. Mr. Drake, Mr. McFarland and Mr. Salvatore are each independent.
Item 4. Principal Accountant Fees and Services.
Audit Fees
For the fiscal year ended November 30, 2006, Briggs, Bunting & Dougherty, LLP (BBD) billed the Registrant aggregate fees of $62,533 for professional services rendered for the audit of the Registrants annual financial statements and review of financial statements included in the Registrants annual report to shareholders and included in the Registrants semi-annual report to shareholders.
For the fiscal year ended November 30, 2005, PriceWaterhouseCoopers LLP (PwC) billed the Registrant aggregate fees of $99,333 for professional services rendered for the audit of the Registrants annual financial statements and review of financial statements included in the Registrants annual report to shareholders and included in the Registrants semi-annual report to shareholders.
Tax Fees
For the fiscal year ended November 30, 2006, BBD billed the Registrant aggregate fees of $6,435 for professional services rendered for tax compliance, tax advice and tax planning. The nature of the services comprising the Tax Fees was the review of the Registrants income tax returns and tax distribution requirements.
For the fiscal year ended November 30, 2005, PwC billed the Registrant aggregate fees of $8,500 for professional services rendered for tax compliance, tax advice and tax planning. The nature of the services comprising the Tax Fees was the review of the Registrants income tax returns and tax distribution requirements.
Audit-Related Fees
For the fiscal year ended November 30, 2006, BBD billed the Registrant aggregate fees of $100 for assurance and related services reasonably related to the audit of the Registrants annual financial statements. The nature of the services comprising the Audit-Related Fees was administrative costs to BBD related to completion of the audit of the Registrants annual financial statements.
For the fiscal year ended November 30, 2005, PwC billed the Registrant aggregate fees of $2,700 for assurance and related services reasonably related to the audit of the Registrants annual financial statements. The nature of the services comprising the Audit-Related Fees was administrative costs to PwC related to its completion of the audit of the Registrants annual financial statements.
All Other Fees
For the fiscal year ended November 30, 2006, there were no Other Fees.
For the fiscal year ended November 30, 2005, there were no Other Fees.
Item 5. Audit Committee of Listed Registrants.
The Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The Registrants Audit Committee members include Robert F. Birch, Rodman L. Drake, Stuart A. McFarland and Louis P. Salvatore.
Item 6. Schedule of Investments.
Please see Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
POLICIES AND PROCEDURES FOR VOTING PROXIES
1. Purpose. The purpose of this document is to describe the policies and procedures for voting proxies received from issuers whose securities are held by the Funds. These policies and procedures are to be implemented by the investment adviser or sub-adviser, if any, (the Adviser) to the Funds.
2. Definition of Proxy. A proxy permits a shareholder to vote without being present at annual or special meetings. A proxy is the form whereby a person who is eligible to vote on corporate matters transmits written instructions for voting or transfers the right to vote to another person in place of the eligible voter.
3. Policy for Voting Proxies.
(a) Fiduciary Considerations. Proxies are voted solely in the interests of the shareholders of the Funds. Any conflict of interest must be resolved in the way that will most benefit the shareholders. |
(b) Management Recommendations. Because the quality and depth of management is a primary factor considered when investing in a company, the recommendation of management on any issue should normally be given substantial weight. |
The vote with respect to most routine issues presented in proxy statements should be cast in accordance with the position of the companys management, unless it is determined that supporting managements position would adversely affect the investment merits of owning the stock. However, each issue should be considered on its own merits, and the position of the companys management should not be supported in any situation where it is found not to be in the best interests of the Funds shareholders.
4. Conflicts of Interest. The Funds recognize that under certain circumstances their Adviser may have a conflict of interest in voting proxies on behalf of the Funds. Such circumstances may include, but are not limited to, situations where the Adviser or one or more of its affiliates, including officers, directors and employees, has or is seeking a client relationship with the issuer of the security that is the subject of the proxy vote. The Adviser shall periodically inform its employees that they are under an obligation to be aware of the potential for conflicts of interest on the part of the Adviser with respect to voting proxies on behalf of Funds, both as a result of the employees personal relationships and due to circumstances that may arise during the conduct of the Advisers business, and to bring conflicts of interest of which they become aware to the attention of the proxy manager (see below). The Adviser shall not vote proxies relating to such issuers on behalf of its client accounts until it has determined that the conflict of interest is not material or a method of resolving such conflict of interest has been agreed upon by the Board of Directors for the Fund. A conflict of interest will be considered material to the extent that it is determined that such conflict has the potential to influence the Advisers decision-making in voting a proxy. Materiality determinations will be based upon an assessment of the particular facts and circumstances. If the proxy manager determines that a conflict of interest is not material, the Adviser may vote proxies notwithstanding the existence of a conflict. If the conflict of interest is determined to be material, the conflict shall be disclosed to the Board of Directors and the Adviser shall follow the instructions of the Board of Directors. The proxy manager shall keep a record of all materiality decisions and report them to the Board of Directors on a quarterly basis.
5. Routine Proposals. Proxies for routine proposals (such as election of directors, selection of independent public accountants, stock splits and increases in capital stock) should generally be voted in favor of management.
6. Non-routine Proposals.
(a) Guidelines on Anti-takeover Issues. Because anti-takeover proposals generally reduce shareholders rights, the vote with respect to these proposals should generally be against. During review of the proposal, if it is concluded that the proposal is beneficial to shareholders, a vote for the proposal should be cast. |
(b) Guidelines on Social and Political Issues. Social and political issues should be reviewed on a case by case basis. Votes should generally be cast with management on social or political issues, subject to review by the proxy manager. |
7. Proxy Manager Approval. Votes on non-routine matters (including the matters in paragraph 6 and mergers, stock option and other compensation plans) and votes against a managements recommendations are subject to approval by the proxy manager. The chief investment officer or his delegatee shall be the proxy manager.
8. Proxy Voting Procedures. Proxy voting will be conducted in compliance with the policies and practices described in this memorandum and is subject to the proxy managers supervision. A reasonable effort should be made to obtain proxy material and to vote in a timely fashion. Records should be maintained regarding the voting of proxies under these policies and procedures.
9. Report to the Board. On a quarterly basis, the proxy manager or his designee will report in writing to the Boards of Directors on the general manner in which proxy proposals relating to anti-takeover, social and political issues were voted, as well as proposals that were voted in opposition to managements recommendations.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Portfolio Manager
As of February 1, 2007, John H. Dolan is responsible for the day to day management of the Funds portfolio. Mr. Dolan is a Managing Partner and the Chief Investment Officer of the Adviser and has over 26 years of industry experience. He joined the Adviser in 1998. As Chief Investment Officer, Mr. Dolan is responsible for the Advisers overall investment strategies, risk management, product development and quantitative research efforts, as well as the development and implementation of new initiatives for the Advisers investment process. Mr. Dolan also oversees the Advisers approach to evaluating new structures in the fixed income market, particularly with regard to credit risk. Prior to joining the Adviser, Mr. Dolan served as Managing Director and ran the Active Bond Group in the Global Investment Management area at Bankers Trust. Prior to that, he spent eight years at Salomon Brothers, Inc. as a Managing Director specializing in mortgage-backed securities trading and new product development.
Management of Other Accounts
The portfolio manager listed below manages other investment companies and/or investment vehicles and accounts in addition to the Fund. The table below shows the number of other accounts managed by Mr. Dolan and the total assets in each of the following categories: (a) registered investment companies; (b) other pooled investment vehicles; and (c) other accounts. For each category, the table also shows the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on account performance.
# of Accounts | Total Assets with | |||||||||
Total # of Accounts | Managed with | Advisory Fee Based | ||||||||
Name of Portfolio | Managed as of | Total Assets | Advisory Fee Based | on Performance | ||||||
Manager | Type of Accounts | November 30, 2006 | ($million) | on Performance | ($million) | |||||
Registered | ||||||||||
John H. Dolan | Investment Company | 1 | $278 | None | None | |||||
Other Pooled | 0 | $0 | None | None | ||||||
Investment Vehicles | ||||||||||
Other Accounts | 1 | $560 | 1 | $560 |
Share Ownership
The following table indicates the dollar range of securities of the Fund owned by the Funds portfolio manager as of November 30, 2006.
Dollar Range of Securities Owned | ||
|
||
John H. Dolan | $50,001 $100,000 |
Portfolio Manager Material Conflict of Interest
Potential conflicts of interest may arise when a funds portfolio manager has day-to-day management responsibilities with respect to one or more other funds or other accounts, as is the case for the portfolio managers of the Fund.
These potential conflicts include:
Allocation of Limited Time and Attention. A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.
Allocation of Limited Investment Opportunities. If a portfolio manager identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit a funds ability to take full advantage of the investment opportunity.
Pursuit of Differing Strategies. At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts.
Variation in Compensation. A conflict of interest may arise where the financial or other benefits available to the portfolio manager differ among the funds and/or accounts that he or she manages. If the structure of the investment advisers management fee and/or the portfolio managers compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others. The portfolio manager might be motivated to favor funds and/or accounts in which he or she has an interest or in which the investment advisor and/or its affiliates have interests. Similarly, the desire to maintain or raise assets under management or to enhance the portfolio managers performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager to lend preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager.
Related Business Opportunities. The investment adviser or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of fund and/or accounts that provide greater overall returns to the investment manager and its affiliates.
The Adviser and the Funds have adopted compliance policies and procedures that are designed to address the various conflicts of interest that may arise for the Adviser and the individuals that it employs. For example, the Adviser seeks to minimize the effects of competing interests for the time and attention of portfolio managers by assigning portfolio managers to manage funds and accounts that share a similar investment style. The Adviser has also adopted trade allocation procedures that are designed to facilitate the fair allocation of limited investment opportunities among multiple funds and accounts. There is, however, no guarantee that such policies and procedures will be able to detect and prevent every situation in which an actual or potential conflict may appear.
Portfolio Manager Compensation
The Funds portfolio manager is compensated by the Adviser. The compensation structure of the Advisers portfolio managers and other investment professionals has three primary components: (1) a base salary, (2) an annual cash bonus, and (3) if applicable, long-term stock-based compensation consisting generally of restricted stock units of the Advisers indirect parent company, Brookfield Asset Management, Inc. The portfolio managers also receive certain retirement, insurance and other benefits that are broadly available to all of the Advisers employees. Compensation of the portfolio managers is reviewed on an annual basis by senior management.
The Adviser compensates its portfolio managers based primarily on the scale and complexity of their portfolio responsibilities, the total return performance of funds and accounts managed by the portfolio manager on an absolute basis and versus appropriate peer groups of similar size and strategy, as well as the management skills displayed in managing their subordinates and the teamwork displayed in working with other members of the firm. Since the portfolio managers are responsible for multiple funds and accounts, investment performance is evaluated on an aggregate basis almost equally weighted among performance, management and teamwork. Base compensation for the Advisers portfolio managers varies in line with the portfolio managers seniority and position. The compensation of portfolio managers with other job responsibilities (such as acting as an executive officer of the Adviser and supervising various departments) will include consideration of the scope of such responsibilities and the portfolio managers performance in meeting them. The Adviser seeks to compensate portfolio managers commensurate with their responsibilities and performance, and competitive with other firms within the investment management industry. Salaries, bonuses and stock-based compensation are also influenced by the operating performance of the Adviser and its indirect parent. While the salaries of the Advisers portfolio managers are comparatively fixed, cash bonuses and stock-based compensation may fluctuate significantly from year to year, based on changes in the portfolio managers performance and other factors as described herein.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
None.
Item 10. Submission of Matters to a Vote of Security Holders.
None.
Item 11. Controls and Procedures.
(a) The Registrants principal executive officer and principal financial officer have concluded that the Registrants Disclosure Controls and Procedures are effective, based on their evaluation of such Disclosure Controls and Procedures as of a date within 90 days of the filing of this report on Form N-CSR.
(b) As of the date of filing this Form N-CSR, the Registrants principal executive officer and principal financial officer are aware of no changes in the Registrants internal control over financial reporting that occurred during the Registrants second fiscal quarter of the period covered by this report that has materially affected or is reasonably likely to materially affect the Registrants internal control over financial reporting.
Item 12. Exhibits.
(a)(1) None.
(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 Investment Company Act of 1940 is attached as an exhibit to this Form N-CSR.
(3) None.
(b) A separate certification for each principal executive officer and principal financial officer of the Registrant as required by Rule 30a-2(b) under the Investment Company Act of 1940 is attached as an exhibit to this Form N-CSR.
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.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
By: /s/ Clifford E. Lai
Clifford E. Lai
Principal Executive Officer
Date: February 5, 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: /s/ Clifford E. Lai
Clifford E. Lai
Principal Executive Officer
Date: February 5, 2007
By: /s/ Thomas F. Doodian
Thomas F. Doodian
Treasurer and Principal Financial Officer
Date: February 5, 2007