pfo-nq_083118
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

 

Investment Company Act file number 811-06495

  Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated  
  (Exact name of registrant as specified in charter)  

 

  301 E. Colorado Boulevard, Suite 720  
  Pasadena, CA 91101  
  (Address of principal executive offices) (Zip code)  

 

  R. Eric Chadwick  
  Flaherty & Crumrine Incorporated  
  301 E. Colorado Boulevard, Suite 720  
  Pasadena, CA 91101  
  (Name and address of agent for service)  

  

Registrant's telephone number, including area code:  626-795-7300

 

Date of fiscal year end:  November 30

 

Date of reporting period:  August 31, 2018

 

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.

 

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q 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 the 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. § 3507.

 
 

Item 1. Schedule of Investments.

The Schedule(s) of Investments is attached herewith.

 

FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND

To the Shareholders of Flaherty & Crumrine Preferred Income Opportunity Fund (“PFO”):

Preferreds performed well in the third fiscal quarter1, bringing total return for the year just back into positive territory. While these returns have not kept pace with returns in recent years, preferreds continue to outperform certain areas of the fixed income market. Total return2 on net asset value (“NAV”) was 2.3% for the quarter, and 0.3% for the first nine months of fiscal 2018. Total return on market price over the same periods was 12.5% and 5.1%, respectively.

By most accounts, it has been a challenging year for corporate bond investments. As the current economic cycle has matured, interest rates rose modestly and credit spreads gradually widened. The yield curve flattened as the Federal Reserve methodically raised its benchmark rate while the long end of the Treasury yield curve moved up only modestly given a limited increase in broad-based inflation and subdued expectations for long-term economic growth. Over the first nine months of the Fund’s fiscal year, the Bloomberg Barclays U.S. Aggregate Index returned -0.5%, while the Bloomberg Barclays Long U.S. Credit Index returned -2.7%.

Preferreds outperformed these fixed-income benchmarks for a few key reasons. First, duration is moderate for many preferreds – and for the Fund’s portfolio specifically. We won’t repeat the merits of fixed-to-float preferreds here, but as previously discussed they offer attractive yields with intermediate duration. Owning both fixed-rate and fixed-to-float preferreds allows for management of portfolio duration despite the long-term nature of the Fund’s investments.

Second, an issuer’s preferreds generally yield more than its corporate bonds. The Fund’s strategy is to identify investment-grade issuers and invest down the capital structure (into preferreds) to earn extra yield for what is, in most cases, similar default risk. For issuers with solid credit quality, preferreds have consistently outperformed corporate bonds over a credit cycle. Over time, higher yields can make up for a lot of principal change and dampen effects of higher interest rates.

Outperformance of preferreds over other fixed income securities has been even better when considered after-tax. If shareholders missed our discussion on taxes in the semi-annual report dated May 31, 2018, we encourage a read. Most preferreds offer tax-advantaged income, which further enhances the extra yield earned for subordination (i.e. being lower in the capital structure than senior debt).

We believe the case for preferreds as an income investment remains largely intact, with a combination of higher relative yields, tax advantages, and benign credit conditions. Returns may be bumpy as markets navigate a late-cycle economy (albeit one that’s currently showing few signs of weakness) and an active Federal Reserve. For fixed-income investors, however, preferreds’ combination of credit quality, intermediate duration and yield should remain attractive.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team

September 30, 2018


1 June 1, 2018 – August 31, 2018

2 Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.

2

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OVERVIEW

August 31, 2018 (Unaudited)

Fund Statistics

 

 

 

 

Net Asset Value

$

11.35

Market Price

$

11.97

Premium

 

5.46

%

Yield on Market Price

 

6.62

%

Common Stock Shares Outstanding

 

12,525,035

Security Ratings**

% of Net Assets†

A

 

1.2

%

BBB

 

54.8

%

BB

 

32.9

%

Below “BB”

0.9

%

Not Rated***

 

8.7

%

Portfolio Rating Guidelines

% of Net Assets†

Security Rated Below Investment Grade By All****

 

33.2

%

Issuer or Senior Debt Rated Below Investment Grade by All*****

1.7

%

**Ratings are from Moody’s Investors Service, Inc. “Not Rated” securities are those with no ratings available from Moody’s.

***Excludes common stock and money market fund investments and net other assets and liabilities of 1.5%.

****Security rating below investment grade by all of Moody’s, Standard & Poor’s, and Fitch Ratings.

*****Security rating and issuer’s senior unsecured debt or issuer rating are below investment grade by all of Moody’s, S&P, and Fitch. The Fund’s investment policy currently limits such securities to 15% of Net Assets.

Industry Categories*

% of Net Assets†

Top 10 Holdings by Issuer

% of Net Assets†

JPMorgan Chase & Co

4.7

%

MetLife Inc

4.2

%

Wells Fargo & Company

4.2

%

Morgan Stanley

3.9

%

PNC Financial Services Group

3.9

%

BNP Paribas

3.2

%

Enbridge Energy Partners

3.1

%

Fifth Third Bancorp

3.0

%

Liberty Mutual Group

2.8

%

HSBC PLC

2.7

%


 

% of Net Assets******†

Holdings Generating Qualified Dividend Income (QDI) for Individuals

 

 

61

%

Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)

44

%

******This does not reflect year-end results or actual tax categorization of Fund distributions. These percentages can, and do, change, perhaps significantly, depending on market conditions. Investors should consult their tax advisor regarding their personal situation.

Net Assets includes assets attributable to the use of leverage.

3

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS

August 31, 2018 (Unaudited)

Shares/$ Par

Value

Preferred Securities§ — 94.3%

Banking — 55.4%

$

1,817,000

Australia & New Zealand Banking Group Ltd., 6.75% to 06/15/26 then
ISDA5 + 5.168%, 144A****

$

1,889,680

**(1)(2)

$

2,200,000

Banco Bilbao Vizcaya Argentaria SA, 6.125% to 11/16/27 then SW5 + 3.87%

1,946,054

**(1)(2)

$

490,000

Banco Mercantil del Norte SA, 7.625% to 01/06/28 then T10Y + 5.353%, 144A****

499,555

**(2)

Bank of America Corporation:

$

2,100,000

5.875% to 03/15/28 then 3ML + 2.931%, Series FF

2,102,625

*(1)

$

300,000

6.30% to 03/10/26 then 3ML + 4.553%, Series DD

321,750

*

Barclays Bank PLC:

$

930,000

7.75%, to 09/15/23 then SW5 + 4.842%

940,509

**(2)

$

2,848,000

7.875% to 03/15/22 then SW5 + 6.772%, 144A****

2,963,427

**(2)

BNP Paribas:

$

380,000

7.00%, to 08/16/28 then SW5 + 3.98%, 144A****

380,950

**(2)

$

4,661,000

7.375% to 08/19/25 then SW5 + 5.15%, 144A****

4,913,859

**(1)(2)

$

1,500,000

7.625% to 03/30/21 then SW5 + 6.314%, 144A****

1,597,500

**(2)

Capital One Financial Corporation:

2,020

6.00%, Series B

51,823

*

12,400

6.00%, Series H

326,430

*

7,000

6.20%, Series F

183,540

*

24,333

6.70%, Series D

642,026

*

Citigroup, Inc.:

$

430,000

5.95% to 05/15/25 then 3ML + 3.905%, Series P

438,471

*

115,370

6.875% to 11/15/23 then 3ML + 4.13%, Series K

3,213,631

*(1)

74,694

7.125% to 09/30/23 then 3ML + 4.04%, Series J

2,125,418

*(1)

CoBank ACB:

15,600

6.125%, Series G, 144A****

1,567,800

*

9,000

6.20% to 01/01/25 then 3ML + 3.744%, Series H, 144A****

963,000

*

10,000

6.25% to 10/01/22 then 3ML + 4.557%, Series F, 144A****

1,045,000

*(1)

$

415,000

6.25% to 10/01/26 then 3ML + 4.66%, Series I, 144A****

441,975

*

$

4,500,000

Colonial BancGroup, 7.114%, 144A****

450

(3)(4)††

$

270,000

Credit Agricole SA, 7.875% to 01/23/24 then SW5 + 4.898%,144A****

287,198

**(2)

232,807

Fifth Third Bancorp, 6.625% to 12/31/23 then 3ML + 3.71%, Series I

6,505,792

*(1)

First Horizon National Corporation:

750

First Tennessee Bank, 3ML + 0.85%, min 3.75%, 3.75%(5),144A****

585,078

*(1)

1

FT Real Estate Securities Company, 9.50% 03/31/31, 144A****

1,296,000

Goldman Sachs Group:

$

2,000,000

5.00% to 11/10/22 then 3ML + 2.874%, Series P

1,896,984

*(1)

$

195,000

5.70% to 05/10/19 then 3ML + 3.884%, Series L

197,946

*

50,000

6.375% to 05/10/24 then 3ML + 3.55%, Series K

1,361,500

*(1)

HSBC Holdings PLC:

$

325,000

6.00% to 05/22/27 then ISDA5 + 3.746%

315,672

**(2)

$

3,430,000

6.50% to 03/23/28 then ISDA5 + 3.606%

3,361,400

**(1)(2)

$

937,000

6.875% to 06/01/21 then ISDA5 + 5.514%

977,994

**(2)

$

800,000

HSBC Capital Funding LP, 10.176% to 06/30/30 then 3ML + 4.98%, 144A****

1,194,000

(1)(2)

4

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2018 (Unaudited)

Shares/$ Par

Value

Preferred Securities — (Continued)

Banking — (Continued)

Huntington Bancshares, Inc.:

99,000

6.25%, Series D

$

2,631,420

*(1)

$

950,000

5.70% to 04/15/23 then 3ML + 2.88%, Series E

949,406

*

JPMorgan Chase & Company:

54,650

6.70%, Series T

1,421,993

*(1)

$

3,750,000

3ML + 3.47%, 5.8089%(5), Series I

3,780,937

*(1)

$

300,000

6.00% to 08/01/23 then 3ML + 3.30%, Series R

313,431

*

$

4,167,000

6.75% to 02/01/24 then 3ML + 3.78%, Series S

4,591,826

*(1)

84,000

KeyCorp, 6.125% to 12/15/26 then 3ML + 3.892%, Series E

2,354,940

*(1)

$

1,550,000

Lloyds TSB Bank PLC, 12.00% to 12/16/24 then 3ML + 11.756%, 144A****

1,886,437

(2)

$

2,240,000

M&T Bank Corporation, 6.45% to 02/15/24 then 3ML + 3.61%, Series E

2,402,400

*(1)

$

500,000

Macquarie Bank Ltd., 6.125% to 03/08/27 then SW5 + 3.703%, 144A****

459,375

**(2)

40,220

MB Financial, Inc., 6.00%, Series C

1,049,742

*

Morgan Stanley:

82,600

5.85% to 04/15/27 then 3ML + 3.491%, Series K

2,162,055

*(1)

148,000

6.875% to 01/15/24 then 3ML + 3.94%, Series F

4,166,940

*(1)

77,200

7.125% to 10/15/23 then 3ML + 4.32%, Series E

2,224,518

*(1)

162,500

New York Community Bancorp, Inc., 6.375% to 03/17/27 then
3ML + 3.821%, Series A

4,532,125

*(1)

PNC Financial Services Group, Inc.:

287,667

6.125% to 05/01/22 then 3ML + 4.067%, Series P

8,010,088

*(1)

$

395,000

6.75% to 08/01/21 then 3ML + 3.678%, Series O

429,957

*(1)

$

1,775,000

RaboBank Nederland, 11.00% to 06/30/19 then 3ML + 10.868%, 144A****

1,885,938

(1)(2)

35,000

Regions Financial Corporation, 6.375% to 09/15/24 then 3ML + 3.536%, Series B

957,071

*

Societe Generale SA:

$

300,000

6.75% to 04/06/28 then SW5 + 3.929%, 144A****

284,250

**(2)

$

3,800,000

7.375% to 09/13/21 then SW5 + 6.238%, 144A****

3,980,500

**(1)(2)

 

2,600

Sovereign Bancorp:
Sovereign REIT, 12.00%, Series A, 144A****

3,061,500

Standard Chartered PLC:

$

1,600,000

7.50% to 04/02/22 then SW5 + 6.301%, 144A****

1,656,000

**(1)(2)

$

2,500,000

7.75% to 04/02/23 then SW5 + 5.723%, 144A****

2,596,875

**(1)(2)

83,700

State Street Corporation, 5.90% to 03/15/24 then 3ML + 3.108%, Series D

2,272,037

*(1)

20,517

Sterling Bancorp, 6.50%, Series A

546,478

*

10,000

Texas Capital Bancshares Inc., 6.50%, Series A

254,050

*

29,460

US Bancorp, 6.50% to 01/15/22 then 3ML + 4.468%, Series F

831,509

*(1)

28,000

Valley National Bancorp, 5.50% to 09/30/22 then 3ML + 3.578%, Series B

733,600

*

5

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2018 (Unaudited)

Shares/$ Par

Value

Preferred Securities — (Continued)

Banking — (Continued)

Wells Fargo & Company:

15,000

5.625%, Series Y

$

382,123

*

225

7.50%, Series L

292,047

*

104,500

8.00%, Series J

2,624,517

*(1)

56,200

5.85% to 09/15/23 then 3ML + 3.09%, Series Q

1,455,299

*(1)

$

2,075,000

5.875% to 06/15/25 then 3ML + 3.99%, Series U

2,189,125

*(1)

$

1,139,000

3ML + 3.77%, 6.1106%(5), Series K

1,155,117

*

34,400

6.625% to 03/15/24 then 3ML + 3.69%, Series R

946,344

*(1)

$

1,100,000

Westpac Banking Corporation, 5.00% to 09/21/27 then ISDA5 + 2.888%

988,142

**(2)

$

1,000,000

Zions Bancorporation, 7.20% to 09/15/23 then 3ML + 4.44%, Series J

1,072,500

*

120,067,649

Financial Services — 1.0%

$

410,000

AerCap Global Aviation Trust, 6.50% to 06/15/25 then
3ML + 4.30%, 06/15/45, 144A****

424,350

(2)

$

800,000

Credit Suisse Group AG, 7.50% to 07/17/23 then SW5 + 4.60%, 144A****

829,200

**(2)

$

444,000

E*TRADE Financial Corporation, 5.30% to 03/15/23 then 3ML + 3.16%, Series B

442,668

*

$

420,000

General Motors Financial Company, 5.75% to 09/30/27 then
3ML + 3.598%, Series A

409,762

*

2,105,980

Insurance — 18.8%

73,000

Allstate Corporation, 6.625%, Series E

1,898,956

*(1)

$

275,000

Aon Corporation, 8.205% 01/01/27

337,563

(1)

Arch Capital Group, Ltd.:

11,000

5.25%, Series E

266,719

**(2)

9,900

5.45%, Series F

245,421

**(2)

$

1,453,000

AXA SA, 6.379% to 12/14/36 then 3ML + 2.256%, 144A****

1,554,710

**(1)(2)

19,750

Axis Capital Holdings Ltd., 5.50%, Series E

493,552

**(2)

$

1,200,000

Chubb Ltd.:
Ace Capital Trust II, 9.70% 04/01/30

1,689,000

(1)(2)

120,000

Delphi Financial Group, 3ML + 3.19%, 5.5038%(5) 05/15/37

2,715,000

(1)

42,000

Enstar Group Ltd., 7.00% to 08/31/28 then 3ML + 4.015%, Series D

1,103,970

**(1)(2)

$

1,031,000

Everest Reinsurance Holdings, 3ML + 2.385%, 4.6988%(5) 05/15/37

1,020,690

(1)

10,000

Hartford Financial Services Group, Inc., 7.875% to 04/15/22 then
3ML + 5.596%, 04/15/42

285,950

$

3,054,000

Liberty Mutual Group, 7.80% 03/15/37, 144A****

3,611,355

(1)

MetLife, Inc.:

$

3,350,000

9.25% 04/08/38, 144A****

4,572,750

(1)

$

2,704,000

10.75% 08/01/39

4,170,920

(1)

$

350,000

MetLife Capital Trust IV, 7.875% 12/15/37, 144A****

435,750

(1)

6

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2018 (Unaudited)

Shares/$ Par

Value

Preferred Securities — (Continued)

Insurance — (Continued)

PartnerRe Ltd.:

23,350

5.875%, Series I

$

587,253

**(1)(2)

5,300

6.50%, Series G

139,178

**(2)

78,200

7.25%, Series H

2,189,991

**(1)(2)

$

241,000

Prudential Financial, Inc., 5.625% to 06/15/23 then 3ML + 3.92%, 06/15/43

252,322

$

3,634,000

QBE Insurance Group Ltd., 7.50% to 11/24/23 then
SW10 + 6.03%, 11/24/43, 144A****

3,974,687

(1)(2)

17,000

RenaissanceRe Holdings Ltd., 5.75%, Series F

431,715

**(2)

$

3,250,000

Unum Group:
Provident Financing Trust I, 7.405% 03/15/38

3,576,625

(1)

24,000

W.R. Berkley Corporation, 5.75% 06/01/56

597,480

XL Group Limited:

$

1,400,000

Catlin Insurance Company Ltd., 3ML + 2.975%, 5.3169%(5), 144A****

1,386,000

(1)(2)

$

3,318,000

XL Capital Ltd., 3ML + 2.4575%, 4.7967%(5), Series E

3,268,562

(1)(2)

40,806,119

Utilities — 8.0%

$

620,000

CenterPoint Energy, Inc., 6.125% to 09/01/23 then 3ML + 3.27%, Series A

632,400

*

$

2,512,000

Commonwealth Edison:
COMED Financing III, 6.35% 03/15/33

2,665,006

(1)

136,000

Dominion Energy, Inc., 5.25% 07/30/76, Series A

3,353,080

(1)

DTE Energy Company:

7,000

5.375% 06/01/76, Series B

173,159

13,000

6.00% 12/15/76, Series F

341,640

$

2,030,000

Emera, Inc., 6.75% to 06/15/26 then 3ML + 5.44%, 06/15/76, Series 2016A

2,162,195

(1)(2)

650

Georgia Power Company, 5.00% 10/01/77, Series 2017A

15,967

24,000

Indianapolis Power & Light Company, 5.65%

2,462,160

*(1)

77,100

Integrys Energy Group, Inc., 6.00% to 08/01/23 then 3ML + 3.22%, 08/01/73

1,998,818

(1)

$

293,000

NextEra Energy:
FPL Group Capital, Inc., 3ML + 2.125%, 4.4656%
(5) 06/15/67, Series C

282,398

(1)

$

300,000

NiSource, Inc., 5.65% to 06/15/23 then T5Y + 2.843%, 144A****

304,125

*

$

1,500,000

PECO Energy:
PECO Energy Capital Trust III, 7.38% 04/06/28, Series D

1,707,303

(1)

 

26,800

PPL Corp:
PPL Capital Funding, Inc., 5.90% 04/30/73, Series B

682,998

(1)

 

20,000

Southern California Edison:
SCE Trust V, 5.45% to 03/15/26 then 3ML + 3.79%, Series K

521,100

*

17,302,349

7

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2018 (Unaudited)

Shares/$ Par

Value

Preferred Securities — (Continued)

Energy — 7.1%

DCP Midstream LP:

$

1,060,000

7.375% to 12/15/22 then 3ML + 5.148%, Series A

$

1,061,988

(1)

3,800

7.875% to 06/15/23 then 3ML + 4.919%, Series B

98,363

$

1,030,000

Enbridge, Inc., 6.00% to 01/15/27 then 3ML + 3.89%, 01/15/77

1,006,825

(1)(2)

$

6,595,000

Enbridge Energy Partners LP, 3ML + 3.7975%, 6.1349%(5) 10/01/37

6,631,481

(1)

Energy Transfer Partners LP:

104,980

7.375% to 05/15/23 then 3ML + 4.53%, Series C

2,694,091

(1)

1,400

7.625% to 08/15/23 then 3ML + 4.738%, Series D

36,750

$

500,000

Enterprise Products Operating L.P., 5.25% to 08/16/27 then
3ML + 3.033%, 08/16/77, Series E

473,750

14,920

Kinder Morgan, Inc., 9.75% 10/26/18, Series A

495,726

*

31,500

NuStar Logistics LP, 3ML + 6.734%, 9.0732%(5) 01/15/43

817,268

Transcanada Pipelines, Ltd.:

$

1,000,000

5.30% to 03/15/27 then 3ML + 3.208%, 03/15/77, Series 2017-A

960,625

(2)

$

1,000,000

5.875% to 08/15/26 then 3ML + 4.64%, 08/15/76, Series 2016-A

1,022,500

(1)(2)

15,299,367

Real Estate Investment Trust (REIT) — 0.4%

3,110

Annaly Capital Management, Inc., 6.95% to 09/30/22 then 3ML + 4.993%, Series F

79,772

National Retail Properties, Inc.:

5,500

5.20%, Series F

131,010

23,962

5.70%, Series E

601,806

(1)

6,918

PS Business Parks, Inc., 5.20%, Series W

166,412

979,000

Miscellaneous Industries — 3.6%

 

$

 

400,000

BHP Billiton Limited:

BHP Billiton Finance U.S.A., Ltd., 6.75% to 10/19/25 then
SW5 + 5.093%, 10/19/75, 144A****

440,000

(2)

$

392,000

General Electric Company, 5.00% to 01/21/21 then 3ML + 3.33%, Series D

386,365

*(1)

Land O’ Lakes, Inc.:

$

240,000

7.25%, Series B, 144A****

259,800

*

$

3,630,000

8.00%, Series A, 144A****

3,993,000

*(1)

30,400

Ocean Spray Cranberries, Inc., 6.25%, 144A****

2,698,000

*

7,777,165

Total Preferred Securities
(Cost $197,582,040)

204,337,629

 

8

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2018 (Unaudited)

Shares/$ Par

Value

Corporate Debt Securities§ — 4.2%

Banking — 2.0%

$

550,000

Regions Financial Corporation, 7.375% 12/10/37, Sub Notes

$

719,735

(1)

123,450

Texas Capital Bancshares Inc., 6.50% 09/21/42, Sub Notes

3,179,455

(1)

18,000

Zions Bancorporation, 6.95% to 09/15/23 then 3ML + 3.89%, 09/15/28, Sub Notes

532,530

4,431,720

Financial Services — 0.0%

1,000

B. Riley Financial, Inc., 7.50% 05/31/27

25,455

25,455

Insurance — 1.2%

$

1,850,000

Liberty Mutual Insurance, 7.697% 10/15/97, 144A****

2,518,189

(1)

2,518,189

Energy — 0.5%

$

904,000

Energy Transfer Partners LP, 8.25% 11/15/29

1,103,498

(1)

1,103,498

Communication — 0.5%

Qwest Corporation:

19,728

6.50% 09/01/56

464,890

24,920

6.75% 06/15/57

609,419

400

7.00% 04/01/52

10,162

1,084,471

Total Corporate Debt Securities
(Cost $7,920,790)

9,163,333

 

Common Stock — 0.0%

Insurance — 0.0%

17,907

WMI Holdings Corporation, 144A****

27,040

*†

27,040

Total Common Stock
(Cost $900,000)

27,040

 

Money Market Fund — 0.5%

 

1,192,190

BlackRock Liquidity Funds:
T-Fund, Institutional Class

1,192,190

Total Money Market Fund
 (Cost $1,192,190)

1,192,190

 

9

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2018 (Unaudited)

Value

Total Investments (Cost $207,595,020***)

99.0

%

$

214,720,192

Other Assets And Liabilities (Net)

1.0

%

2,079,549

Total Managed Assets

100.0

%‡

$

216,799,741

Loan Principal Balance

(74,700,000

)

Total Net Assets Available To Common Stock

$

142,099,741

 

§Date shown is maturity date unless referencing the end of the fixed-rate period of a fixed-to-floating rate security.

*Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income.

**Securities distributing Qualified Dividend Income only.

***Aggregate cost of securities held.

****Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. At August 31, 2018, these securities amounted to $62,465,303 or 28.8% of total managed assets.

(1)All or a portion of this security is pledged as collateral for the Fund’s loan. The total value of such securities was $143,099,329 at August 31, 2018.

(2)Foreign Issuer.

(3)Level 3, illiquid security (designation is unaudited; see Note 2: Additional Accounting Standards).

(4)Valued at fair value as determined in good faith by or under the direction of the Board of Directors as of August 31, 2018.

(5)Represents the rate in effect as of the reporting date.

Non-income producing.

††The issuer has filed for bankruptcy protection. As a result, the Fund may not be able to recover the principal invested and also does not expect to receive income on this security going forward.

The percentage shown for each investment category is the total value of that category as a percentage of total managed assets.

ABBREVIATIONS:

3ML  3-Month ICE LIBOR USD A/360

ISDA5  5-year USD ICE Swap Semiannual 30/360

SW5  5-year USD Swap Semiannual 30/360

SW10  10-year USD Swap Semiannual 30/360

T5Y  Federal Reserve H.15 5-Yr Constant Maturity Treasury Semiannual yield

T10Y  Federal Reserve H.15 10-Yr Constant Maturity Treasury Semiannual yield

10

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)

For the period from December 1, 2017 through August 31, 2018 (Unaudited)

Value

OPERATIONS:

Net investment income

$

6,760,531

Net realized gain/(loss) on investments sold during the period

11,515

Change in net unrealized appreciation/(depreciation) of investments

(6,719,755

)

Net increase in net assets resulting from operations

52,291

DISTRIBUTIONS:

Dividends paid from net investment income to Common Stock Shareholders(2)

(7,511,468

)

Total Distributions to Common Stock Shareholders

(7,511,468

)

FUND SHARE TRANSACTIONS:

Increase from shares issued under the Dividend Reinvestment and
Cash Purchase Plan

153,398

Net increase in net assets available to Common Stock resulting from
Fund share transactions

153,398

NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK
FOR THE period

$

(7,305,779

)

 

NET ASSETS AVAILABLE TO COMMON STOCK:

Beginning of period

$

149,405,520

Net decrease in net assets during the period

(7,305,779

)

End of period

$

142,099,741

 

(1)These tables summarize the nine months ended August 31, 2018 and should be read in conjunction with the Fund’s audited financial statements, including notes to financial statements, in its Annual Report dated November 30, 2017.

(2)May include income earned, but not paid out, in prior fiscal year.

11

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

Financial Highlights(1)

For the period December 1, 2017 through August 31, 2018 (Unaudited)
For a Common Stock share outstanding throughout the period

 

PER SHARE OPERATING PERFORMANCE:

 

 

Net asset value, beginning of period

 

$

11.94

INVESTMENT OPERATIONS:

 

 

Net investment income

 

 

0.54

Net realized and unrealized gain/(loss) on investments

 

 

(0.53

)

Total from investment operations

 

 

0.01

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

 

 

From net investment income

 

 

(0.60

)

Total distributions to Common Stock Shareholders

 

 

(0.60

)

Net asset value, end of period

 

$

11.35

Market value, end of period

 

$

11.97

Common Stock shares outstanding, end of period

 

 

12,525,035

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

Net investment income†

 

 

6.23

%*

Operating expenses including interest expense

 

 

2.64

%*

Operating expenses excluding interest expense

 

 

1.29

%*

 

SUPPLEMENTAL DATA: ††

 

 

Portfolio turnover rate

 

 

9

%**

Total managed assets, end of period (in 000’s)

 

$

216,800

Ratio of operating expenses including interest expense to average total managed assets

 

 

1.74

%*

Ratio of operating expenses excluding interest expense to average total managed assets

 

 

0.85

%*

 

(1)These tables summarize the nine months ended August 31, 2018 and should be read in conjunction with the Fund’s audited financial statements, including notes to the financial statements, in its Annual Report dated November 30, 2017.

*Annualized.

**Not annualized.

The net investment income ratio reflects income net of operating expenses, including interest expense.

††Information presented under heading Supplemental Data includes loan principal balance.

 

 

12

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

Financial Highlights (Continued)

Per Share of Common Stock (Unaudited)

Total
Dividends
Paid

Net Asset
Value

NYSE
Closing Price

Dividend
Reinvestment
Price
(1)

December 29, 2017

$0.0690

$11.93

$11.81

$11.78

January 31, 2018

0.0690

11.80

10.98

11.02

February 28, 2018

0.0660

11.67

11.11

11.09

March 29, 2018

0.0660

11.58

10.86

10.83

April 30, 2018

0.0660

11.41

10.69

10.76

May 31, 2018

0.0660

11.29

10.83

10.84

June 29, 2018

0.0660

11.23

10.75

10.79

July 31, 2018

0.0660

11.30

11.68

11.30

August 31, 2018

0.0660

11.35

11.97

11.37

 

(1)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 reinvestment 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.

 

13

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

Notes to Financial Statements (Unaudited)

1.Aggregate Information for Federal Income Tax Purposes 

At August 31, 2018, the aggregate cost of securities for federal income tax purposes was $213,112,305, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $13,560,146 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $11,952,259.

2.Additional Accounting Standards

Fair Value Measurements: The Fund has analyzed all existing investments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:

Level 1 – quoted prices in active markets for identical securities

Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)

Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of levels are recognized at market value at the end of the period.

14

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

Notes to Financial Statements (Unaudited) (Continued)

A summary of the inputs used to value the Fund’s investments as of August 31, 2018 is as follows:

Level 2

Level 3

Total

Level 1

Significant

Significant

Value at

Quoted

Observable

Unobservable

August 31, 2018

Price

Inputs

Inputs

Preferred Securities

Banking

$120,067,649

$104,052,453

$16,014,746

$450

Financial Services

2,105,980

1,681,630

424,350

Insurance

40,806,119

22,326,489

18,479,630

Utilities

17,302,349

8,469,062

8,833,287

Energy

15,299,367

8,667,886

6,631,481

Real Estate Investment Trust (REIT)

979,000

979,000

Miscellaneous Industries

7,777,165

826,365

6,950,800

Corporate Debt Securities

Banking

4,431,720

3,711,985

719,735

Financial Services

25,455

25,455

Insurance

2,518,189

2,518,189

Energy

1,103,498

1,103,498

Communication

1,084,471

1,084,471

Common Stock

Insurance

27,040

27,040

Money Market Fund

1,192,190

1,192,190

Total Investments

$214,720,192

$153,044,026

 

$61,675,716

 

$450

During the reporting period, securities with an aggregate market value of $1,386,000 were transferred into Level 1 from Level 2. The securities were transferred due to an increase in the quantity and quality of information related to trading activity or broker quotes for these securities. During the period, securities with an aggregate market value of $2,901,955 were transferred into Level 2 from Level 1. The securities were transferred due to a decrease in the quantity and quality of the information related to trading activity or broker quotes for these securities. During the reporting period, there were no transfers into or out of Level 3.

The fair values of the Fund’s investments are generally based on market information and quotes received from brokers or independent pricing services that are approved by the Board of Directors and are unaffiliated with the Adviser. To assess the continuing appropriateness of security valuations, management, in consultation with the Adviser, regularly compares current prices to prior prices, prices across comparable securities, actual sale prices for securities in the Fund’s portfolio, and market information obtained by the Adviser as a function of being an active market participant.

Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades—or the same information for securities that are similar in many respects to those being valued—are classified as Level 2. If

15

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

Notes to Financial Statements (Unaudited) (Continued)

market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market.

The following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value: 

 

 

 

 

Preferred Securities

 

 

Total Investments

 

Banking

Balance as of 11/30/17

 

$

450

 

 

$

450

 

Accrued discounts/premiums

 

 

 

 

 

 

Realized gain/(loss)

 

 

 

 

 

 

Change in unrealized appreciation/(depreciation)

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

Sales

 

 

 

 

 

 

Transfer in

 

 

 

 

 

 

Transfer out

 

 

 

 

 

 

Balance as of 08/31/18

 

$

450

 

 

$

450

 

For the nine months ended August 31, 2018, total change in unrealized gain/(loss) on Level 3 securities still held at period-end and included in the change in net assets was $0.

The following table summarizes the valuation techniques used and unobservable inputs developed to determine the fair value of Level 3 investments: 

Category

 

Fair Value
at 08/31/18

 

Valuation Technique

 

Unobservable Input

 

Input Range (Wgt Avg)

Preferred Securities (Banking)

 

$450

 

Bankruptcy recovery

 

Credit/Structure-specific recovery

 

0.00% - 0.02% (0.01%)

The significant unobservable inputs used in the fair value measurement technique for bankruptcy recovery are based on recovery analysis that is specific to the security being valued, including the level of subordination and structural features of the security, and the current status of any bankruptcy or liquidation proceedings. Observable market trades in bankruptcy claims are utilized by management, when available, to assess the appropriateness of valuations, although the frequency of trading depends on the specific credit and seniority of the claim. Expected recoveries in bankruptcy by security type and industry do not tend to deviate much from historical recovery rates, which are very low (sometimes zero) for preferred securities and more moderate for senior debt. Significant changes in these inputs would result in a significantly higher or lower fair value measurement.

Directors

R. Eric Chadwick, CFA
Chairman of the Board

Morgan Gust

David Gale

Karen H. Hogan

Officers

R. Eric Chadwick, CFA
Chief Executive Officer and
President

Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary

Bradford S. Stone
Chief Financial Officer,
Vice President and Treasurer

Roger W. Ko
Assistant Treasurer

Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary

Linda M. Puchalski
Assistant Treasurer

Investment Adviser

Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com

Questions concerning your shares of Flaherty & Crumrine Preferred Income Opportunity Fund?

If your shares are held in a Brokerage Account, contact your Broker.

If you have physical possession of your shares in certificate form, contact the Fund’s Transfer Agent & Shareholder Servicing Agent —

BNY Mellon c/o Computershare
P.O. Box 30170
College Station, TX 77842-3170
1-866-351-7446

This report is sent to shareholders of Flaherty & Crumrine Preferred Income Opportunity 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.

 

Quarterly
Report

August 31, 2018

www.preferredincome.com


 

 

 

Item 2. 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 the report that includes the disclosure required by this paragraph, based on their evaluation of these 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 (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 registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

 

Item 3. Exhibits.

 

Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are 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) Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

 

By (Signature and Title)*

  /s/ R. Eric Chadwick
    R. Eric Chadwick, Chief Executive Officer and President
    (Principal Executive Officer)

 

Date 10/23/2018

 

 

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/ R. Eric Chadwick
    R. Eric Chadwick, Chief Executive Officer and President
    (Principal Executive Officer)

 

Date 10/23/2018

 

By (Signature and Title)*

  /s/ Bradford S. Stone
    Bradford S. Stone, Chief Financial Officer, Treasurer and Vice President
    (Principal Financial Officer)

 

Date 10/23/2018

 

 

* Print the name and title of each signing officer under his or her signature.