The Funds’ investment portfolios have been managed since 2001 by a team led by Gunther Stein of Symphony Asset Management, LLC, an affiliate of Nuveen Investments. Gunther and the team have more than 25 years of combined investment management experience, much of it in evaluating and purchasing senior corporate loans and other high-yield debt. Here Gunther talks about his management strategies and the performance of the Funds for the six-month period ended January 31, 2009.

 

WHAT KEY STRATEGIES WERE USED TO MANAGE THE FUNDS DURING THIS SIX-MONTH PERIOD?

 

The last months of 2008 were one of the worst periods in recent history for many asset classes. During this time, the market saw the virtual collapse of some of the largest and most respected financial firms in the world, including Lehman Brothers and American International Group. While nearly every market and asset class was affected by these events, very few were impacted more than the senior loan market. The demise of Lehman Brothers, which had large amounts of credit-related assets on its books (including senior loans, corporate bonds, high yield bonds and securitized debt), led to a massive deleveraging in the credit markets. Not only was the market driven down by the forced selling of assets by Lehman Brothers into a volatile market, but Lehman was also a major counterparty in the credit default swap (CDS) market. Investors who traded with Lehman in the swap market were attempting to offset exposure, and the uncertainty surrounding Lehman’s exit created significant dislocations during the period.

 

As Lehman began to flood the market with paper as a known forced seller, buyers willing to pay acceptable prices were virtually non-existent. Many parties had some exposure to Lehman (either directly or indirectly) or held similar assets to those that Lehman was pushing out into the market at fire sale prices. Often they, too, became forced sellers. This forced selling took a number of different forms though the fourth quarter of 2008; however, the result was the same – the simultaneous and broad offering of assets into a marketplace with few or no buyers.

 

This environment continued through mid-December, as continued markdowns were met with the continued sale of assets. In many cases, this selling was driven by liquidity, meaning that investors sold what they could to raise cash. The senior loan market is larger and generally more liquid than the high yield bond market, one reason that senior debt underperformed on a

 

Certain statements in this report are forward-looking statements. Discussions of specific investments are for illustration only and are not intended as recommendations of individual investments. The forward-looking statements and other views expressed herein are those of the portfolio managers as of the date of this report. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements and the views expressed herein are subject to change at any time, due to numerous market and other factors. The Fund disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein.

4

mark-to-market basis despite the fact that it remains senior to high-yield bonds within a company’s capital structure. In many cases, the market saw senior bank loans trading at higher implied yield than subordinated debt of the same issuers. We believe these types of relative situations created attractive longer-term investment opportunities.

 

In mid-December, even as fundamentals deteriorated further, the market’s technical factors began to improve. For example, there was a decline in new-issue supply, which helped ease the supply side of the market. On the demand side, we also saw some stabilization. Buyers continued to move into the senior loan market in late December and, in January, the senior loan market staged a strong rally. The Credit Suisse Leveraged Loan Index returned 5.78% during the month, the second highest monthly return since inception of the Index in 1992.

 

While we expect the loan market to remain volatile going forward, we feel that the market presents many unprecedented values at current levels for investors who are willing to tolerate this volatility. Our buying activity toward the end of this period remained focused on higher-quality issuers. We continued to believe that loans were at depressed levels versus their intrinsic value, and that if this environment continues it may create opportunities to purchase mispriced names.

 

HOW DID THE FUNDS PERFORM OVER THIS SIX-MONTH PERIOD?

 

The performance of the Funds, as well as the performance of a widely followed market index, is presented in the accompanying table.

 

Average Annual Total Returns on Common Share Net Asset Value*

For the six-month period ended 1/31/08

 

		Six-Month				1-Year				5-Year
NSL			-45.48%				-44.64%				-7.87%
JFR			-41.33%				-40.05%				N/A
JRO			-44.37%				-43.19%				N/A
CSFB Leveraged Loan Index1			-22.53%				-22.22%				-1.86%

5

 

For the six-months ended January 31, 2009, all three Funds significantly underperformed the unmanaged, unleveraged CSFB Leveraged Loan Index. As previously noted, senior loans did not perform well over this period, and this unfavorable environment is reflected in the returns of the Funds and the index shown above. Additionally, the primary factor in the significant relative underperformance of these Funds, compared to that of the index, was the Funds’ use of financial leverage (see below).

 

This six-month period provided few opportunities to generate positive performance. While this is no excuse for the Fund’s poor performance, it is important to understand that much of the weakness in the loan market has been driven by the swift and broad collapse of financial markets. This led to forced sales in the senior loan markets at very depressed prices, and it proved impossible to protect the Funds against these market-driven events.

 

One holding that in particular negatively impacted the Funds’ performance was Tribune Company, which filed for bankruptcy on December 9, 2008. When the Funds purchased Tribune, we had confidence that Tribune’s diversified asset portfolio at least partially compensated for the cyclicality of its core media business. However, the credit crisis severely reduced Tribune’s ability to fetch a fair price for their assets. We feel that the recovery in Tribune should lead to higher prices than where the loans traded at the end of the period.

 

We were able to find a few situations to make money in a collapsing market, such as the position in Alltel, which we purchased not only because we felt it was a good asset but because we felt the Verizon buyout might act as a catalyst to drive Alltel’s term loan higher, which we purchased at a discount to par. We subsequently sold Alltel before the end of the period. In mid-December, our positioning in better quality began to pay off as loans issued by Hospital Corporation of America (HCA, Inc.) advanced. Another positive holding was Univision, which resolved a lawsuit.

 

IMPACT OF THE FUNDS’ CAPITAL STRUCTURES AND LEVERAGE STRATEGIES ON PERFORMANCE

 

In this unfavorable investment environment, the most significant factor impacting the returns of these Funds relative to those of the index was the Funds’ use of financial leverage. The Funds use leverage because their adviser believes that, over time, leveraging provides opportunities for additional income and total return for common shareholders. However, the use of leverage also can expose common shareholders to additional risk – especially when market conditions are as unfavorable as they were during this period. As the prices of most loans held by the Funds declined during the year, the negative impact of these valuation changes on common share net asset value and common shareholder total return was magnified by the use of leverage.

 

RECENT DEVELOPMENTS IN THE AUCTION RATE PREFERRED MARKETS

 

As noted in the last shareholder report, beginning in February 2008, more shares were submitted for sale in the regularly scheduled auctions for the auction rate preferred shares issued by these Funds than there were offers to buy. This meant that these auctions “failed to clear,” and that many or all of the Funds’ auction rate preferred shareholders who wanted to sell

6

their shares in these auctions were unable to do so. This decline in liquidity in auction rate preferred shares did not lower the credit quality of these shares, and auction rate preferred shareholders unable to sell their shares received distributions at the “maximum rate” applicable to failed auctions, as calculated in accordance with the pre-established terms of the auction rate preferred shares.

 

These developments generally have not affected the portfolio management or investment policies of these Funds. However, one continuing implication for common shareholders of these auction failures is that the Funds’ cost of leverage will likely be higher, at least temporarily, than it otherwise would have been had the auctions continued to be successful. As a result, the Funds’ future common share earnings may be lower than they otherwise might have been.

 

As noted in the last shareholder report, the Funds’ Board of Trustees has authorized a program to redeem portions of the Funds’ auction rate preferred shares, and replace the shares in each Fund’s capital structure with bank borrowings.

 

As of January 31, 2009, NSL, JFR and JRO had redeemed $20,000,000, $295,000,000 and $180,000,000 of auction rate preferred shares, respectively, equivalent to 43.5%, 73.8% and 75.0% of their respective original outstanding balances of auction rate preferred shares. As of January 31, 2009, NSL, JFR and JRO had $26,000,000, $105,000,000 and $180,000,000, respectively, of auction rate preferred shares still outstanding, and had total leverage ratios of approximately 36%, 35% and 40%, respectively. While the Funds’ Board and management continue to work to resolve this situation, the Funds cannot provide any assurance on when their remaining outstanding auction rate preferred shares might be redeemed.

 

For up-to-date information, please visit the Nuveen CEF Auction Rate Preferred Resource Center at: http://www.nuveen.com/ResourceCenter/AuctionRatePreferred.aspx.

7