Annual Certified Shareholder Report by an Investment Company — Form N-CSR — ICA’40
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‘N-CSR’ — Annual Certified Shareholder Report by an Investment Company
The Board of Directors of the abrdn
Australia Equity Fund, Inc. (the “Fund”) has authorized a managed distribution policy (“MDP”) of paying quarterly distributions at an annual rate, set once a year, that is a percentage of the
rolling average of the Fund’s net asset values over the preceding three month period ending on the last day of the month immediately preceding the distribution’s declaration date. With each distribution,
the Fund will issue a notice to shareholders and an accompanying press release which will provide detailed information regarding the estimated amount and composition of the
distribution and other information required
by the Fund’s MDP exemptive order. The Fund’s Board of Directors may amend or terminate the MDP at any time without prior notice to shareholders; however, at this time, there are no reasonably foreseeable
circumstances that might cause the termination of the MDP. You should not draw any conclusions about the Fund’s investment performance from the amount of distributions or from the terms of the Fund’s
MDP.
Distribution Disclosure
Classification (unaudited)
The Fund’s policy is to provide
investors with a stable distribution rate. Each quarterly distribution will be paid out of current income, supplemented by realized capital gains and, to the extent necessary, paid-in capital.
The Fund is subject to U.S.
corporate, tax and securities laws. Under U.S. tax rules, the amount applicable to the Fund and character of distributable income for each fiscal period depends on the actual exchange rates during the entire year
between the U.S. Dollar and the currencies in which Fund assets are denominated and on the aggregate gains and losses realized by the Fund during the entire year.
Therefore, the exact amount
of distributable income for each fiscal year can only be determined as of the end of the Fund’s fiscal year, October 31. Under Section 19 of the Investment Company Act of
1940, as amended (the “1940
Act”), the Fund is required to indicate the sources of certain distributions to shareholders. The estimated distribution composition may vary from quarter to quarter because it may be materially impacted by
future income, expenses and realized gains and losses on securities and fluctuations in the value of the currencies in which Fund assets are denominated.
The distributions for the
fiscal year ended October 31, 2022 consisted of 38% net investment income and 62% net realized long term capital gains.
In January 2023, a Form
1099-DIV will be sent to shareholders, which will state the final amount and composition of distributions and provide information with respect to their appropriate tax treatment for the 2022 calendar year.
abrdn Australia Equity Fund, Inc.
Letter to Shareholders (unaudited)
Dear Shareholder,
We present the Annual Report,
which covers the activities of abrdn Australia Equity Fund, Inc. (the “Fund”), for the fiscal year ended October 31, 2022. The Fund’s principal investment objective is long-term capital appreciation
through investment primarily in equity securities of Australian companies listed on the Australian Stock Exchange Limited. Its secondary objective is current income, which is expected to be derived primarily from
dividends and interest on Australian corporate and governmental securities.
Total Investment Return1
For the fiscal year ended
October 31, 2022, the total return to shareholders of the Fund based on the net asset value (“NAV”) and market price of the Fund, respectively, compared to the Fund’s benchmark is as follows:
NAV2,3
-18.74%
Market Price2
-25.72%
S&P/ASX 200 (Net Total Return)4
-16.77%
For more information about
Fund performance, please visit the Fund on the web at www.abrdniaf.com. Here, you can view quarterly commentary on the Fund's performance, monthly fact sheets, distribution and performance information, and other Fund
literature.
NAV, Market Price and
Premium(+)/Discount(-)
The below table represents
comparison from current fiscal year end to prior fiscal year end of market price to NAV and associated Premium(+) and Discount(-).
NAV
Closing
Market
Price
Premium(+)/
Discount(-)
10/31/2022
$4.67
$4.03
-13.70%
10/31/2021
$6.44
$6.08
-5.60%
During the fiscal year ended
October 31, 2022, the Fund’s NAV traded within a range of $4.37 to $6.53 and the Fund’s market price traded
within a range of $3.97 to $6.33. During the
fiscal year ended October 31, 2022, the Fund’s shares traded within a range of a premium(+)/discount(-) of 7.50% to -13.70%.
Managed Distribution Policy
The Fund has a managed
distribution policy of paying quarterly distributions at an annual rate, set once a year, as a percentage of the rolling average of the Fund’s net asset values over the preceding three month period ending on the
last day of the month immediately preceding the distribution’s declaration date. In March 2022, the Board of Directors of the Fund (the “Board”) determined the rolling distribution rate to be 10% for
the 12-month period commencing with the distribution payable in June 2022. This policy will be subject to regular review by the Board. The distributions will be made from current income, supplemented by realized
capital gains and, to the extent necessary, paid-in capital, which is a nontaxable return of capital.
On November 9, 2022, the Fund
announced that it will pay on January 11, 2023, a stock distribution of US $0.12 per share to all shareholders of record as of November 22, 2022. This stock distribution will automatically be paid in newly issued
shares of the Fund unless otherwise instructed by the shareholder. Shares of common stock will be issued at the lower of the NAV per share or the market price per share with a floor for the NAV of not less than 95% of
the market price. Fractional shares will generally be settled in cash, except for registered shareholders with book entry accounts at Computershare Investor Services who will have whole and fractional shares added to
their account.
Shareholders may request to
be paid their quarterly distributions in cash instead of shares of common stock by providing advance notice to the bank, brokerage or nominee who holds their shares if the shares are in “street name” or by
filling out in advance an election card received from Computershare Investor Services if the shares are in registered form.
The Fund is covered under
exemptive relief received by the Fund’s investment manager from the U.S. Securities and Exchange Commission (“SEC”) that allows the Fund to distribute long-term capital gains as frequently as monthly
in any one taxable year.
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1
Past performance is no guarantee of future results. Investment returns and principal value will fluctuate and shares, when sold, may be worth more or less than original cost. Current performance may be
lower or higher than the performance quoted. Net asset value return data include investment management fees, custodial charges and administrative fees (such as Trustee and legal fees) and assumes the reinvestment of
all distributions.
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2
Assuming the reinvestment of dividends and distributions.
{foots1}
3
The Fund’s total return is based on the reported net asset value (“NAV”) for each financial reporting period end and may differ from what is reported on the Financial Highlights due to financial
statement rounding or adjustments.
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4
The ASX 200 is a market-capitalization weighted and float-adjusted stock market index of Australian stocks listed on the Australian Securities Exchange from S&P Global Ratings. The index is
calculated net of withholding taxes to which the Fund is generally subject. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in
an index.
abrdn Australia Equity Fund, Inc.
1
Letter to Shareholders (unaudited) (concluded)
Revolving Credit Facility
The Fund is permitted to
borrow for investment purposes as may be permitted by the 1940 Act or any rule, order or interpretation thereunder. This allows the Fund to borrow for investment purposes in the amount up to 33 1/3% of the
Fund’s total assets.
On October 13, 2020, the Fund
entered into a 3-year term revolving credit facility with a committed facility of AUD$20million with State Street Global Advisors. The Fund’s outstanding balance as of October 31, 2022 was AUD$15 million on the
revolving credit facility. Under the terms of the loan facility and applicable regulations, the Fund is required to maintain certain asset coverage ratios for the amount of its outstanding borrowings. A more detailed
description of the Fund’s revolving credit facility can be found in the Notes to Financial Statements.
Unclaimed Share Accounts
Please be advised that
abandoned or unclaimed property laws for certain states require financial organizations to transfer (escheat) unclaimed property (including Fund shares) to the state. Each state has its own definition of unclaimed
property, and Fund shares could be considered “unclaimed property” due to account inactivity (e.g., no owner-generated activity for a certain period), returned mail (e.g., when mail sent to
a shareholder is returned to the Fund’s transfer agent as undeliverable), or a combination of both. If your Fund shares are categorized as unclaimed, your financial advisor or the Fund’s
transfer agent will follow the applicable state’s statutory requirements to contact you, but if unsuccessful, laws may require that the shares be escheated to the appropriate state. If this happens, you will
have to contact the state to recover your property, which may involve time and expense. For more information on unclaimed property and how to maintain an active account, please contact your financial adviser or the
Fund’s transfer agent.
Open Market Repurchase Program
The Fund’s Board
approved an open market repurchase and discount management policy, which allows the Fund to purchase, in the open market, its outstanding common shares, with the amount and timing of any repurchase determined at the
discretion of the Fund’s investment adviser. The Fund reports the number of shares repurchased on its website monthly. During the fiscal year ended October 31, 2022, the Fund did not repurchase any shares.
On a quarterly basis, the
Fund’s Board will receive information on any transactions made pursuant to this policy during the prior quarter and management will post the number of shares repurchased on the Fund’s website on a monthly
basis. Under the terms of the Program, the Fund is permitted to repurchase up to 10% of its outstanding shares of common stock in the open market during any 12 month period.
Portfolio Holdings Disclosure
The Fund’s complete
schedule of portfolio holdings for the second and fourth quarters of each fiscal year are included in the Fund’s semi-annual and annual reports to shareholders. The Fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. These reports are available on the SEC’s website at http://www.sec.gov. The Fund makes the
information available to shareholders upon request and without charge by calling Investor Relations toll-free at 1-800-522-5465.
Proxy Voting
A description of the policies
and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities and information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12 month
period ended June 30 is available by August 31 of the relevant year: (1) upon request without charge by calling Investor Relations toll-free at 1-800-522-5465; and (2) on the SEC’s website at
http://www.sec.gov.
Investor Relations Information
As part of abrdn’s
commitment to shareholders, we invite you to visit the Fund on the web at www.abrdniaf.com. Here, you can view monthly fact sheets, quarterly commentary, distribution and performance information, and other Fund
literature.
Enroll in abrdn’s email
services and be among the first to receive the latest closed-end fund news, announcements, videos, and other information. In addition, you can receive electronic versions of important Fund documents, including annual
reports, semi-annual reports, prospectuses and proxy statements. Sign up today at https://www.abrdn.com/enus/cefinvestorcenter/contact-us/preferences
All amounts are U.S.
Dollars unless otherwise stated.
2
abrdn Australia Equity Fund, Inc.
Report of the Investment Manager (unaudited)
Market/Economic Review
Over the reporting period,
Australian equities fell in line with their peers across the Asia Pacific and the wider developed markets. The belief at the start of the period that inflationary pressures would be transitory, as economies came out
of COVID-19-related shutdowns, proved to be false. These inflationary pressures were exacerbated by the Russian invasion of Ukraine, causing spikes in energy and food prices. Consequently, equity markets experienced
large sell-offs as investors moved away from riskier assets, with growth-oriented stocks1 the hardest hit. Energy and resource companies were buoyed by high commodity prices, with lithium-related companies performing particularly well
with the demand from the move to renewable energy intensifying.
While it took central banks
some time to make changes to monetary policy2, once they did, the moves were fast and frequent, with Australia seeing the fastest rate of interest rate increases since 1994. The Reserve Bank of
Australia (RBA) ended its bond purchasing program in early 2022 and then began hiking interest rates in a surprise move ahead of Australia’s federal elections in May 2022. The RBA continued to hike rates each
month thereafter through the end of the period under review, with rates now sitting at 2.85%. While the pace of rate hikes has begun to slow, the RBA has indicated there is likely still further to go with the Consumer
Price Index (CPI)3 for the quarter ended September 30, 2022 printing at 7.3%. This was a 1.8% increase from the previous quarter and the fastest CPI rise since
1990.
Meanwhile, an interesting
divergence emerged throughout the period between the National Australia Bank (NAB) business survey and Westpac’s consumer sentiment survey. While NAB’s survey showed continued business confidence
throughout the year, with levels still remaining elevated at the end of the period, Westpac’s survey showed a significant drop in consumer sentiment across the period, down at 83.7 by October – a
level normally associated with a recession.
Performance Review
The abrdn Australia Equity
Fund, Inc. (the “Fund”) returned -18.74% on a net asset value4 basis for the 12-month period ended October 31, 2022, versus the -16.77% return of its benchmark, the S&P ASX 200 Index Net Total Return.
The Fund underperformed the benchmark over
the period. There was a broad rotation in the market away from growth-oriented tech names in favor of those seen as more defensive and able to benefit from a higher interest rate environment.
The financial sector is the
Fund’s largest sector positioning, although the Fund is underweight5 compared to the benchmark. Our stock selection within the financial sector added to returns. Within the segment, banking stocks fell the least due
to expectations of higher interest rates being positive for the sector. However, the risk-off environment and potential threat of a recession hurt asset managers, with fund flows likely to be more muted and funds
under management reduced. Consequently, the overweight6 position in National Australia Bank was accretive to the Fund’s performance relative to its benchmark, as was the Fund’s lack of
exposure to Magellan Financial Group, which faced performance issues and large redemptions in addition to the sectoral headwinds. Behind financials, the materials sector is the next largest sector weighting in the
Fund’s portfolio. This sector was the top contributor, posting a broadly flat performance over the period, with good stock selection adding value. BHP was the top individual contributor to returns, thanks to a
recovery in iron ore prices. Pilbara Minerals benefitted from an elevated pricing environment which has been exacerbated by structural supply shortages. Strong electric vehicle growth in the U.S. and China, and sales
rebounding in the European market, have also contributed to a buoyant lithium pricing environment. In addition, Oz Minerals performed well on reports that BHP Group was considering raising its standing offer to
acquire Oz Minerals, with BHP looking to boost its exposure to metals central to the green energy transition. The company also approved the development of its West Musgrave project. The lack of exposure to Newcrest
Mining also helped relative performance.
The Fund’s biggest
overweight position was in the healthcare sector, which was flat on a relative basis over the period. The notable underperformer was Cochlear. While there was no material company-specific news, at its annual general
meeting in October 2022, Cochlear’s management reiterated project earnings guidance provided in August 2022 anticipating a net profit of A$290m to A$305m (excluding the loss-making Oticon acquisition) for
financial year 2023. Net profit is expected to be weighted to the second half of
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1
Growth stocks – A stock of a company that generates substantial and sustainable positive cash flow, and whose revenues and earnings are expected to increase at a faster rate than the average company in the
same industry.
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2
Monetary policy – Decisions made by a government, usually through its central bank, regarding the amount of money in circulation in the economy. This includes setting official interest rates.
{foots1}
3
Consumer Price Index – a measure of inflation. An index of the cost of all goods and services to a typical consumer.
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4
Net asset value (NAV) – A key measure of the value of a company, fund or trust – the total value of assets less liabilities, divided by the number of shares.
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5
Underweight – A portfolio holding less of a particular security (or sector or region) than the security’s weight in the benchmark portfolio.
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6
Overweight – A portfolio holding an excess amount of a particular security (or sector or region) compared to the security’s weight in the benchmark portfolio.
abrdn Australia Equity Fund, Inc.
3
Report of the Investment Manager (unaudited) (continued)
the financial year as they expect trading
conditions to progressively improve, with intermittent COVID‐19-related hospital or region-specific elective surgery restrictions likely to continue. Meanwhile, the release of its Nucleus 8 Sound Processor is
expected to contribute to the quarter ended December 31, 2022 as commercial availability commences in Australia and Europe. The new sound processor is expected to be launched across other markets by the end of
December, subject to the timing of regulatory approvals.
Elsewhere, James Hardie
Industries weighed on returns as the market considered the impact of a more complex macroeconomic background for construction with rising mortgage rates and a more hawkish U.S. Federal Reserve. This macroeconomic
environment hampered Goodman Group, with its stock selling-off heavily, alongside the rest of the real estate investment trusts sector, despite no fundamental news flow. Meanwhile, Medibank fell sharply towards the
end of the period after experiencing a cyberattack that exposed the details of around 9.7 million current and former customers. Finally, Spark NZ performed well following confirmation that it has now officially
commenced the process of monetizing its fixed TowerCo assets. This was viewed favourably, given recent comparable transactions in the market.
In key portfolio activity, we
initiated positions in Elders and Pilbara Minerals. We believe Elders is a well-run agricultural services business with strong capital discipline and multiple internal growth options. Elders is expected to benefit
from robust ongoing seasonal conditions and offers the potential for bolt-on acquisitions. We believe Pilbara Minerals has a high-quality asset base and organic growth profile supported by a structurally growing
market for a commodity that is critical to the low-energy transition.
Elsewhere, we initiated a
position in Metcash, given the inflationary pricing environment being observed in food retailing, which we believe will see price increases and strong earnings. We also initiated a position in Shopping Centres
Australasia, which is an internally managed convenience retail portfolio we believe that is well-located and set to benefit from rising food price inflation.
Conversely, we exited Fisher
& Paykel Healthcare, given its earnings headwinds and poor visibility, while its high valuation further elevates near-term downside risk. We also exited Altium given near-term concerns around its Chinese business,
recent changes to the financial outlook and potential further reinvestment requirements to achieve sales targets.
We exited positions in Sydney
Airport and AusNet. Both decisions were driven by corporate activity, with both companies’ share prices
trading close to the final (and Board
recommended) bid offers7 Finally, we exited Afterpay following the takeover from Square, given our view of the deficiencies of the board governance structure along with
rising operational headwinds.
The fund’s closed-end
status allows for the fund to borrow for investment purposes, which can amplify gains or losses. The Fund's leverage usage for the fiscal year ranged from 4.5% to 8.3% of average managed assets. In the
period under review, the portfolio’s leverage negatively impacted performance due to the weakness in the market.
The Fund has a policy of
paying a quarterly distribution. Funding from the distribution is a combination of capital gains from trading, income received in the form of dividends from underlying securities and retained earnings (capital). While
our primary objective is long-term capital appreciation through investment primarily in equity securities of Australian companies listed on the Australian Stock Exchange Limited, our secondary objective is current
income and we seek to manage Fund cashflows to adequately meet the quarterly distribution. The quarterly distribution reflects the Fund’s current policy to provide shareholders with a relatively stable cash flow
per share. This policy did not have a material effect on the Fund’s investment strategy over the reporting period. During the 12-month period ended October 31, 2022, the distributions comprised ordinary income
and long-term capital gains, and did not include a return of capital.
Outlook
Inflationary pressures remain
the key concern for investors. While inflation may well be nearing its peak, ongoing increases in global interest rates are likely to persist in the short term, coupled with increasing risks of an economic slowdown.
This will likely see higher market volatility8 remaining a feature for some time.
We remain cautious into 2023.
Recent trading updates from many Australian corporates revealed that, while consumer spending is still brisk, early signs of belt-tightening can be seen, with some companies reporting slowing sales momentum.
Meanwhile, cost pressures and
higher-than-normal inventory positions also increase the risk of a discount cycle should consumer demand slow markedly. Given this volatile backdrop, our portfolio positioning remains biased toward businesses that
offer strong pricing power and those that exhibit defensive business moats while remaining cautious on rate-sensitive sectors and businesses that are just beginning their journey toward profitability.
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7
Bid – in the context of a takeover bid means making an offer for the shares of another company. 'Bid' - can simply mean offering to buy shares. It may also mean the highest price that you are prepared to pay
for a given security at a particular time.
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8
Volatility – If the price of a fund or asset moves significantly over a short period of time it is said to be 'volatile' or has 'high volatility'. If the price remains relatively stable it is said to have 'low
volatility'. Volatility can be used as a measure of risk.
4
abrdn Australia Equity Fund, Inc.
Report of the Investment Manager (unaudited) (concluded)
We remain committed to our
‘bottom-up’ investment style, with a focus on quality companies. We favor businesses with clear growth prospects that are leveraged to long-term structural shifts. We believe holdings’ defensiveness
(i.e., their robust balance sheets and prospects for generating healthy through-the-cycle earnings and dividend growth) is an added advantage in the current uncertain environment.
Risk Considerations
Past performance is not an
indication of future results.
Foreign securities in which
the Fund may invest may be more volatile, harder to price and less liquid than U.S. securities. They are subject to risks associated with less stringent accounting and regulatory
standards, the impact of currency exchange
rate fluctuation political and economic instability, reduced information about issuers, higher transaction costs and delayed settlement. There are also risks associated with investing in Australia, including the risk
of investing in a single-country Fund. The Fund focuses its investments in the Australia region, which subjects the Fund to more volatility and greater risk of loss than geographically diverse funds. Equity
stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.
abrdn Asia Limited (formerly known as
Aberdeen Standard Investments (Asia) Limited)
abrdn Australia Equity Fund, Inc.
5
Total Investment Return (unaudited)
The following table summarizes
the average annual Fund performance compared to the Fund’s primary benchmark for the 1-year, 3-year, 5-year and 10-year periods ended October 31, 2022.
This graph shows the change in
value of a hypothetical investment of $10,000 in the Fund for the period indicated. For comparison, the same investment is shown in the indicated index.
abrdn Inc. (formerly known
as "Aberdeen Standard Investments, Inc.") has entered into an agreement with the Fund to limit investor relations services fees, without which performance would be lower. This agreement aligns with the term of the
advisory agreement and may not be terminated prior to the end of the current term of the advisory agreement. See Note 3 in the Notes to Financial Statements.
Returns represent past
performance. Total investment return at NAV is based on changes in the NAV of Fund shares and assumes reinvestment of dividends and distributions, if any, at market prices pursuant to the dividend reinvestment program
sponsored by the Fund’s transfer agent. All return data at NAV includes fees charged to the Fund, which are listed in the Fund’s Statement of Operations under “Expenses.” Total investment
return at market value is based on changes in the market price at which the Fund’s shares traded on the NYSE American during the period and assumes reinvestment of dividends and distributions, if any, at market
prices pursuant to the dividend reinvestment program sponsored by the Fund’s transfer agent. The Fund’s total investment return is based on the reported NAV on the financial reporting period ended October31, 2022. Because the Fund’s shares trade in the stock market based on investor demand, the Fund may trade at a price higher or lower than its NAV. Therefore, returns are calculated based on both market price
and NAV. Past performance is no guarantee of future results. The performance information provided does not reflect the deduction of taxes that a shareholder would pay on distributions received
from the Fund. The current performance of the Fund may be lower or higher than the figures shown. The Fund’s yield, return, market price and NAV will fluctuate. Performance information current to the most recent
month-end is available at www.abrdniaf.com or by calling 800-522-5465.
The net operating expense ratio
based on the fiscal year ended October 31, 2022 was 1.67%.The net operating expenses excluding interest expense based on the fiscal year ended October 31, 2022 was 1.55%.
6
abrdn Australia Equity Fund, Inc.
Portfolio Summary (as a percentage of net assets) (unaudited)
The following table summarizes
the sector composition of the Fund’s portfolio, in S&P Global Inc.’s Global Industry Classification Standard (“GICS”) Sectors. Industry allocation is shown below for any sector more than
25% of net assets.
Sectors
Financials
29.0%
Banks
20.0%
Capital Markets
6.0%
Insurance
3.0%
Materials
23.1%
Health Care
14.3%
Consumer Staples
8.2%
Energy
7.7%
Real Estate
6.7%
Consumer Discretionary
6.1%
Communication Services
5.5%
Information Technology
2.8%
Industrials
2.1%
Utilities
1.5%
Short-Term Investment
0.8%
Liabilities in Excess of Other Assets
(7.8%)
100.0%
The following were the
Fund’s top ten holdings as of October 31, 2022:
Asset coverage ratio on revolving credit facility at year end(c)
1,314%
2,150%
1,799%
–
–
Asset coverage per $1,000 on revolving credit facility at year end
$13,136
$21,503
$17,987
$–
$–
(a)
Based on average shares outstanding.
(b)
Total investment return based on market value is calculated assuming that shares of the Fund’s common stock were purchased at the closing market price as of the beginning of the period, dividends,
capital gains and other distributions were reinvested as provided for in the Fund’s dividend reinvestment plan and then sold at the closing market price per share on the last day of the period. The computation
does not reflect any sales commission investors may incur in purchasing or selling shares of the Fund. The total investment return based on the net asset value is similarly computed except that the Fund’s net
asset value is substituted for the closing market value.
(c)
Asset coverage ratio is calculated by dividing net assets plus the amount of any borrowings, for investment purposes by the amount of the Revolving Credit Facility.
abrdn Australia Equity
Fund, Inc. (formerly, Aberdeen Australia Equity Fund, Inc.) (the “Fund”) is a non-diversified closed-end management investment company incorporated in Maryland on September 30, 1985. The Fund’s
principal investment objective is long-term capital appreciation through investment primarily in equity securities of Australian companies listed on the Australian Stock Exchange Limited (“ASX”). Its
secondary objective is current income, which is expected to be derived primarily from dividends and interest on Australian corporate and governmental securities. The Fund normally invests at least 80% of its net
assets, plus the amount of any borrowings for investment purposes, in equity securities, consisting of common stock, preferred stock and convertible stock, of companies tied economically to Australia (each an
“Australian Company”). This 80% investment policy is a non-fundamental policy of the Fund and may be changed by the Board of Directors of the Fund ("the Board") upon 60 days’ prior written notice to
shareholders. As a fundamental policy, at least 65% of the Fund's total assets must be invested in companies listed on the ASX. abrdn Asia Limited (formerly, known as Aberdeen Standard Investments (Asia) Limited)
("abrdn Asia"), the Fund’s investment manager (the “Investment Manager”), uses the following criteria in determining if a company is “tied economically” to Australia: whether the company
(i) is a constituent of the ASX; (ii) has its headquarters located in Australia, (iii) pays dividends on its stock in Australian Dollars; (iv) has its accounts audited by Australian auditors; (v) is subject to
Australian taxes levied by the Australian Taxation Office; (vi) holds its annual general meeting in Australia; (vii) has common stock/ordinary shares and/or other principal class of securities registered with
Australian regulatory authorities for sale in Australia; (viii) is incorporated in Australia; or (ix) has a majority of its assets located in Australia or a majority of its revenues are derived from Australian
sources. There can be no assurance that the Fund will achieve its investment objective.
2. Summary of Significant
Accounting Policies
The Fund is an investment
company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 Financial
Services-Investment Companies.
The following is a summary of
significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform to generally accepted accounting principles (“GAAP”) in the United States of
America. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of income and expenses for the period. Actual results could differ from those estimates. The accounting records of
the Fund are maintained in U.S. Dollars and
the U.S. Dollar is used as both the functional and reporting currency. However, the Australian Dollar is the functional currency for U.S. federal tax purposes.
a. Security Valuation:
The Fund values its
securities at current market value or fair value, consistent with regulatory requirements. "Fair value" is defined in the Fund's Valuation and Liquidity Procedures as the price that could be received to sell an asset
or paid to transfer a liability in an orderly transaction between willing market participants without a compulsion to transact at the measurement date. Pursuant to Rule 2a-5 under the Investment Company Act of 1940,
as amended (the "1940 Act"), the Board of Directors (the "Board") designated the abrdn Australia Limited (formerly, Aberdeen Standard Investments Australia Limited), the Fund's investment adviser (the "Investment
Adviser"), as the valuation designee ("Valuation Designee") to perform the fair value determinations relating to Fund investments for which market quotations are not readily available.
Equity securities that are
traded on an exchange are valued at the last quoted sale price or the official closing price on the principal exchange on which the security is traded at the “Valuation Time” subject to application,
when appropriate, of the valuation factors described in the paragraph below. Under normal circumstances, the Valuation Time is as of the close of regular trading on the New York Stock Exchange ("NYSE") (usually 4:00
p.m. Eastern Time). In the absence of a sale price, the security is valued at the mean of the bid/ask price quoted at the close on the principal exchange on which the security is traded. Securities traded on NASDAQ
are valued at the NASDAQ official closing price. Closed-end funds and exchange-traded funds (“ETFs”) are valued at the market price of the security at the Valuation Time. A security using any of these
pricing methodologies is determined to be a Level 1 investment.
Foreign equity securities
that are traded on foreign exchanges that close prior to Valuation Time are valued by applying valuation factors to the last sale price or the mean price as noted above. Valuation factors are provided by an
independent pricing service provider. These valuation factors are used when pricing the Fund's portfolio holdings to estimate market movements between the time foreign markets close and the time the Fund values such
foreign securities. These valuation factors are based on inputs such as depositary receipts, indices, futures, sector indices/ETFs, exchange rates, and local exchange opening and closing prices of each security. When
prices with the application of valuation factors are utilized, the value assigned to the foreign securities may not be the same as quoted or published prices of the securities on their primary markets. A security that
applies a valuation factor is determined to be a Level 2 investment because the exchange-traded price has been adjusted. Valuation factors are not utilized if the independent pricing service provider is
unable to provide a valuation factor or if
the valuation factor falls below a predetermined threshold; in such case, the security is determined to be a Level 1 investment.
Short-term investments are
comprised of cash and cash equivalents invested in short-term investment funds which are redeemable daily. The Fund sweeps available cash into the State Street Institutional U.S. Government Money Market Fund, which
has elected to qualify as a “government money market fund” pursuant to Rule 2a-7 under the 1940 Act and has an objective, which is not guaranteed, to maintain a $1.00 per share NAV. Generally, these
investment types are categorized as Level 1 investments.
In the event that a
security’s market quotations are not readily available or are deemed unreliable (for reasons other than because the foreign exchange on which it trades closes before the Valuation Time), the security is valued
at fair value as determined by the Adviser as Valuation Designee, taking into account the relevant factors and surrounding circumstances using valuation policies and procedures approved by the Board. A security that
has been fair valued by the Adviser may be classified as Level 2 or Level 3 depending on the nature of the inputs.
In accordance with the
authoritative guidance on fair value measurements and disclosures under GAAP, the Fund discloses the fair value of its investments using a three-level hierarchy that classifies the inputs to valuation techniques used
to measure the fair value. The hierarchy assigns Level 1, the highest level, measurements to valuations based upon unadjusted quoted prices in active markets for
identical assets, Level 2 measurements to
valuations based upon other significant observable inputs, including adjusted quoted prices in active markets for similar assets, and Level 3, the lowest level, measurements to valuations based upon unobservable
inputs that are significant to the valuation. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk
inherent in a particular valuation technique used to measure fair value including a pricing model and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable. Observable
inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability, which are based on market data obtained from sources independent of the reporting entity. Unobservable
inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in
the circumstances. A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement.
The three-level hierarchy of
inputs is summarized below:
Level 1 - quoted prices in
active markets for identical investments;
Level 2 - other significant observable
inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk); or
Level 3 - significant unobservable inputs
(including the Fund’s own assumptions in determining the fair value of investments).
A summary of standard
inputs is listed below:
Security Type
Standard Inputs
Foreign equities utilizing a fair value factor
Depositary receipts, indices, futures, sector indices/ETFs, exchange rates, and local
exchange opening and closing prices of each security.
The following is a
summary of the inputs used as of October 31, 2022 in valuing the Fund's investments at fair value. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with
investing in those securities.
Investments, at Value
Level 1 – Quoted
Prices
Level 2 – Other Significant
Observable Inputs
Level 3 – Significant
Unobservable Inputs
Total
Assets
Investments in Securities
Common Stocks
$6,331,183
$118,217,074
$–
$124,548,257
Short-Term Investment
925,390
–
–
925,390
Total Investments
$7,256,573
$118,217,074
$–
$125,473,647
Total Assets
$7,256,573
$118,217,074
$–
$125,473,647
Amounts listed as
“–” are $0 or round to $0.
For the fiscal year
ended October 31, 2022, there were no significant changes to the fair valuation methodologies.
Foreign securities, currencies, and other
assets and liabilities denominated in foreign currencies are translated into U.S. Dollars at the exchange rate of said currencies against the U.S. Dollar, as of the Valuation Time, as provided by an independent
pricing service approved by the Board.
The Valuation Time is as of the
close of regular trading on the New York Stock Exchange (usually 4:00 p.m. Eastern Time).
Foreign currency amounts are
translated into U.S. Dollars on the following basis:
i)
market value of investment securities, other assets and liabilities – at the current daily rates of exchange; and
ii)
purchases and sales of investment securities, income and expenses – at the rate of exchange prevailing on the respective dates of such transactions.
The Fund isolates that
portion of the results of operations arising from changes in the foreign exchange rates due to the fluctuations in the market prices of the securities held at the end of the reporting period. Similarly, the Fund
isolates the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of portfolio securities sold during the reporting period.
Net exchange gain/(loss) is
realized from sales and maturities of portfolio securities, sales of foreign currencies, settlement of securities transactions, dividends, interest and foreign withholding taxes recorded on the Fund's books. Net
unrealized foreign exchange appreciation/(depreciation) includes changes in the value of portfolio securities and other assets and liabilities arising as a result of changes in the exchange rate.
Foreign security and currency
transactions may involve certain considerations and risks not typically associated with those of domestic origin, including unanticipated movements in the value of the foreign currency relative to the U.S. Dollar.
Generally, when the U.S. Dollar rises in value against foreign currency, the Fund’s investments denominated in that foreign currency will lose value because the foreign currency is worth fewer U.S. Dollars; the
opposite effect occurs if the U.S. Dollar falls in relative value.
c. Security Transactions,
Investment Income and Expenses:
Security transactions are
recorded on the trade date. Realized and unrealized gains/(losses) from security and currency transactions are calculated on the identified cost basis. Dividend income and corporate actions are recorded generally on
the ex-date, except for certain dividends and corporate actions which may be recorded after the ex-date, as soon as the Fund acquires information regarding such dividends or corporate actions. Interest income and
expenses are recorded on an accrual basis.
d. Distributions:
The Fund has a managed
distribution policy to pay distributions from net investment income supplemented by net realized foreign exchange gains, net realized capital gains and return of capital distributions, if necessary, on a quarterly
basis. The managed distribution policy is subject to regular review by the Board. The Fund will also declare and pay distributions at least annually from net realized gains on investment transactions and net realized
foreign exchange gains, if any. Dividends and distributions to shareholders are recorded on the ex-dividend date. Dividends and distributions to shareholders are determined in accordance with federal income
tax regulations, which may differ from GAAP.
These differences are
primarily due to differing treatments for foreign currencies, loss deferrals and recognition of market discount and premium.
e. Federal Income Taxes:
The Fund, for U.S. federal
income purposes is comprised of a separately identifiable unit called a Qualified Business Unit (“QBUs”) (see section 987 of the Internal Revenue Code of 1986, as amended (the "IRC")). The Fund has
operated with a QBU for U.S. federal income purposes since 1989. The home office is designated as the United States and the QBU is Australia with a functional currency of the Australian dollar. The securities held
within the Fund reside within either the home office of the QBU or the home office depending on certain factors including geographic region of the security. As an example, the majority of the Fund’s Australian
securities reside within the Australian QBU. When sold, the Australian dollar denominated securities within the Australian QBU generate capital gain/loss but not currency gain/loss, because the QBU’s functional
currency is Australian dollar.
IRC section 987 states that
currency gain/loss is generated when money is repatriated from a QBU to the home office. The currency gain/loss would result from the difference between the current exchange rate and the average exchange rate for the
year during which money was originally contributed to the QBU from the home office. Based on the QBU structure, there may be sizable differences in the currency gain/loss recognized for U.S. federal income tax
purposes and what is reported within the financial statements under GAAP. Additionally, the Fund’s composition of the distributions to shareholders is calculated based on U.S. federal income tax requirements
whereby currency gain/loss is characterized as income and distributed as such. As of the Fund’s fiscal year-end, the calculation of the composition of distributions to shareholders is finalized and reported in
the Fund’s annual report to shareholders.
The Fund intends to continue
to qualify as a “regulated investment company” (RIC) by complying with the provisions available to certain investment companies, as defined in Subchapter M of the Internal
Revenue Code of 1986, as amended, and to
make distributions of net investment income and net realized capital gains sufficient to relieve the Fund from all federal income taxes. Therefore, no federal income tax provision is required.
The Fund recognizes the tax
benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management of the Fund has concluded that there are no
significant uncertain tax positions that would require recognition in the financial statements. Since tax authorities can examine previously filed tax returns, the Fund's U.S. federal and state tax returns for each of
the most recent four fiscal years up to the most recent fiscal year ended October 31, 2022 are subject to such review.
f. Foreign Withholding
Tax:
Dividend and interest
income from non-U.S. sources received by the Fund are generally subject to non-U.S. withholding taxes. In addition, the Fund may be subject to capital gains tax in certain countries in which it invests. The above
taxes may be reduced or eliminated under the terms of applicable U.S. income tax treaties with some of these countries. The Fund accrues such taxes when the related income is earned.
In addition, when the Fund
sells securities within certain countries in which it invests, the capital gains realized may be subject to tax. Based on these market requirements and as required under GAAP, the Fund accrues deferred capital gains
tax on securities currently held that have unrealized appreciation within these countries. The amount of deferred capital gains tax accrued, if any, is reported on the Statement of Assets and Liabilities.
3. Agreements and Transactions
with Affiliates
a. Investment Manager and
Investment Adviser:
abrdn Asia serves as
investment manager to the Fund and abrdn Australia Limited serves as investment adviser to the Fund, pursuant to a management agreement and an advisory agreement, respectively. The Investment Manager and the
Investment Adviser are indirect wholly-owned subsidiaries of abrdn plc (formerly known as "Standard Life Aberdeen plc") (collectively the “Advisers”).
The Investment Manager makes
investment decisions on behalf of the Fund on the basis of recommendations and information furnished to it by the Investment Adviser, including the selection of, and responsibility for the placement of orders with,
brokers and dealers to execute portfolio transactions on behalf of the Fund.
In rendering management
services, the Investment Manager may use the resources of advisory subsidiaries of abrdn plc. These affiliates have entered into a memorandum of understanding/ personnel sharing procedures pursuant to which investment
professionals from each
affiliate, including the Investment Adviser,
may render portfolio management and research services to U.S. clients of the abrdn plc affiliates, including the Fund, as associated persons of the Investment Manager. No remuneration is paid by the Fund with regards
to the memorandum of understanding/personnel sharing procedures.
Pursuant to the management
agreement, the Fund pays the Investment Manager a fee, payable monthly by the Fund, at the following annual rates: 1.10% of the Fund’s average weekly Managed Assets up to $50 million, 0.90% of the Fund's average
weekly Managed Assets between $50 million and $100 million and 0.70% of the Fund's average weekly Managed Assets in excess of $100 million. Managed Assets is defined in the management agreement as net assets plus the
amount of any borrowings for investment purposes. The Investment Adviser is paid by the Investment Manager, and not the Fund, for its services.
For the fiscal year ended
October 31, 2022, abrdn Asia earned $1,298,132 from the Fund for investment management fees.
b. Fund Administration:
abrdn Inc. (formerly known
as Aberdeen Standard Investments, Inc.), an affiliate of the Advisers, is the Fund’s Administrator, pursuant to an agreement under which abrdn Inc. receives a fee, payable monthly by the Fund, at an annual fee
rate of 0.08% of the Fund’s average weekly Managed Assets up to $500 million, 0.07% of the Fund’s average weekly Managed Assets between $500 million and $1.5 billion, and 0.06% of the Fund’s average
weekly Managed Assets in excess of $1.5 billion. For the period ended October 31, 2022, abrdn Inc. earned $114,072 from the Fund for administration services.
c. Investor Relations:
Under the terms of the
Investor Relations Services Agreement, abrdn Inc. provides and pays third parties to provide investor relations services to the Fund and certain other funds advised by abrdn Asia or its affiliates as part of an
Investor Relations Program. Under the Investor Relations Services Agreement, the Fund owes a portion of the fees related to the Investor Relations Program (the "Fund's Portion"). However, investor
relations services fees are limited by abrdn Inc. so that the Fund will only pay up to an annual rate of 0.05% of the Fund's average weekly net assets. Any difference between the capped rate of 0.05% of the Fund's
average weekly net assets and the Fund's Portion is paid for by abrdn Inc.
Pursuant to the terms of the
Investor Relations Services Agreement, abrdn Inc. (or third parties engaged by abrdn Inc.), among other things, provides objective and timely information to shareholders based on publicly-available information;
provides information efficiently through the use of technology while offering shareholders immediate access to knowledgeable investor relations representatives; develops and maintains effective communications with
investment
professionals from a wide variety of firms;
creates and maintains investor relations communication materials such as fund manager interviews, films and webcasts, publishes white papers, magazine articles and other relevant materials discussing the Fund's
investment results, portfolio positioning and outlook; develops and maintains effective communications with large institutional shareholders; responds to specific shareholder questions; and reports activities and
results to the Board and management detailing insight into general shareholder sentiment.
During the period ended
October 31, 2022, the Fund incurred investor relations fees of approximately $70,866. For the fiscal year ended October 31, 2022, abrdn Inc. did not waive any investor relations fees because the Fund did not reach the
capped amount.
4. Investment Transactions
Purchases and sales of
investment securities (excluding short-term securities) for the fiscal year ended October 31, 2022, were $32,978,605 and $33,024,375, respectively.
5. Capital
The authorized capital of
the Fund is 30 million shares of $0.01 par value per share of common stock. As of October 31, 2022, there were 24,932,179 shares of common stock issued and outstanding.
The following table shows the
shares issued by the Fund as a part of a quarterly distribution to shareholders during the fiscal year ended October 31, 2022.
The Fund’s Board
approved an open market repurchase and discount management policy (the “Program”). The Program allows the Fund to purchase, in the open market, its outstanding common shares, with the amount and timing of
any repurchase determined at the discretion of the Fund’s investment adviser. Such purchases may be made opportunistically at certain discounts to net asset value per share in the reasonable judgment of
management based on historical discount levels and current market conditions.
On a quarterly basis, the
Fund’s Board will receive information on any transactions made pursuant to this policy during the prior quarter and management will post the number of shares repurchased on the Fund’s website on a monthly
basis. Under the terms of the Program, the Fund is permitted to repurchase up to 10% of its outstanding shares of common stock in the open market during any 12 month period.
7. Revolving Credit Facility
The Fund may use leverage
to the maximum extent permitted by the 1940 Act, which permits leverage to exceed 33 1/3% of the Fund’s total assets (including the amount obtained through leverage) in certain market conditions.
On October 13, 2020, the Fund
entered into a 3-year term revolving credit facility with a committed facility of AUD$20 million with State Street Global Advisors. On November 16, 2021, Fund entered into
an amendment under the revolving credit
facility to adjust the charged interest on amounts borrowed at a variable rate, which may be based on the Secured Overnight Financing Rate plus a spread. For the fiscal year ended October 31, 2022, the balance of the
loan outstanding was AUD$15 million and the average interest rate on the loan facility was 1.70% The average balance for the fiscal year was AUD$12,397,260. The interest expense is accrued on a daily basis and is
payable to State Street Global Advisors on a monthly basis. Interest expense related to the line of credit for the fiscal year ended October 31, 2022, was $159,790.
The Fund’s leveraged
capital structure creates special risks not associated with unleveraged funds having similar investment objectives and policies. The funds borrowed pursuant to the loan facility may constitute a substantial lien and
burden by reason of their prior claim against the income of the Fund and against the net assets of the Fund in liquidation. The Fund is not permitted to declare dividends or other distributions in the event of default
under the loan facility. In the event of a default under the loan facility, the lenders have the right to cause a liquidation of the collateral (i.e., sell portfolio securities and other assets of the Fund) and, if
any such default is not cured, the lenders may be able to control the liquidation as well. A liquidation of the Fund’s collateral assets in an event of default, or a voluntary paydown of the loan facility in
order to avoid an event of default, would typically involve administrative expenses and sometimes penalties. Additionally, such liquidations often involve selling off of portions of the Fund’s assets at
inopportune times which can result in losses when markets are unfavorable. The loan facility has a term of three years and is not a perpetual form of leverage; there can be no assurance that the loan facility will be
available for renewal on acceptable terms, if at all. Bank loan fees and expenses included in the Statement of Operations include fees for the loan facility as well as commitment fees for any portion of the loan
facility not drawn upon at any time during the period. During the fiscal year ended October 31, 2022, the Fund incurred fees of approximately $93,342.
The credit agreement
governing the loan facility includes usual and customary covenants for this type of transaction. These covenants impose on the Fund asset coverage requirements, Fund composition requirements and limits on certain
investments, such as illiquid investments, which are more stringent than those imposed on the
Fund by the 1940 Act. The covenants or
guidelines could impede the Investment Manager or Investment Adviser from fully managing the Fund’s portfolio in accordance with the Fund’s investment objective and policies. Furthermore, non-compliance
with such covenants or the occurrence of other events could lead to the cancellation of the loan facility.
The estimated fair value of
the loan facility was calculated, for disclosure purposes, by discounting future cash flows by a rate equal to
the current Australian Treasury rate with an
equivalent maturity date, the spread between the U.S. insurance and financial debt rate and the U.S. Treasury rate. The following table shows the maturity date, interest rate, notional/carrying amount and estimated
fair value outstanding as of October 31, 2022.
The stock or other security of a company may
not perform as well as expected, and may decrease in value, because of factors related to the company (such as poorer than expected earnings or certain management decisions) or to the industry in which the company is
engaged (such as a reduction in the demand for products or services in a particular industry). Holders of common stock generally are subject to more risks than holders of preferred stock or debt securities because the
right to repayment of common stockholders’ claims is subordinated to that of preferred stock and debt securities upon the bankruptcy of the issuer.
b. Focus Risk:
The Fund may have elements
of risk not typically associated with investments in the United States due to focused investments in a limited number of countries or regions subject to foreign securities or currency risks. The Fund focuses its
investments in Australia, which subjects the Fund to more volatility and greater risk of loss than geographically diverse funds. Such focused investments may subject the Fund to additional risks resulting from
political or economic conditions in such countries or regions and the possible imposition of adverse governmental laws or currency exchange restrictions could cause the securities and their markets to be less
liquid and their prices to be more volatile than those of comparable U.S. securities.
c. Foreign Currency
Exposure Risk – Australia:
Currency exchange rates can
fluctuate significantly over short periods and can be subject to unpredictable changes based on a variety of factors, including political developments and currency controls by governments. The Fund will normally hold
almost all its assets in Australian dollar denominated securities, although some assets may be denominated in other foreign currencies. Accordingly, a change in the value of a currency in which a security is
denominated against the
U.S. dollar will generally result in a
change in the U.S. dollar value of the Fund’s assets. Such a change may thus decrease the Fund’s net asset value.
d. Foreign Securities Risk
– Australia:
Investments in foreign
securities that are traded on foreign markets, including Australian and New Zealand securities, are subject to risks of loss that are different from the risks of investing in U.S. securities. These include the
possibility of losses due to currency fluctuations, or to adverse political, economic or diplomatic developments in Australia and New Zealand, including possible increases in taxes. Additionally, accounting, auditing,
financial reporting standards and other regulatory practices and requirements for securities in which the Fund may invest vary from those applicable to entities subject to regulation in the United States. The
Australian securities market for both listed and unlisted securities may be more volatile and less liquid than the major U.S. markets. In addition, the cost to the Fund of buying, selling and holding securities in
the Australian market may be higher than in the United States.
e. Issuer Risk:
The value of a security may
decline for reasons directly related to the issuer, such as management performance, financial leverage and reduced demand for the issuer's goods or services.
f. Leverage Risk:
The Fund may use leverage
to purchase securities. Increases and decreases in the value of the Fund's portfolio will be magnified when the Fund uses leverage.
The Fund is subject to the
risk that the Adviser may make poor security selections. The Adviser, and its portfolio managers apply their own investment techniques and risk analyses in making investment decisions for the Fund and there can be no
guarantee that these decisions will achieve the desired results for the Fund. In addition, the Adviser may select securities that underperform the relevant market or other funds with similar investment objectives and
strategies.
h. Market Events Risk:
Markets are affected by
numerous factors, including interest rates, the outlook for corporate profits, the health of the national and world economies, the fluctuation of other stock markets around the world, and financial, economic and other
global market developments and disruptions, such as those arising from war, terrorism, market manipulation, government interventions, defaults and shutdowns, political changes or diplomatic developments, public health
emergencies and natural/environmental disasters. Such events can negatively impact the securities markets and cause the Fund to lose value.
One such event is the
COVID-19 pandemic, which has caused major disruptions to economies and markets around the world, including the markets in which the Fund invests, and which has and may continue to negatively impact the value of the
Fund’s investments.
Policy and legislative
changes in countries around the world are affecting many aspects of financial regulation, and governmental and quasi-governmental authorities and regulators throughout the world have previously responded to serious
economic disruptions with a variety of significant fiscal and monetary policy changes.
The impact of these changes
on the markets, and the practical implications for market participants, may not be fully known for some time. In addition, economies and financial markets throughout the world are becoming increasingly interconnected.
As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to countries experiencing economic and financial difficulties, the value and liquidity of the Fund’s
investments may be negatively affected by such events.
For example, whether or not
the Fund invests in securities of issuers located in Europe (whether the EU, Eurozone or UK) or with significant exposure to European, EU, Eurozone or UK issuers or countries, the unavoidable uncertainties and events
related to the UK’s departure from the EU (“Brexit”) could negatively affect the value and liquidity of the Fund’s investments, increase taxes and costs of business and cause volatility in
currency exchange rates and interest rates. Brexit could adversely affect the performance of contracts in existence at the date of Brexit and European, UK or worldwide political, regulatory, economic or market
conditions and could contribute to instability in
political institutions, regulatory agencies
and financial markets. Brexit could also lead to legal uncertainty and politically divergent national laws and regulations as a new relationship between the UK and EU is defined and as the UK determines which EU laws
to replace or replicate. Any of these effects of Brexit, and others that cannot be anticipated, could adversely affect the Fund’s business, results of operations and financial condition.
i. Mid-Cap Securities
Risk:
Securities of medium-sized
companies tend to be more volatile and less liquid than securities of larger companies.
j. Non-U.S. Taxation
Risk:
Income, proceeds and gains
received by the Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries, which will reduce the return on those investments. Tax treaties between certain
countries and the United States may reduce or eliminate such taxes.
If, at the close of its
taxable year, more than 50% of the value of the Fund’s total assets consists of securities of foreign corporations, including for this purpose foreign governments, the Fund will be permitted to make an election
under the Code that will allow shareholders a deduction or credit for foreign taxes paid by the Fund. In such a case, shareholders will include in gross income from foreign sources their pro rata shares of such taxes.
A shareholder’s ability to claim an offsetting foreign tax credit or deduction in respect of such foreign taxes is subject to certain limitations imposed by the Code, which may result in the shareholder’s
not receiving a full credit or deduction (if any) for the amount of such taxes. Shareholders who do not itemize on their U.S. federal income tax returns may claim a credit (but not a deduction) for such foreign taxes.
If the Fund does not qualify for or chooses not to make such an election, shareholders will not be entitled separately to claim a credit or deduction for U.S. federal income tax purposes with respect to foreign taxes
paid by the Fund; in that case the foreign tax will nonetheless reduce the Fund’s taxable income. Even if the Fund elects to pass through to its shareholders foreign tax credits or deductions, tax-exempt
shareholders and those who invest in the Fund through tax-advantaged accounts such as IRAs will not benefit from any such tax credit or deduction.
k. Passive Foreign
Investment Company Tax Risk:
Equity investments by the
Fund in certain “passive foreign investment companies” (“PFICs”) could subject the Fund to a U.S. federal income tax (including interest charges) on distributions received from the PFIC or on
proceeds received from the disposition of shares in the PFIC. The Fund may be able to elect to treat a PFIC as a “qualified electing fund” (i.e., make a “QEF election”), in which case the Fund
will be required to include its share of the company’s income and net capital gains annually. The Fund may make an election to mark the gains (and to a
limited extent losses) in such holdings
“to the market” as though it had sold and repurchased its holdings in those PFICs on the last day of the Fund’s taxable year. Such gains and losses are treated as ordinary income and loss. Because it
is not always possible to identify a foreign corporation as a PFIC, the Fund may incur the tax and interest charges described above in some instances.
l. REIT and Real Estate
Risk:
Investment in real estate
investment trusts ("REITs") and real estate involves the risks that are associated with direct ownership of real estate and with the real estate industry in general. These risks include: declines in the value of real
estate; risks related to local economic conditions, overbuilding and increased competition; increases in property taxes and operating expenses; changes in zoning laws; casualty or condemnation losses; variations in
rental income, neighborhood values or the appeal of properties to tenants; changes in interest rates and changes in general economic and market conditions. REITs’ share prices may decline because of adverse
developments affecting the real estate industry including changes in interest rates. The returns from REITs may trail returns from the overall market. Additionally, there is always a risk that a given REIT will fail
to qualify for favorable tax treatment. REITs may be leveraged, which increases risk. Certain REITs charge management fees, which may result in layering the management fee paid by the fund.
m. Sector Risk:
To the extent that the Fund
has a significant portion of its assets invested in securities of companies conducting business in a broadly related group of industries within an economic sector, the Fund may be more vulnerable to unfavorable
developments in that economic sector than funds that invest more broadly.
Financials Sector Risk. To the extent that the financials sector represents a significant portion of the Fund's investments, the Fund will be sensitive to changes in, and its performance may depend to a greater
extent on, factors impacting this sector. Performance of
companies in the financials sector may be
adversely impacted by many factors, including, among others, government regulations, economic conditions, credit rating downgrades, changes in interest rates, and decreased liquidity in credit markets. The impact of
more stringent capital requirements, recent or future regulation of any individual financial company, or recent or future regulation of the financials sector as a whole cannot be predicted. In recent years, cyber
attacks and technology malfunctions and failures have become increasingly frequent in this sector and have caused significant losses.
n. Small-Cap Securities
Risk:
Securities of smaller
companies are usually less stable in price and less liquid than those of larger, more established companies. Therefore, they generally involve greater risk.
o. Valuation Risk:
The price that the Fund
could receive upon the sale of any particular portfolio investment may differ from the Fund’s valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued
using a fair valuation methodology or a price provided by an independent pricing service. As a result, the price received upon the sale of an investment may be less than the value ascribed by the Fund, and the Fund
could realize a greater than expected loss or lower than expected gain upon the sale of the investment. The Fund’s ability to value its investments may also be impacted by technological issues and/or errors by
pricing services or other third-party service providers.
9. Contingencies
In the normal course of
business, the Fund may provide general indemnifications pursuant to certain contracts and organizational documents. The Fund's maximum exposure under these arrangements is dependent on future claims that may be made
against the Fund, and therefore, cannot be estimated; however, the Fund expects the risk of loss from such claims to be remote.
10. Tax
Information
The U.S. federal
income tax basis of the Fund’s investments (including derivatives, if applicable) and the net unrealized appreciation as of October 31, 2022, were as follows:
As of October 31, 2022, the
components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income
$-
Undistributed Long-Term Capital Gains
611,428
Total undistributed earnings
$611,428
Capital loss carryforward
$-*
Other currency gains
—
Other Temporary Differences
(1,846,786)
Unrealized Appreciation/(Depreciation)
1,045,197**
Total accumulated earnings/(losses) – net
$(190,161)
Amounts listed as
“–” are $0 or round to $0.
*
During the year ended October 31, 2022, the Fund did not utilize a capital loss carryforward.
**
The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable to corporate actions.
11. Subsequent Events
Management has evaluated
the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued. Based on this evaluation, no disclosures and/or adjustments were required to the
financial statements as of October 31, 2022, other than as noted below.
Report of Independent Registered Public Accounting
Firm
To the
Shareholders and Board of Directors
abrdn Australia Equity Fund, Inc.:
Opinion on the Financial
Statements
We have audited the
accompanying statement of assets and liabilities of abrdn Australia Equity Fund, Inc. (formerly, Aberdeen Australia Equity Fund, Inc.) (the Fund), including the portfolio of investments, as of October 31, 2022, the
related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the related notes (collectively, the financial statements)
and the financial highlights for each of the years in the five-year period then ended. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position
of the Fund as of October 31, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements
and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in
accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial
highlights. Such procedures also included confirmation of securities owned as of October 31, 2022, by correspondence with custodians and brokers; when replies were not received from brokers, we performed other
auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and
financial highlights. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor
of one or more abrdn investment companies since 2009.
Federal Tax Information: Dividends and
Distributions (Unaudited)
Designation Requirements
Of the distributions paid by the
Fund from ordinary income for the year ended October 31, 2022, the following percentages met the requirements to be treated as qualifying for the corporate dividends received deduction and qualified dividend income,
respectively.
Dividends Received Deduction
0.40%
Qualified Dividend Income
100.00%
The above amounts are based on
the best available information at this time. In early 2023, the Fund will notify applicable shareholders of final amounts for use in preparing 2022 U.S. federal income tax forms.
24
abrdn Australia Equity Fund, Inc.
Supplemental Information (Unaudited)
Board of Directors’
Consideration of Management and Advisory Agreements
At a regularly scheduled
quarterly meeting (the “Quarterly Meeting”) of the Board of Directors (the “Board”) of abrdn Australia Equity Fund, Inc. (“IAF” or the “Fund”) held on June 15, 2022, the
Board, including a majority of the Directors who are not considered to be “interested persons” of the Fund (the “Independent Directors”) under the Investment Company Act of 1940, as amended
(the “1940 Act”), approved for an annual period the continuation of the Fund’s management agreement with abrdn Asia Limited (the “Investment Manager”) and the investment advisory
agreement among the Fund, the Investment Manager and abrdn Australia Limited (the “Investment Adviser”). In addition, the Independent Directors of the Fund held a separate telephonic meeting on June 8,2022 (together with the in-person Quarterly Meeting held on June 15, 2022, the “Meetings”) to review the materials provided and the relevant legal considerations. The Investment Manager and the Investment
Adviser are referred to collectively herein as the “Advisers” and the aforementioned agreements with the Advisers are referred to as the “Advisory Agreements.” The Investment Adviser is an
affiliate of the Investment Manager.
In connection with their
consideration of whether to approve the continuation of the Fund’s Advisory Agreements, the Board members received and reviewed a variety of information provided by the Advisers relating to the Fund, the
Advisory Agreements and the Advisers, including comparative performance, fee and expense information and other information regarding the nature, extent and quality of services provided by the Advisers under their
respective Advisory Agreements. The materials provided to the Board generally included, among other items: (i) information about the profitability of the Advisory Agreements to the Advisers; (ii) information on the
investment performance of the Fund and the performance of peer groups of funds and the Fund’s performance benchmark; (iii) a report prepared by the Advisers in response to a request submitted by the Independent
Directors’ independent legal counsel on behalf of such Directors; (iv) information on the Fund’s advisory fees and other expenses, including information comparing the Fund’s expenses to those of a
peer group of funds and information about any applicable expense limitations and fee “breakpoints”; and (v) a memorandum from the Independent Directors’ independent legal counsel on the
responsibilities of the Board in considering for approval the investment advisory arrangements under the 1940 Act and Maryland law.
The Board, including the
Fund’s Independent Directors, also considered other matters such as: (i) the Fund’s investment objective and strategies; (ii) the Advisers’ financial results and financial condition; (iii) the
Advisers’ investment personnel and operations; (iv) the procedures employed to value the Fund’s assets; (v) the resources devoted to, and the record of compliance with, the Fund’s investment policies
and restrictions, policies on personal securities transactions and other compliance policies; (vi) the allocation of the Fund’s brokerage, if any, including, if applicable, allocations to brokers affiliated with
the Advisers and the use, if any, of “soft” commission dollars to pay Fund expenses and to pay for research and other similar services; and (vii) possible conflicts of interest. Throughout the process, the
Board had the opportunity to ask questions of and request additional information from the Advisers.
In addition to the materials
requested by the Directors in connection with their annual consideration of the continuation of the Advisory Agreements, the Directors received and reviewed materials in advance of each regular quarterly meeting of
the Board that contained information about the Fund’s investment performance and information relating to the services provided by the Advisers.
The Independent Directors
were advised by separate independent legal counsel throughout the process and consulted in executive sessions with their independent legal counsel regarding their consideration of the renewal of the Advisory
Agreements. The Directors also considered the recommendation of the Board’s Contract Review Committee, which consists solely of the Board’s Independent Directors, that the Advisory Agreements be renewed.
In considering whether to approve the continuation of the Advisory Agreements, the Board, including the Independent Directors, did not identify any single factor as determinative. Individual Directors may have
evaluated the information presented differently from one another, giving different weights to various factors. Matters considered by the Board, including the Independent Directors, in connection with its approval of
the continuation of the Advisory Agreements included the factors listed below.
Fees and expenses. The Board reviewed with management the effective annual fee rate paid by the Fund to the Investment Manager for investment management services. The Board also received and considered
information compiled at the request of the Fund by Institutional Shareholder Services Inc. (“ISS”), an independent third-party provider of investment company data as to the Fund’s total return, that
compared the Fund’s effective annual management fee rate with the fees paid by a peer group consisting of other comparable closed-end funds (each such group, a “Peer Group”). The Directors took into
account the management fee structure, including that management fees for the Fund were based on the Fund’s total managed assets. The Directors also considered information from management about the fees charged
by the Advisers to other U.S. clients investing primarily in an asset class similar to that of the Fund. The Board reviewed and considered additional information about the Investment Adviser’s fees, including
the amount of the management fees retained by the Investment Manager after payment of the advisory fees. The Board considered that the compensation paid to the Investment Adviser was paid by the Investment Manager,
and, accordingly that the retention of the Investment Adviser did not increase the fees or expenses otherwise incurred by the Fund’s shareholders. The Board considered the fee comparisons in light of the
differences in resources and costs required to manage the different types of accounts.
The Board also took into account
management’s discussion of the Fund’s expenses, including the factors that impacted the Fund’s expenses.
abrdn Australia Equity Fund, Inc.
25
Supplemental Information (Unaudited) (concluded)
Investment performance of the
Fund and the Advisers. The Board received and reviewed with management, among other performance data, information that compared the Fund’s return to comparable investment companies focused on non-U.S.
regions. The Board also received and considered performance information compiled by ISS, as compared with the funds in the Fund’s Morningstar category (the “Morningstar Group”).
In addition, the Board
received and reviewed information for each of the last five fiscal years regarding the Fund’s total return on a gross and net basis and relative to the Fund’s benchmark, the impact of foreign currency
movements on the Fund’s performance and the Fund’s share performance and premium/discount information. The Board also received and reviewed information on the Fund’s total return for each of the last
five fiscal years as compared with the total returns of its Morningstar Group average, and other comparable abrdn-managed funds. The Board took into account information about the Fund’s discount/premium ranking
relative to its Morningstar Group and considered management’s discussion of the Fund’s performance. Additionally, the Directors considered management’s discussion of the factors contributing to
differences in performance, including differences in the investment strategies of each of these other funds and accounts.
The Board also considered the
Advisers’ performance generally, the historical responsiveness of the Investment Manager to Director concerns about performance, and the willingness of the Advisers to take steps intended to improve
performance.
The nature, extent and
quality of the services provided to the Fund under the Advisory Agreements. The Board considered, among other things, the nature, extent and quality of the services provided by the Advisers to the Fund and the resources dedicated to the Fund by the Advisers. The
Directors took into account the Advisers’ investment experience and considered the allocation of responsibilities between the Advisers. The Board also considered the Advisers’ risk management processes.
The Board considered the background and experience of the Advisers’ senior management personnel and the qualifications, background and responsibilities of the portfolio managers primarily responsible for the
day-to-day portfolio management services for the Fund. The Board also considered information regarding the Advisers’ compliance with applicable laws and Securities and Exchange Commission and other regulatory
inquiries or audits of the Fund and the Advisers. The Board considered that they received information on a regular basis from the Fund’s Chief Compliance Officer regarding the Advisers’ compliance policies
and procedures and considered the Advisers’ brokerage policies and practices. Management reported to the Board on, among other things, its business plans and organizational changes. The Directors took into
account their knowledge of management and the quality of the performance of management’s duties through Board meetings, discussion and reports during the preceding year.
Economies of Scale. The Board considered management’s discussion of the Fund’s management fee structure and determined that the management fee structure was reasonable. The Board based this
determination on various factors, including how the Fund’s management fee compared to its Peer Group at higher asset levels and that the Fund’s management agreement provides breakpoints at higher asset
levels.
After reviewing these and
related factors, the Board concluded that the nature, extent and quality of the services provided supported the renewal of the Advisory Agreements.
The Directors also considered
other factors, which included but were not limited to the following:
•
the nature, quality, cost and extent of administrative services provided by abrdn Inc., an affiliate of the Adviser, under a separate agreement covering administrative services.
•
so-called “fallout benefits” to the Advisers and their affiliates, including indirect benefits. The Directors considered any possible conflicts of interest associated with these fallout and
other benefits, and the reporting, disclosure and other processes in place to disclose and monitor such possible conflicts of interest.
•
whether the Fund has operated in accordance with its investment objective and the Fund’s record of compliance with its investment restrictions, and the compliance programs of the Advisers. The
Directors also considered the compliance-related resources the Advisers and their affiliates were providing to the Fund.
•
the effect of any market and economic volatility on the performance, asset levels and expense ratios of the Fund.
* * *
Based on their evaluation of
all factors that they deemed to be material, including those factors described above, and assisted by the advice of independent counsel, the Directors, including the Independent Directors, concluded that renewal of
the Advisory Agreements would be in the best interest of the Fund and its shareholders. Accordingly, the Board, including the Board’s Independent Directors voting separately, approved the Fund’s Advisory
Agreements for an additional one-year period.
26
abrdn Australia Equity Fund, Inc.
Additional Information Regarding the
Fund (Unaudited)
Recent Changes
The following information is
a summary of certain changes during the fiscal year ended October 31, 2022. This information may not reflect all of the changes that have occurred since you purchased the Fund.
During the applicable period,
there have been: (i) no material changes to the Fund's investment objectives and policies that constitute its principal portfolio emphasis that have not been approved by shareholders; (ii) no material changes to the
Fund's principal risks; (iii) no changes to the persons primarily responsible for day-to-day management of the Fund; and (iv) no changes to the Fund's charter or by-laws that would delay or prevent a change of control
that have not been approved by shareholders.
Investment Objectives and
Policies
Investment Objectives. The Fund’s principal investment objective is long-term capital appreciation through investment primarily in equity securities of Australian companies listed on the Australian Stock
Exchange Limited (“ASX”). Its secondary objective is current income, which is expected to be derived primarily from dividends and interest on Australian corporate and governmental securities.
Principal Investment
Strategy. The Fund will normally invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities, consisting of common stock, preferred stock
and convertible stock, of Australian Companies. As a fundamental policy, at least 65% of the Fund’s total assets must be invested in companies listed on the ASX. Australian Companies are companies that are tied
economically to Australia. The Fund’s investment manager, abrdn Asia Limited (formerly, Aberdeen Standard Investments (Asia) Limited) ("abrdn Asia" or the "Investment Manager"), the Fund’s investment
manager (“ASIAL” or the “Investment Manager”), uses the following criteria in determining if a company is “tied economically” to Australia: whether the company: (i) is a constituent
of the ASX; (ii) has its headquarters located in Australia; (iii) pays dividends on its stock in Australian dollars; (iv) has its accounts audited by Australian auditors; (v) is subject to Australian taxes levied by
the Australian Taxation Office; (vi) holds its annual general meeting in Australia; (vii) has common stock/ordinary shares and/or other principal class of securities registered with Australian regulatory authorities
for sale in Australia; (viii) is incorporated in Australia; or (ix) has a majority of its assets located in Australia or a majority of its revenues derived from Australian sources. In determining whether a company is
“tied economically” to Australia, the Investment Manager will consider certain of these criteria separately while others will only be considered in combination with other criteria. The Fund uses such
criteria for the following reasons: the ASX is a primary benchmark for equity investment in Australia; location in Australia of a company’s headquarters, auditors or site of its annual meeting are
indicative of
where key strategic planning and direction
of the company take place; payment of dividends may be an important component of returns in which earnings are distributed to shareholders; payment of taxes generally evidences that assets of the company are resident
in, or that income is earned in, Australia; registration of securities for sale in Australia indicates that the company is seeking capital from Australian securities markets; and incorporation in Australia establishes
corporate domicile and subjects the company to Australian legal, tax and regulatory requirements. The Fund’s 80% investment policy is a non-fundamental policy of the Fund and may be changed by the Board of
Directors upon 60 days’ prior written notice to shareholders. However, it is a fundamental policy of the Fund to normally invest at least 65% of its total assets in equity securities, consisting of common stock,
preferred stock and convertible preferred stock, listed on the ASX. Although securities listed on the ASX may include securities of New Zealand issuers that are listed on the ASX, New Zealand companies will not be
included in the Fund’s definition of an Australian company under criterion (i) above. However, up to 10% of the value of the Fund’s total assets (at the time of purchase) may be invested in unlisted equity
securities. In seeking to achieve the Fund’s investment objectives, the Investment Manager invests in quality companies and is an active, engaged owner. The Investment Manager evaluates every company
against quality criteria and build conviction using a team-based approach and peer review process. The quality assessment covers five key factors: 1) the durability of the business model, 2) the attractiveness of the
industry, 3) the strength of financials, 4) the capability of management, and 5) the most material environmental, social and governance (“ESG”) factors impacting a company. The Investment Manager seeks to
understand what is changing in companies, industries and markets but is not being priced into the market or is being mispriced. Through fundamental research, supported by a global research presence and proprietary
tools, the Adviser seeks to identify companies whose quality is not yet fully recognized by the market. The Investment Manager may sell a security when it perceives that a company's business direction or growth
potential has changed or the company's valuations no longer offer attractive relative value.
The Fund may also invest in
debt securities, consisting of notes and debentures of Australian companies, bills and bonds of the Federal and State governments of Australia and U.S. Government securities. Such debt securities will be rated in one
of the four highest rating categories by a nationally recognized statistical rating organization or, if unrated, determined to be of comparable quality by the Investment Manager, and will typically have a maturity of
10 years or less. During periods when, in the Investment Manager’s judgment, changes in the Australian market or other economic conditions warrant a defensive economic policy, the Fund may temporarily reduce its
position in equity securities and increase its position in debt securities or in money market instruments having a maturity of not more than six
abrdn Australia Equity Fund, Inc.
27
Additional Information Regarding the
Fund (Unaudited) (continued)
months and consisting of Australian bank
time deposits; bills and acceptances; Australian Federal Treasury bills; Australian corporate notes; and U.S. Treasury bills. The Fund may also invest in such money market instruments in order to meet dividend and
expense obligations.
The Fund invests its assets
in a broad spectrum of Australian and New Zealand industries, including metals and minerals, other natural resources, construction, electronics, food, appliances and household goods, transport, tourism, the media and
financial institutions. In selecting industries and companies for equity investment, the Investment Manager may, among other factors, consider overall growth prospects, competitive positions in domestic and export
markets, technology, research and development, productivity, labor costs, raw material costs and sources, profit margins, return on investment, capital resources, management and government regulation.
The Fund’s investments
in Australian debt securities and Australian money market instruments are limited to obligations of Australian Federal and State governments, governmental agencies and authorities, listed corporate issuers and banks
considered to be creditworthy by the Investment Manager.
In 1999, the Fund received a
no-action assurance letter from the SEC staff to permit the Fund to concentrate its portfolio investments under certain circumstances. The Fund will not invest in a security if, after the investment, more than 25% of
its total assets would be invested in any one industry or group of industries, provided that the Fund may invest between 25% and 35% of its total assets in the securities of any one industry group if, at the time of
investment, that industry group represents 20% or more of the S&P/ASX 200 Accumulation Index. The no-action letter issued by the SEC staff referred to industry sectors of the Australian All Ordinaries Index, then
the Fund’s performance benchmark. The Fund’s performance benchmark was subsequently changed to the S&P/ASX 200 Accumulation Index, as reported to shareholders in the Fund’s semi-annual report for
the period ended April 30, 2000. The S&P/ASX 200 Accumulation Index comprises the top 200 companies listed on the ASX by market capitalization. The S&P/ASX 200 Accumulation Index most closely represents the
universe of stocks that are held by the Fund. Standard & Poor’s subsequently discontinued the use of the ASX classification system for the S&P/ASX 200 Accumulation Index and replaced such classification
system with the Global Industry Classification Standard (“GICS”). The GICS classification tier of Industry Groupings (of which there were 24 as of October 31, 2022) is the classification most
comparable to the ASX classification formerly used by both the Australian All Ordinaries Index and the S&P/ASX 200 Accumulation Index.
The Fund does not trade in
securities for short-term gain.
Repurchase Agreements
The Fund may enter into
repurchase agreements with banks and broker-dealers when it deems it advisable. A repurchase agreement is a contract under which the Fund acquires a security for a relatively short period (usually no more than one
week) subject to the obligations of the seller to repurchase and the Fund to resell such security at a fixed time and price (representing the Fund’s cost plus interest). The Investment Manager will monitor the
value of such securities daily to determine that the value equals or exceeds the repurchase price. Under the 1940 Act, repurchase agreements are considered to be loans made by the Fund which are collateralized by the
securities subject to repurchase.
Loans of Portfolio Securities
The Fund’s investment
policies permit the Fund to enter into securities lending agreements. Under such agreements, the Fund may lend to borrowers (primarily banks and broker-dealers) portfolio securities with an aggregate market value of
up to one- third of the Fund’s total assets when it deems advisable. Any such loans must be secured by collateral (consisting of any combination of cash, U.S. government securities, irrevocable bank letters of
credit or other high quality debt securities) in an amount at least equal, on a daily marked-to-market basis, to the current market value of the securities loaned. Cash collateral will be invested by the lending agent
in short-term instruments, money market mutual funds or other collective investment funds, and income from these investments will be allocated among the Fund, the borrower and the lending agent. The Fund may terminate
a loan after such notice period as is provided for the particular loan. The Fund will receive from the borrower amounts equivalent to any cash payments of interest, dividends and other distributions with respect to
the loaned securities, although the tax treatment of such payments may differ from the treatment of distributions paid directly by the issuer to the Fund. The Fund also has the option to require non-cash distributions
on the loaned securities to be credited to its account. The terms of the Fund’s lending arrangement includes provisions to permit the Fund to vote the loaned securities.
Risk Factors
The Fund is a
non-diversified, closed-end investment company designed primarily as a long-term investment vehicle and not as a trading tool. The Fund invests primarily in Australian equity securities. An investment in the Fund's
shares may be speculative and involves a high degree of risk, including risks and considerations not typically associated with funds that invest only in U.S. securities. The Fund should not be considered a complete
investment program. Due to the uncertainty in all investments, there can be no assurance that the Fund will achieve its investment objectives. The value of an investment in the Fund's Common Shares could decline
substantially
28
abrdn Australia Equity Fund, Inc.
Additional Information Regarding the
Fund (Unaudited) (continued)
and cause you to lose some or all of your
investment. Before investing in the Fund's Common Shares you should consider carefully the following principal risks of investing in the Fund.
Management Risk. The Fund's ability to achieve its investment objective is directly related to the Advisers' investment strategies for the Fund. The value of your investment in the Fund's
Common Shares may vary with the effectiveness of the research and analysis conducted by the Advisers and their ability to identify and take advantage of attractive investment opportunities. If the investment
strategies of the Advisers do not produce the expected results, the value of your investment could be diminished or even lost entirely, and the Fund could underperform the market or other funds with similar investment
objectives. Additionally, there can be no assurance that all of the personnel of the Advisers will continue to be associated with the Advisers for any length of time. The loss of the services of one or more key
employees of the Advisers could have an adverse impact on the Fund's ability to realize its investment objective
Investment and Market
Risk. An investment in the Fund's shares is subject to investment risk, including the possible loss of the entire principal amount that you invest. Your investment in shares
represents an indirect investment in the securities owned by the Fund. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The value of the
securities in which the Fund invests will affect the value of the shares. Your shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of Fund
dividends and distributions.
Australian Securities
Risk. Because the Fund's investments are primarily in equity securities of Australian Companies, the Fund is particularly vulnerable to loss in the event of adverse political,
economic, financial and other developments that affect Australia, including fluctuations of Australian currency versus the U.S. dollar. The Australian economy is heavily dependent upon trade and any reduction in
trading with its key partners may cause an adverse impact on the Australian economy and the securities in which the Fund invests. The Fund is therefore exposed to the risks that could affect the economies of its
Asian, Australasian, European and American trading partners, such as fluctuations in commodities markets, exchange rates, high unemployment, trade regulations and deficits, among others. Also, Australia is located in
a part of the world that has historically been prone to natural disasters such as drought and is economically sensitive to environmental events. Any such event could result in a significant adverse impact on the
Australian economy.
Investments in foreign
securities that are traded on foreign markets, including Australian and New Zealand securities, are subject to risks of loss that are different from the risks of investing in U.S. securities.
These include the possibility of losses due
to currency fluctuations, or to adverse political, economic or diplomatic developments in Australia and New Zealand, including possible increases in taxes. Additionally, accounting, auditing, financial reporting
standards and other regulatory practices and requirements for securities in which the Fund may invest vary from those applicable to entities subject to regulations in the United States. The Australian securities
market for both listed and unlisted securities may be more volatile and less liquid than the major U.S. markets. In addition, the cost to the Fund of buying, selling and holding securities in the Australian market may
be higher than in the United States.
Any higher expenses of
non-U.S. investing may reduce the amount the Fund can earn on its investments and typically results in a higher operating expense ratio than for investment companies that invest only in the United States. Regulatory
oversight of the Australian securities market may differ from that of U.S. markets. There also may be difficulty in invoking legal protections across borders.
Currency Exchange Rate
Fluctuations. Currency exchange rates can fluctuate significantly over short periods and can be subject to unpredictable changes based on a variety of factors, including political
developments and currency controls by governments. The Fund will normally hold almost all its assets in Australian dollar denominated securities, although some assets may be denominated in other foreign currencies.
Accordingly, a change in the value of a currency in which a security is denominated against the U.S. dollar will generally result in a change in the U.S. dollar value of the Fund's assets. Such a change may thus
decrease the Fund's net asset value.
In addition, although most of
the Fund's income will be received or realized primarily in Australian dollars, the Fund will be required to compute and distribute its income in U.S. dollars. Therefore, for example, if the exchange rate for the
Australian dollar declines after the Fund's income has been accrued and translated in U.S. dollars, but before the income has been received or converted into U.S. dollars, the Fund could be required to liquidate
portfolio securities to make distributions. Similarly, if the exchange rate declines between the time the Fund incurs expenses in U.S. dollars and the time such expenses are paid, the amount of Australian dollars
required to be converted into U.S. dollars in order to pay those expenses will be greater than the Australian dollar equivalent of those expenses at the time they were incurred. Similar effects may result from the
Fund's investments that are denominated in other foreign currencies.
Currency exchange rate
fluctuations can decrease or eliminate income available for distribution or, conversely, increase income available for distribution. For example, in some situations, if certain currency exchange losses exceed net
investment income for a taxable year, the Fund would not be able to make ordinary income distributions, and all or a portion of distributions made before the
abrdn Australia Equity Fund, Inc.
29
Additional Information Regarding the
Fund (Unaudited) (continued)
losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders for U.S. federal income tax purposes, thus reducing shareholders' cost basis in their Fund shares, or as a capital gain distribution, rather than as
an ordinary income dividend.
Equity Risk. The value of equity securities, including common stock, preferred stock and convertible stock, will fluctuate in response to factors affecting the particular company, as
well as broader market and economic conditions. Moreover, in the event of the company's bankruptcy, claims of certain creditors, including bondholders, will have priority over claims of common stock holders and are
likely to have varying types of priority over holders of preferred and convertible stock.
Leverage Risks. The Fund's leveraged capital structure creates special risks not associated with unleveraged funds having similar investment objectives and policies. The loan facility may
constitute a substantial lien and burden by reason of their prior claim against the income of the Fund and against the net assets of the Fund in liquidation. The Fund is limited in its ability to declare dividends or
other distributions in the event of default under the loan facility. In the event of default under the loan facility, the lender has the right to cause a liquidation of the collateral (i.e., sell portfolio securities
and other assets of the Fund) and, if any such default is not cured, the lender may be able to control the liquidation as well. The loan facility has a term of 364 days and is not a perpetual form of leverage; there
can be no assurance that the loan facility will be available for renewal on acceptable terms, if at all.
The credit agreement
governing the loan facility includes usual and customary covenants for this type of transaction. These covenants impose on the Fund asset coverage requirements, Fund composition requirements and limits on certain
investments which are more stringent than those imposed on the Fund by the Investment Company Act of 1940, as amended. The covenants or guidelines could impede the Fund's Advisers from fully managing the Fund's
portfolio in accordance with the Fund's investment objectives and policies. Furthermore, non-compliance with such covenants or the occurrence of other events could lead to the cancellation of the loan facility.
Foreign Custody Risk. The Fund's custodian generally holds the Fund's non-U.S. securities and cash in non-U.S. bank sub- custodians and securities depositories – generally in Australia.
Regulatory oversight of non-U.S. banks and securities depositories may differ from that in the U.S. Additionally, laws applicable to non-U.S. banks and securities depositories may limit the Fund's ability to recover
its assets in the event the non-U.S. bank, securities depository or issuer of a security held by the Fund goes bankrupt.
Concentration Risk. The Fund's investment policies permit it to invest up to 35% of its total assets in the securities of a single industry
group, provided that, at the time of
investment, that group represents 20% or more of the S&P/ASX 200. At any time the Fund has such a concentration of investments in a single industry group, it will be particularly vulnerable to adverse economic,
political and other factors that affect that industry group. An industry sector can include more than one industry group.
Concentration in the
financial sector may make the Fund vulnerable to risks of regulation, consolidation, financial innovation and technological progress. Significant exposure to the materials sector may make the Fund vulnerable to risks
that the issuers in such sector will underperform the market as a whole due to legislative or regulatory changes and/or increased competition affecting that sector. Companies in the materials sector may be adversely
impacted by the volatility of commodity prices, changes in exchange rates, social and political unrest, depletion of resources, decreases in demand, overproduction, litigation and changes in government regulations,
among other factors. Significant exposure to the mining sector may make the Fund susceptible to fluctuations in extraction and production costs. In addition, mining companies may have security concerns and
environmental damage and may also be at risk for increased government regulation and intervention.
LIBOR Risk. Under the Fund’s credit facility, the Fund is charged interest on amounts borrowed at a variable rate, which may be based on the London Interbank Offered Rate
(“LIBOR”) plus a spread. Additionally, the Fund may invest in certain debt securities, derivatives or other financial instruments that utilize LIBOR as a “benchmark” or “reference
rate” for various interest rate calculations. In July 2017, the United Kingdom Financial Conduct Authority (“FCA”), which regulates the LIBOR administrator, announced that the FCA will no longer
persuade or compel banks to submit rates for the calculation of LIBOR after 2021. However, for US dollar LIBOR, it now appears that the relevant date may be deferred to June 30, 2023 for the most common tenors
(overnight and one, three, six and 12 months). As to those tenors, the LIBOR administrator has published a consultation regarding its intention to cease publication of US dollar LIBOR as of June 30, 2023 (instead of
December 31, 2021, as previously expected), apparently based on continued rate submissions from banks. The FCA and other regulators have stated that they welcome the LIBOR Administrator’s action. An extension to
2023 would mean that many legacy US dollar LIBOR contracts would terminate before related LIBOR rates cease to be published. However, the same regulators emphasized that, despite any continued publication of US dollar
LIBOR through June 30, 2023, no new contracts using US dollar LIBOR should be entered into after December 31, 2021. There is no assurance that LIBOR, of any particular currency and tenor, will continue to be published
until any particular date.
30
abrdn Australia Equity Fund, Inc.
Additional Information Regarding the
Fund (Unaudited) (continued)
Although the financial regulators and
industry working groups have suggested alternative reference rates, such as the European Interbank Offer Rate (“EURIBOR”), Sterling Overnight Interbank Average Rate (“SONIA”) and Secured
Overnight Financing Rate (“SOFR”), global consensus on alternative rates is incomplete, and the process for amending existing contracts or instruments to transition from LIBOR remains unclear.
It is not possible to predict
the effect that these announcements or any such discontinuance will have on LIBOR or on floating rate securities linked to LIBOR (“LIBOR-linked securities”). Many, but not all, LIBOR-linked securities have
provisions that will change their interest rate basis upon the occurrence of certain benchmark transitions events. If the calculation agent (or other party in certain cases) for such a security determines that a
benchmark transition event and its related benchmark replacement date have occurred with respect to LIBOR for particular LIBOR-linked securities, then a benchmark replacement may be selected by the calculation agent
(or other party) in accordance with the benchmark transition provisions of the relevant securities.
The selection of a benchmark
replacement, and any decisions, determinations or elections made by the calculation agent (or other party) in connection with implementing a benchmark replacement with respect to LIBOR-linked securities in accordance
with the relevant benchmark transition provisions could result in adverse consequences to the interest rate, which could adversely affect the return on, value of and market for LIBOR-linked securities held by the
Fund. Further, there is no assurance that the characteristics of any benchmark replacement will be similar to LIBOR, or that any benchmark replacement will produce the economic equivalent of LIBOR. In addition, these
announcements and any additional regulatory or market changes, or any substitute reference rate and any pricing adjustments imposed by a regulator or by counterparties or otherwise may adversely affect the
Fund’s performance and/or NAV. Until then, the Fund may continue to invest in instruments that reference such rates or otherwise use such reference rates due to favorable liquidity or pricing.
Market Events Risk. The market values of securities or other assets will fluctuate, sometimes sharply and unpredictably, due to changes in general market conditions, overall economic trends
or events, governmental actions or intervention, actions taken by the U.S. Federal Reserve or foreign central banks, market disruptions caused by trade disputes or other factors, political developments, investor
sentiment and other factors that may or may not be related to the issuer of the security or other asset. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or
political events, trading and tariff arrangements, war, terrorism, natural disasters and other circumstances in one country or region could have profound impacts
on global economies or markets. As a result,
whether or not the Fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the Fund's investments may be negatively affected.
In addition, any spread of an infectious illness, public health threat or similar issue could reduce consumer demand or economic output, result in market closures, travel restrictions or quarantines, and
generally have a significant impact on the world economy, which in turn could adversely affect the Fund's investments.
COVID-19 Risk. Economies and financial markets around the world, including the United States, have experienced increased volatility, losses, uncertainty and disruption to consumer demand, economic output
and supply chains as a result of conditions associated with COVID-19. To the extent the impacts of COVID-19 continue, the Fund may experience negative impacts to its business that could exacerbate other risks of the
Fund and may adversely affect the value and liquidity of the Fund’s investments.
The ultimate adverse impact
of COVID-19 on economic and market conditions and on the Fund is difficult to accurately predict. The full extent of the impact and effects of COVID-19 will depend on future developments, including, among other
factors, the duration and spread of the outbreak, along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market
interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economic slowdown.
Brexit Risk. The United Kingdom left the European Union on January 31, 2020 ("Brexit"). The European Union and the United Kingdom reached an agreement in principle on the terms of certain
agreements and declarations governing the ongoing relationship between the European Union and the United Kingdom, including the European Union-United Kingdom Trade and Cooperation Agreement (the "TCA"), which came
into full force on May 1, 2021. Due to political uncertainty, it is not possible to anticipate the form or nature of the future trading relationship between the United Kingdom and the EU. The Fund may face risks
associated with the potential uncertainty and consequences that may follow Brexit, including with respect to potential volatility in exchange rates and interest rates. Whether or not the Fund invests in securities of
issuers located in Europe (whether the EU, Eurozone or UK) or with significant exposure to European, EU, Eurozone or UK issuers or countries, the unavoidable uncertainties and events related to Brexit could negatively
affect the value and liquidity of the Fund's investments, increase taxes and costs of business and cause volatility in currency exchange rates and interest rates. Brexit could adversely affect the performance of
contracts and European, UK or worldwide political, regulatory, economic or market conditions and could contribute to instability in
abrdn Australia Equity Fund, Inc.
31
Additional Information Regarding the
Fund (Unaudited) (continued)
political institutions, regulatory agencies
and financial markets. Brexit could also lead to legal uncertainty and politically divergent national laws and regulations. Any of these effects of Brexit, and others that cannot be anticipated, could adversely affect
the Fund's business, results of operations and financial condition. In addition, the risk that abrdn plc, the parent of the companies that provide investment advisory, sub-advisory and administration services to the
Fund and which is headquartered in the UK, fails to adequately respond to Brexit could have significant customer, reputation and capital impacts for abrdn plc and its subsidiaries, including those providing services
to the Fund; however, abrdn plc has detailed contingency planning in place to seek to manage the consequences of Brexit on the Fund and to manage any disruption to the Fund and to the services its subsidiaries
provide. Given the fluidity and complexity of the situation, however, it cannot assure that the Fund will not be adversely impacted despite preparations.
Cybersecurity Risk. The Fund is subject to direct cybersecurity risk. Cybersecurity incidents may allow an unauthorized party to gain access to Fund assets, customer data (including private
shareholder information), or proprietary information, or cause the Fund, the Advisers and/or the Fund's service providers (including, but not limited to, Fund accountants, custodians, sub-custodians and transfer
agents) to suffer data breaches, data corruption or lose operational functionality.
Net Asset Value Discount. Shares of closed-end investment companies frequently trade at a discount from net asset value. This characteristic is a risk separate and distinct from the risk that net
asset value will decrease. The Fund's shares have frequently traded in the market below net asset value since the commencement of the Fund's operations. The Fund cannot predict whether its shares in the future will
trade at, below or above net asset value. This risk that shares of a closed-end fund might trade at a discount is more significant for investors who wish to sell their shares in a relatively short period of time. For
those investors, realization of gain or loss on their investment is likely to be more dependent upon the existence of a premium or discount than upon portfolio performance.
Distribution Rate. The Fund has a managed distribution policy under which quarterly distributions, at a rate determined annually by the Board of Directors, are paid from current income,
supplemented by realized capital gains and, to the extent necessary, paid-in capital. There can be no assurance that the distribution rate set at any time, or the policy itself, will be maintained. To the extent total
distributions for a year exceed the Fund's net investment income, such excess will be deemed for U.S. federal income tax purposes to have been distributed from realized capital gains and/or will be treated as return
of capital, as applicable. In general terms, a return of capital would involve a situation in which the Fund distribution (or a portion thereof) represents a return of a portion of a shareholder's investment
in the Fund, rather than making a
distribution that is funded from the Fund's earned income or other profits. Although return of capital distributions may not be currently taxable, such distributions would decrease the basis of a shareholder's shares,
and therefore, may increase a shareholder's tax liability for capital gains upon a sale of shares, even if sold at a loss to the shareholder's original investments. The Fund's managed distribution policy may, in
certain situations, cause the Fund to make taxable distributions to shareholders in excess of the minimum amounts of such taxable distributions required to avoid liability for federal income and excise taxes. Such
excess taxable distributions may, in such situations, cause shareholders to be liable for taxes for which they would not otherwise be liable if the Fund only paid that amount required to avoid liability for federal
income and excise taxes. The Fund's income distributions and its capital and currency gains distributions are determined in accordance with income tax regulations that may differ from accounting principles generally
accepted in the United States. These differences are primarily due to differing treatments for foreign currencies.
If the Fund's investments do
not generate sufficient income, the Fund may be required to liquidate a portion of its portfolio to fund these distributions, and therefore a portion or all of such distributions may represent a reduction of the
shareholders' principal investment. Such liquidation might be at a time when independent investment judgment would not dictate such action, increasing the Fund's overall portfolio turnover (and related transaction
costs) and making it more difficult for the Fund to achieve its investment objective.
Non-Diversification Risk. The Fund is classified as a "non-diversified" management investment company under the 1940 Act. This means that the Fund is not subject to limits under the 1940 Act as to
the proportion of its assets that may be invested in the securities of a single issuer. As a non-diversified investment company, the Fund may therefore invest its assets in securities of a smaller number of issuers or
may invest a larger portion of its assets in a single issuer than a diversified fund, and, as a result, would be more susceptible than a diversified fund to any single corporate, political, geographic or regulatory
occurrence. Although the Fund must comply with certain diversification requirements in order to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), the Fund may
be more susceptible to any single economic, political or regulatory occurrence than would be the case if it had elected to diversify its holding sufficiently to be classified as a "diversified" management investment
company under the 1940 Act.
Conflicts of Interest Risk.
The Advisers' advisory fees are based on net assets plus the amount of any borrowings for investment purposes. Consequently, the Advisers will benefit from an increase in
the Fund's net assets resulting from an offering. Additionally, the portfolio
32
abrdn Australia Equity Fund, Inc.
Additional Information Regarding the
Fund (Unaudited) (continued)
managers' management of "other accounts" may
give rise to potential conflicts of interest in connection with their management of the Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the
same investment objective as the Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio manager could favor one account over another.
However, the Advisers believe that these risks are mitigated by the fact that: (i) accounts with like investment strategies managed by a particular portfolio manager are generally managed in a similar fashion, subject
to exceptions to account for particular investment restrictions or policies applicable only to certain accounts, differences in cash flows and account sizes, and similar factors; and (ii) portfolio manager personal
trading is monitored to avoid potential conflicts. In addition, the Advisers have adopted trade allocation procedures that require equitable allocation of trade orders for a particular security among participating
accounts.
In some cases, another
account managed by the same portfolio manager may compensate the Advisers based on the performance of the portfolio held by that account. The existence of such a performance-based fee may create additional conflicts
of interest for the portfolio manager in the allocation of management time, resources and investment opportunities.
Another potential conflict
could include instances in which securities considered as investments for the Fund also may be appropriate for other investment accounts managed by the Advisers or their affiliates. Whenever decisions are made to buy
or sell securities by the Fund and one or more of the other accounts simultaneously, the Advisers may aggregate the purchases and sales of the securities and will allocate the securities transactions in a manner that
it believes to be equitable under the circumstances. As a result of the allocations, there may be instances where the Fund will not participate in a transaction that is allocated among other accounts. While these
aggregation and allocation policies could have a detrimental effect on the price or amount of the securities available to the Fund from time to time, it is the opinion of the Advisers that the benefits from the
policies outweigh any disadvantage that may arise from exposure to simultaneous transactions. The Advisers have adopted policies that are designed to eliminate or minimize conflicts of interest, although there is no
guarantee that procedures adopted under such policies will detect each and every situation in which a conflict arises.
From time to time, the
Advisers may seed proprietary accounts for the purpose of evaluating a new investment strategy that eventually may be available to clients through one or more product structures. Such accounts also may serve the
purpose of establishing a performance record for the strategy. The management by the Advisers of accounts with proprietary interests and nonproprietary client accounts may create an incentive to favor the proprietary
accounts in the allocation
of investment opportunities, and the timing
and aggregation of investments. The Advisers' proprietary seed accounts may include long-short strategies, and certain client strategies may permit short sales. A conflict of interest arises if a security is sold
short at the same time as a long position, and continuous short selling in a security may adversely affect the stock price of the same security held long in client accounts. The Advisers have adopted various policies
to mitigate these conflicts.
Situations may occur when the
Fund could be disadvantaged because of the investment activities conducted by the Advisers and their affiliates for other accounts. Such situations may be based on, among other things, the following: (1) legal or
internal restrictions on the combined size of positions that may be taken for the Fund or the other accounts, thereby limiting the size of the Fund's position; (2) the difficulty of liquidating an investment for the
Fund or the other accounts where the market cannot absorb the sale of the combined position; or (3) regulatory restrictions on transaction with affiliates.
The Advisers and their
respective principals, officers, employees and affiliates may buy and sell securities or other investments for their own accounts and may have actual or potential conflicts of interest with respect to investments made
on the Fund's behalf. As a result of differing trading and investment strategies or constraints, positions may be taken by principals, officers, employees and affiliates of the Advisers that are the same as, different
from or made at a different time from positions taken for the Fund. Further, the Advisers may at some time in the future manage additional investment funds with the same investment objective as the Fund.
Share Repurchases. Any acquisition by the Fund of its shares, pursuant to its share repurchase program, will decrease the amount of total assets of the Fund, and therefore, may increase the
Fund's expense ratio. Furthermore, if the Fund borrows to finance share repurchases, interest on such borrowings would reduce the Fund's net investment income. If the Fund liquidates a portion of its investment
portfolio in connection with a share repurchase, such liquidation might be at a time when independent investment judgment would not dictate such action, increasing the Fund's overall portfolio turnover (and related
transaction costs) and making it more difficult for the Fund to achieve its investment objective.
Tax Risk. The Fund may invest in securities of which the federal income tax treatment may not be clear or may be subject to recharacterization by the Internal Revenue Service
("IRS"). It could be more difficult for the Fund to comply with the United States tax requirements applicable to regulated investment companies, or with other tax requirements applicable to foreign investors, if the
tax characterization of the Fund's investments or the tax treatment of the income from such investments were successfully challenged by the IRS.
abrdn Australia Equity Fund, Inc.
33
Additional Information Regarding the
Fund (Unaudited) (continued)
Tax Considerations. The Fund intends to qualify and to continue to qualify as a regulated investment company under the Code. If it so qualifies, it generally will be relieved of U.S. federal
income tax on its investment company taxable income and net capital gains, if any, which it distributes to shareholders in accordance with requirements under the Code. In order to continue to meet the requirements of
the Code applicable to regulated investment companies and to minimize its U.S. federal income tax liability, it is the Fund's policy to distribute substantially all of its net income and capital gains, if any, to
shareholders. To the extent that the Fund has earnings available for distribution, its distributions in the hands of shareholders may be treated as ordinary dividend income, although certain distributions may be
reported by the Fund as capital gain distributions, which would be treated as long-term capital gain, or qualified dividend income, which in the case of individuals may be eligible for long-term capital gain tax rates
if certain holding period rules apply. Dividends and capital gains distributions paid by the Fund are not expected to qualify for the corporate dividends- received deduction. Distributions in excess of the Fund's
current and accumulated earnings and profits will first reduce a shareholder's basis in his shares and, after the shareholder's basis is reduced to zero, will constitute capital gains to the shareholder who holds his
shares as capital assets. Subject to certain limitations imposed by the Code, foreign income taxes withheld from distributions or otherwise paid by the Fund may be creditable or deductible by U.S. shareholders for
U.S. federal income tax purposes, if the Fund is eligible to and makes an election to treat the shareholders as having paid those taxes for U.S. federal income tax purposes. No assurance can be given that the Fund
will be eligible to make this election each year, but it intends to do so if it is eligible. If the election is made, the foreign taxes paid by the Fund will be includable in the U.S. federal taxable income of
shareholders. Non-U.S. investors may not be able to credit or deduct the foreign taxes, but they may be deemed to have additional income from the Fund equal to their share of the foreign taxes paid by the Fund,
subject to U.S. withholding tax. Investors should discuss with their tax advisers the specific tax consequences of investing in the Fund.
Anti-Takeover Provisions. The Fund presently has provisions in its bylaws that may limit the ability of other entities or persons to acquire control of the Fund. The bylaws provide for a staggered
election of the Fund's Directors, who are divided into three classes, each having a term of three years and until their successors are duly elected and qualify, or, when filling a vacancy, for the unexpired portion of
such term and until their successors are duly elected and qualify. Thus, only Directors in a single class may be changed in any one year and it would require two years to change a majority of the Board of Directors.
This system of electing Directors may be regarded as "anti-takeover" because it makes it more difficult for Fund shareholders to change a majority of the Fund's Directors and, thus, has the effect of maintaining
continuity of management. Other bylaw
provisions that may be regarded as
"anti-takeover:" (a) provide specific requirements for shareholder-requested special meetings; (b) require that shareholders who wish to propose a nominee for Director or have shareholders vote on other proposals
satisfy certain advance written notice and information requirements; (c) establish Director qualifications; (d) establish supermajority Board vote requirements for certain actions, including mergers, dissolution,
election of officers, officer and Director compensation, and the amendment of the Director term and qualification requirements and the director quorum and voting requirements; (e) establish restrictive approval
requirements for an investment advisory agreement, a sub-advisory agreement or a management agreement between the Fund and an affiliate of a disinterested director then serving on the Board or who served on the Board
in the two years prior to approval of such agreement; and (f) subject to such conditions as provided in the bylaws, reserve to the Board the power to adopt, alter, or repeal the bylaws or any provision of the
bylaws.
Articles Supplementary
approved by the Board of Directors subject the Fund to certain provisions of the Maryland General Corporation Law with respect to unsolicited takeovers. These provisions: (a) require a two-thirds vote of the
shareholders to remove Directors; (b) provide that the number of Directors may be fixed only by the Board; (c) provide that certain vacancies on the Board of Directors may be filled only by the vote of the remaining
Directors and those vacancies shall be filled until the end of the term of the directorship in which the vacancy occurs; and (d) require that a shareholder-requested special meeting be called only on the request of
the holders of a majority of the outstanding shares.
The foregoing provisions may
be regarded as "anti-takeover" provisions and may have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices. The Board has considered these provisions
and determined that they are in the best of shareholders.
Securities Lending Risk. In connection with its loans of portfolio securities, the Fund may be exposed to the risk of delay in recovery of the loaned securities or possible loss of rights in the
collateral should the borrower become insolvent. The Fund also bears the risk of loss on the investment of cash collateral. There is also the risk that, in the event of default by the borrower, the collateral might
not be sufficient to cover any losses incurred by the Fund. There can be no assurance that the return to the Fund from a particular loan, or from its loans overall, will exceed the related costs and any related
losses.
Repurchase Agreements
Risk. Repurchase agreements may involve risks in the event of default or insolvency of the seller, including possible delays or restrictions with respect to the Fund's ability
to
34
abrdn Australia Equity Fund, Inc.
Additional Information Regarding the
Fund (Unaudited) (continued)
dispose of the underlying securities, and
the possibility that the collateral might not be sufficient to cover any losses incurred by the Fund.
Unlisted Securities Risk. The Fund may invest up to 10% of the value of its total assets (at the time of purchase) in unlisted equity securities. Because the market for unlisted securities is not
liquid, it may be difficult for the Fund to sell these securities timely and at a desirable price. If not listed, such securities could nonetheless be resold in privately negotiated transactions, although the price
may be lower and the time to dispose of the security may take considerably longer than for listed securities and the sale price may be lower than the price paid by the Fund. Unlisted securities are not subject to the
disclosure and other investor protection requirements of Australian law applicable to listed securities.
Risks of Issuance of Preferred
Shares. The Fund has authority to issue preferred shares. The Board has not yet exercised this authority and has no current intention of exercising this authority. The following
is a description of the risks involved if the Fund were to issue preferred shares.
•
Leverage. The issuance of preferred shares would create leverage that would affect the amount of income available for distribution on the Fund's shares of common stock as well as the
net asset value of the shares of common stock. It is expected that the initial dividend rate or rates that would be paid on any class or series of preferred shares would be determined at the time of issuance and would
depend on various factors, including market conditions prevailing at the time. If the investment performance of the capital represented by the preferred shares fails to cover the dividends payable thereon, the total
return on the Fund's common stock would be less or, in the case of negative returns, would result in higher negative returns to a greater extent than would otherwise be the case. Negative performance of the invested
capital would also reduce the Fund's net asset value. The requirement to pay dividends on the preferred stock in full before any dividends may be paid on the common stock means that dividends on the common stock from
earnings may be reduced or eliminated.
•
Voting Rights. Voting rights in the Fund are non-cumulative. The voting rights of the holders of the current outstanding common stock would be limited by the issuance of any preferred
shares because the holders of any preferred shares would have the following class voting rights. Pursuant to current applicable law, holders of preferred shares, voting as a separate class, would be entitled to elect
two of the Fund's Directors (the remaining Directors would be elected by holders of the Fund's common stock.) Additionally, if dividends on preferred shares were unpaid in an amount equal to two years' dividends,
holders of such preferred shares, voting as a separate class and subject to any prior rights of any other outstanding class of senior securities, would be entitled to elect a majority of the Fund's Directors and to
continue to be so represented until all dividends in arrears have
been paid or otherwise provided for. Approval by the holders of a majority of the outstanding preferred shares, voting as a separate class, would also be required for a plan of reorganization that would
adversely affect their shares, for changes in fundamental investment restrictions, for a change to an open-end classification, or for a proposal for the Fund to cease to be an investment company.
•
Asset Coverage. Under the 1940 Act, the Fund is not permitted to issue preferred shares unless immediately after such issuance the value of the Fund's total net assets (as defined below)
is at least 200% of the liquidation value of the outstanding preferred shares and the newly issued preferred shares plus the aggregate amount of any senior securities of the Fund representing indebtedness (i.e., such
liquidation value plus the aggregate amount of senior securities representing indebtedness may not exceed 50% of the Fund's total net assets). In addition, the Fund is not permitted to declare any cash dividend or
other distribution on its common stock unless, at the time of such declaration, the value of the Fund's total net assets (determined after deducting the amount of such dividend or other distribution) satisfies the
above-referenced 200% coverage requirement.
•
Other Considerations. The class or other voting rights of the preferred shares and the representation of the preferred shares on the Board of Directors could make it more difficult for the Fund
to engage in certain types of transactions that might be proposed by the Board of Directors and/or holders of common stock, such as a change in a fundamental investment policy, a merger, sale of assets, exchange of
securities, liquidation of the Fund or conversion to an open-end fund. Holders of preferred shares might have interests that differ from holders of common stock, and there can be no assurance that holders of preferred
shares would vote to approve transactions approved by holders of the common stock. The flexibility to issue preferred shares as well as common stock could enhance the Board of Directors' ability to negotiate on behalf
of the shareholders in a takeover, but might also render more difficult, or discourage, a merger, tender offer or proxy contest, the assumption of control by the holder of a large block of the Fund's securities or the
removal of incumbent management. The issuance of preferred shares would involve costs (underwriting commissions, offering expenses, rating agency expenses, legal fees, etc.) that would be borne by the holders of
common stock.
Risks of Borrowing and Leverage
to Holders of Common Stock. The Fund's fundamental investment policies permit it to borrow to the extent permitted, or not prohibited, by the 1940 Act and related rules and regulatory
interpretations. Borrowing involves interest and other costs to the Fund. If the return to the Fund from investments made with proceeds of a borrowing does not exceed the interest and costs of the borrowing, such
costs could reduce the return to the holders of common stock. Moreover, leveraging generally exaggerates the positive and negative effects of market, interest rate and currency fluctuations on the net asset value and
market value of the Fund's common stock, as well as on distributions to common stockholders.
abrdn Australia Equity Fund, Inc.
35
Additional Information Regarding the
Fund (Unaudited) (continued)
By increasing the Fund's invested assets,
and thus its market exposure, leveraging would increase the volatility of both the net asset value and, consequently, the market value of the Fund's common stock. Any decline in the value of the Fund's investments
would be borne entirely by the holders of its common stock. Thus, although leveraging may enhance benefits to holders of common stock in a rising market environment, a market downturn can be particularly
disadvantageous to holders of common stock of a leveraged fund. Because the Fund invests primarily in securities that are not U.S. dollar-denominated and because it pays dividends and other distributions in U.S.
dollars, any leveraging or the issuance of debt securities that also pay interest in U.S. dollars would exaggerate the effects of currency fluctuations on the prices of, and distributions on, the Fund's common stock.
Moreover, a decline in the value of the Fund's assets, and thus its asset coverage for any senior securities, could prevent the Fund from paying dividends or distributions on its common stock, which could, in turn,
jeopardize the Fund's qualification as a regulated investment company under the Code and/or subject the Fund to income and excise taxes and/or force the Fund to sell portfolio securities at a time or price that is not
favorable.
The 1940 Act generally
prohibits the Fund from engaging in most forms of leverage representing indebtedness other than preferred shares unless immediately after such incurrence the Fund's total assets less all liabilities and indebtedness
not represented by senior securities (for these purposes, "total net assets") is at least 300% of the aggregate senior securities representing indebtedness (i.e., the use of leverage through senior securities
representing indebtedness may not exceed 33 1/3% of the Fund's total net assets (including the proceeds from leverage)). Additionally, under the 1940 Act, the Fund generally may not declare any dividend or other
distribution upon any class of its capital shares, or purchase any such capital shares, unless at the time of such declaration or purchase, this asset coverage test is satisfied.
Holders of senior securities
representing indebtedness would have the right to elect a majority of the Fund's directors if the Fund failed to have asset coverage for its debt of at least 100% on the last business day of each of twelve consecutive
calendar months. This right would continue until such asset coverage was 110% or more on the last business day of each of three consecutive calendar months. An event of default would be deemed to have occurred if the
Fund failed to have asset coverage for its debt of at least 100% for 24 consecutive months.
Fundamental Investment
Restrictions
The following restrictions
are fundamental policies, which cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities. In the event that the Fund issues preferred shares, changes in
investment restrictions would also
require approval by a majority of the
outstanding preferred shares, voting as a separate class. If a percentage restriction on investment or use of assets set forth below is adhered to at the time a transaction is effected, later changes in a percentage
resulting from changing values will not be considered a violation.
The Fund may not:
1.
Purchase securities on margin, except such short-term credits as may be necessary for the clearance of securities.
2.
Make short sales of securities or maintain a short position.
3.
(a) Issue senior securities except (i) insofar as the Fund may be deemed to have issued a senior security in connection with any repurchase or securities lending agreement or any borrowing permitted by
its investment restrictions, and (ii) that the Fund may issue one or more series of a class of preferred stock, if permitted by its Articles; or (b) borrow money, except as permitted under, or to the extent not
prohibited by, the 1940 Act, as amended, and rules thereunder, as interpreted or modified by regulatory authority having jurisdiction, from time to time.
4.
Buy or sell commodities, commodity contracts, real estate or interests in real estate, except that the Fund may buy and sell shares of real estate unit investment trusts which are listed on the ASX and
which hold interests in real estate.
5.
Make loans (except that the Fund may purchase debt securities whether or not publicly traded or privately placed or may enter into repurchase and securities lending agreements consistent with the Fund's
investment policies).
6.
Make investments for the purpose of exercising control or management.
7.
Act as an underwriter (except to the extent the Fund may be deemed to be an underwriter in connection with the sale of securities in the Fund's investment portfolio).
8.
Invest more than 25% of its assets in a particular industry or group of industries, provided, however, that the Fund may invest between 25% and 35% of its total assets in the securities of any one
industry group if, at the time of investment, that industry group represents 20% or more of the S&P/ ASX 200 Accumulation Index.
Effects of Leverage
The following table is
furnished in response to requirements of the SEC. It is designed to, among other things, illustrate the effects of leverage through the use of senior securities, as that term is defined under Section 18 of the 1940
Act, on Common Share total return, assuming investment portfolio total returns (consisting of income
36
abrdn Australia Equity Fund, Inc.
Additional Information Regarding the
Fund (Unaudited) (concluded)
and changes in the value of investments held
in a Fund's portfolio) of -10%, -5%, 0%, 5% and 10%. The table below reflects the Fund's continued use of the revolving credit facility and reverse repurchase agreements, as applicable, as of October 31, 2022 as a
percentage of total managed assets (including assets attributable to such leverage) and the annual return that the Fund's portfolio must experience (net of expenses) in order to cover such costs. The information below
does not reflect the Fund's use of certain other forms of economic leverage achieved through the use of other instruments or transactions not considered to be senior securities under the 1940 Act, such as covered
credit default swaps or other derivative instruments.
The assumed investment
portfolio returns in the table below are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Fund. Your actual returns may be
greater or less than those appearing below. In addition, actual borrowing expenses associated with reverse repurchase agreements (or dollar rolls or borrowings, if any) used by the Fund may vary frequently and may be
significantly higher or lower than the rate used for the example below.
Assumed
annual
returns on
the Fund's
portfolio
(net of
expenses)
(10)%
(5)%
0%
5%
10%
Corresponding
return of
shareholder
(11.1%)
(5.7%)
(0.3%)
5.1%
10.5%
Based on estimated
indebtedness of $9,591,750 (representing approximately 7.6% of the Fund's Managed Assets as of October 31,
2022), and an average annual interest rate
of 3.76% (effective weighted average interest rate as of October 31, 2022), the Fund's investment portfolio at fair value would have to produce an annual return of approximately 0.29% to cover annual interest payments
on the estimated debt.
Share total return is
composed of two elements – the distributions paid by the Fund to holders of shares (the amount of which is largely determined by the net investment income of the Fund after paying dividend payments on any
preferred shares issued by the Fund and expenses on any forms of leverage outstanding) and gains or losses on the value of the securities and other instruments the Fund owns. As required by SEC rules, the table
assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0%, the Fund must assume that the income it receives on its investments is
entirely offset by losses in the value of those investments. This table reflects hypothetical performance of the Fund's portfolio and not the actual performance of the Fund's shares, the value of which is determined
by market forces and other factors.
Should the Fund elect to add
additional leverage to its portfolio, any benefits of such additional leverage cannot be fully achieved until the proceeds resulting from the use of such leverage have been received by the Fund and invested in
accordance with the Fund's investment objective and policies. As noted above, the Fund's willingness to use additional leverage, and the extent to which leverage is used at any time, will depend on many factors,
including, among other things, the Adviser's assessment of the yield curve environment, interest rate trends, market conditions and other factors.
abrdn Australia Equity Fund, Inc.
37
Dividend Reinvestment and Optional Cash Purchase
Plan (Unaudited)
The Fund intends to distribute to
stockholders substantially all of its net investment income and to distribute any net realized capital gains at least annually. Net investment income for this purpose is income other than net realized long-term and
short-term capital gains net of expenses. Pursuant to the Dividend Reinvestment and Optional Cash Purchase Plan (the “Plan”), stockholders whose shares of common stock are registered in their own names
will be deemed to have elected to have all distributions automatically reinvested by Computershare Trust Company N.A. (the “Plan Agent”) in the Fund shares pursuant to the Plan, unless such stockholders
elect to receive distributions in cash. Stockholders who elect to receive distributions in cash will receive such distributions paid by check in U.S. Dollars mailed directly to the stockholder by the Plan Agent, as
dividend paying agent. In the case of stockholders such as banks, brokers or nominees that hold shares for others who are beneficial owners, the Plan Agent will administer the Plan on the basis of the number of shares
certified from time to time by the stockholders as representing the total amount registered in such stockholders’ names and held for the account of beneficial owners that have not elected to receive
distributions in cash. Investors that own shares registered in the name of a bank, broker or other nominee should consult with such nominee as to participation in the Plan through such nominee and may be required to
have their shares registered in their own names in order to participate in the Plan. Please note that the Fund does not issue certificates so all shares will be registered in book entry form. The Plan Agent serves as
agent for the stockholders in administering the Plan. If the Directors of the Fund declare an income dividend or a capital gains distribution payable either in the Fund’s common stock or in cash, nonparticipants
in the Plan will receive cash and participants in the Plan will receive common stock, to be issued by the Fund or purchased by the Plan Agent in the open market, as provided below. If the market price per share (plus
expected per share fees) on the valuation date equals or exceeds NAV per share on that date, the Fund will issue new shares to participants at NAV; provided, however, that if the NAV is less than 95% of the market
price on the valuation date, then such shares will be issued at 95% of the market price. The valuation date will be the payable date for such distribution or dividend or, if that date is not a trading day on the New
York Stock Exchange, the immediately preceding trading date. If NAV exceeds the market price of Fund shares at such time, or if the Fund should declare an income dividend or capital gains distribution payable only in
cash, the Plan Agent will, as agent for the participants, buy Fund shares in the open market, on the New York Stock Exchange or elsewhere, for the participants’ accounts on, or shortly after, the payment date.
If, before the Plan Agent has completed its purchases, the market price exceeds the NAV of a Fund share, the average per share purchase price paid by the Plan Agent may exceed the NAV of the Fund’s shares,
resulting in the acquisition of fewer shares than if the distribution had been paid in shares issued by the Fund on the
dividend payment date. Because of the
foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend amount in open-market purchases during the purchase period or if the market
discount shifts to a market premium during the purchase period, the Plan Agent will cease making open-market purchases and will receive the uninvested portion of the dividend amount in newly issued shares at the close
of business on the last purchase date.
Participants have the option
of making additional cash payments of a minimum of $50 per investment (by check, one-time online bank debit or recurring automatic monthly ACH debit) to the Plan Agent for investment in the Fund’s common stock,
with an annual maximum contribution of $250,000. The Plan Agent will wait up to three business days after receipt of a check or electronic funds transfer to ensure it receives good funds. Following confirmation of
receipt of good funds, the Plan Agent will use all such funds received from participants to purchase Fund shares in the open market on the 25th day of each month or the next trading day if the 25th is not a trading
day.
If the participant sets up
recurring automatic monthly ACH debits, funds will be withdrawn from his or her U.S. bank account on the 20th of each month or the next business day if the 20th is not a banking business day and invested on the next
investment date. The Plan Agent maintains all stockholder accounts in the Plan and furnishes written confirmations of all transactions in an account, including information needed by stockholders for personal and tax
records. Shares in the account of each Plan participant will be held by the Plan Agent in the name of the participant, and each stockholder’s proxy will include those shares purchased pursuant to the Plan. There
will be no brokerage charges with respect to common shares issued directly by the Fund. However, each participant will pay a per share fee of $0.02 incurred with respect to the Plan Agent’s open market purchases
in connection with the reinvestment of dividends, capital gains distributions and voluntary cash payments made by the participant. Per share fees include any applicable brokerage commissions the Plan Agent is required
to pay.
Participants also have the
option of selling their shares through the Plan. The Plan supports two types of sales orders. Batch order sales are submitted on each market day and will be grouped with other sale requests to be sold. The price will
be the average sale price obtained by Computershare’s broker, net of fees, for each batch order and will be sold generally within 2 business days of the request during regular open market hours. Please note that
all written sales requests are always processed by Batch Order. ($10 and $0.12 per share). Market Order sales will sell at the next available trade. The shares are sold real time when they hit the market, however an
available trade must be presented to complete this transaction. Market Order sales may only
38
abrdn Australia Equity Fund, Inc.
Dividend Reinvestment and Optional Cash Purchase
Plan (Unaudited) (concluded)
The receipt of dividends and
distributions under the Plan will not relieve participants of any income tax that may be payable on such dividends or distributions. The Fund or the Plan Agent may terminate the Plan as applied to any voluntary cash
payments made and any dividend or distribution paid subsequent to notice of the termination sent to members of the Plan at least 30 days prior to the record date for such dividend or distribution. The Plan also may be
amended by
the Fund or the Plan Agent, but (except when
necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority) only by mailing a written notice at least 30 days prior to
the effective date to the participants in the Plan. All correspondence concerning the Plan should be directed to the Plan Agent by phone at 1-800-647-0584, using Investor Center through www.computershare.com/buyaberdeen or in writing to Computershare Trust Company N.A., P.O. Box 43006, Providence, RI02940-3078.
The names, years of birth and
business addresses of the Directors and officers of the Fund as of October 31, 2022, their principal occupations during the past five years, the number of portfolios each Director oversees and other directorships they
hold are provided in the tables below. Directors that are deemed “interested persons” (as that term is defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended) of the Fund or the
Fund's Advisers are included in the table below under the heading “Interested Directors.” Directors who are not interested persons, as described above, are referred to in the table below under the
heading “Independent Directors.” abrdn Inc., its parent company abrdn plc, and its advisory affiliates are collectively referred to as “abrdn” in the tables below.
Name, Address and
Year of Birth
Position(s) Held
with the Fund
Term of Office
and Length of
Time Served
Principal Occupation(s)
During Past Five Years
Number of
Funds in
Fund Complex*
Overseen by
Director
Other
Directorships
Held by
Director**
Interested Directors
Stephen Bird†
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1967
Class III Director
Term expires 2024; Director since 2021
Mr. Bird joined the Board of abrdn plc in July 2020 as Chief Executive-Designate, and was formally appointed Chief Executive Officer in September 2020. Previously,
Mr. Bird served as chief executive officer of global consumer banking at Citigroup from 2015, retiring from the role in November 2019. His responsibilities encompassed all consumer and commercial banking businesses in
19 countries, including retail banking and wealth management, credit cards, mortgages, and operations and technology supporting these businesses. Prior to this, Mr. Bird was chief executive for all of
Citigroup’s Asia Pacific business lines across 17 markets in the region, including India and China. Mr. Bird joined Citigroup in 1998, and during his 21 years with the company he held a number of leadership
roles in banking, operations and technology across its Asian and Latin American businesses. Before this, he held management positions in the UK at GE Capital – where he was director of UK operations from 1996 to
1998 – and at British Steel.
28
None.
Independent Directors
Radhika Ajmera
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1964
Class II Director
Term expires 2023; Director since 2021
Ms. Ajmera was appointed Chair of abrdn Japan Equity Fund Inc in 2017, having served as a director since 2014. She has been an independent
nonexecutive director of abrdn Asia-Pacific Income Fund VCC since 2015. She is also an independent non-executive director of abrdn Funds since 2020 and abrdn Global Income Fund Inc, abrdn Asia-Pacific Income Fund Inc
and abrdn Australia Equity Fund Inc since 2021. She has over 20 years’ experience in fund management, predominantly in emerging markets. She has also held a number of UK closed end fund non-executive
directorships. Ms. Ajmera is a graduate of the London School of Economics.
Number of
Funds in
Fund Complex*
Overseen by
Director
Other
Directorships
Held by
Director**
P. Gerald Malone
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1950
Chairman of the Board, Class II Director
Term expires 2023; Director since 2008
Mr. Malone is, by profession, a lawyer of over 40 years. Currently, he is a non-executive director of a number of U.S. companies, including Medality Medical
(medical technology company) since 2018. He is also Chairman of many of the open and closed end funds in the Fund Complex. He previously served as a non-executive director of U.S. healthcare company Bionik
Laboratories Corp. (2018 - July 2022), as Independent Chairman of UK companies Crescent OTC Ltd (pharmaceutical services) until February 2018; and fluidOil Ltd. (oil services) until June 2018; U.S. company Rejuvenan
llc (wellbeing services) until September 2017 and as chairman of UK company Ultrasis plc (healthcare software services company) until October 2014. Mr. Malone was previously a Member of Parliament in the U.K. from
1983 to 1997 and served as Minister of State for Health in the U.K. government from 1994 to 1997.
28
None.
William J. Potter
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1948
Class III Director
Term expires 2024; Director since 1985
Mr. Potter has been the Chairman of Arsenal Square Holdings (consulting and advisory) since 2018, a Director of Alexandria Bancorp (international banking and
trustee services) since 1989, a Director of the National Foreign Trade Council (international trade) 1983-2017, director of Howell Biopharma Ltd (healthcare) since 2018, director and chairman of Arrow Robotics Ltd
(technology) since 2018, and advisory board member of Nuvve Holding Corporation (technology) since 2020. He also serves on the boards or advisory boards of a number of private companies and charities including the
Queen Elizabeth September 11th Garden and the National Foundation for Cancer Research.
3
None.
Moritz Sell
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1967
Class I Director
Term expires 2025; Director since 2004
Mr. Sell currently serves as a Principal at Edison Holdings GmbH (commercial real estate and venture capital) (since October 2015). In addition,
Mr. Sell served as Senior Advisor to Markston International LLC, an Independent Investment manager (from 2014 through 2019).
3
Swiss Helvetia Fund (since June 2017) and High Income Securities Fund (since June 2018).
*
As of October 31, 2022, the Fund Complex consists of: abrdn Income Credit Strategies Fund, abrdn Asia-Pacific Income Fund, Inc., abrdn Global Income Fund, Inc., abrdn Australia Equity Fund, Inc., abrdn
Emerging Markets Equity Income Fund, Inc., abrdn Japan Equity Fund, Inc., The India Fund, Inc., abrdn Global Dynamic Dividend Fund, abrdn Total Dynamic Dividend Fund, abrdn Global Premier Properties Fund, abrdn Global
Infrastructure Income Fund, abrdn Funds (which consists of 19 portfolios) and abrdn ETFs (which consists of 3 portfolios). For the purposes of listing the number of funds in the Fund Complex overseen by each Board
member, each portfolio of abrdn Funds and abrdn ETFs is counted individually.
**
Current directorships (excluding Fund Complex) as of October 31, 2022 held in (1) any other investment companies registered under the 1940 Act, (2) any company with a class of securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “1934 Act”) or (3) any company subject to the requirements of Section 15(d) of the Exchange Act.
†
Mr. Bird is considered to be an “interested person” of the Fund as defined in the 1940 Act because of his affiliation with the Investment Manager.
Joseph Andolina**
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1978
Chief Compliance Officer; Vice President – Compliance
Since 2017
Currently, Chief Risk Officer – Americas for abrdn Inc. and serves as the Chief Compliance Officer for abrdn Inc. Prior to joining the Risk and Compliance
Department, he was a member of abrdn Inc.'s Legal Department, where he served as US Counsel since 2012.
Chris Demetriou**
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1983
Vice President
Since 2020
Currently, Chief Executive Officer – UK, EMEA and Americas. Mr. Demetriou joined abrdn Inc. in 2013, as a result of the acquisition of SVG, a FTSE 250 private
equity investor based in London.
Sharon Ferrari**
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1977
Vice President
Since 2009
Currently, Senior Product Manager for abrdn Inc. Prior to that she was a Senior Fund Administration Manager for abrdn Inc. Ms. Ferrari joined the company in
June 2008.
Alan Goodson**
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1974
Vice President
Since 2009
Currently, Executive Director, Product & Client Solutions – Americas for abrdn Inc., overseeing Product Management & Governance , Product Development
and Client Solutions for registered and unregistered investment companies in the U.S., Brazil and Canada. Mr. Goodson is Director and Vice President of abrdn Inc. and joined abrdn Inc. in 2000.
Heather Hasson**
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1982
Vice President
Since 2021
Currently, Senior Product Solutions and Implementation Manager for abrdn Inc. Ms. Hasson joined the company in November 2006.
Robert Hepp**
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1986
Vice President
Since 2021
Currently, Senior Product Governance Manager – US for abrdn Inc. Mr. Hepp joined abrdn Inc. as a Senior Paralegal in 2016.
Megan Kennedy**
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1974
Vice President and Secretary
Since 2008
Currently, Director, Senior Product Governance for abrdn Inc. Ms. Kennedy joined abrdn Inc. in 2005.
Andrew Kim**
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1983
Vice President
Since 2021
Currently, Senior Product Governance Manager – US for abrdn Inc. Mr. Kim joined abrdn Inc. as a Product Manager in 2013.
Brian Kordeck**
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1978
Vice President
Since 2021
Currently, Senior Product Manager – US for abrdn Inc. Mr. Kordeck joined abrdn Inc. as a Senior Fund Administrator in 2013.
Currently, Vice President and Senior Director, Product Management for abrdn Inc. Ms. Melia joined abrdn Inc. in September 2009.
Christian Pittard**
c/o abrdn Investments Limited
280 Bishopsgate
London, EC2M 4AG
Year of Birth: 1973
President
Since 2009
Currently, Group Head of Product Opportunities at abrdn and a Director of Aberdeen Asset Management PLC since 2010. Mr. Pittard joined abrdn from KPMG in 1999.
Lucia Sitar**
c\o abrdn Inc.
1900 Market Street
Suite 200 Philadelphia, PA19103
Year of Birth: 1971
Vice President
Since 2008
Currently, Vice President and Head of Product Management and Governance for abrdn Inc. since 2020. Previously, Ms. Sitar was Managing U.S.
Counsel for abrdn Inc. She joined abrdn Inc. as U.S. Counsel in July 2007.
*
Officers hold their positions with the Fund until a successor has been duly elected and qualifies. Officers are elected annually at a meeting of the Board of Directors.
**
Each officer may hold officer position(s) in one or more other funds which are part of the Fund Complex.
abrdn Australia Equity Fund, Inc.
43
[THIS PAGE INTENTIONALLY LEFT BLANK]
Corporate Information
Directors
Radhika Ajmera
Stephen Bird
P. Gerald Malone, Chair
William J. Potter
Moritz Sell
Investment Manager
abrdn Asia Limited
21 Church Street
#01-01 Capital Square Two
Singapore 049480
Investment Adviser
abrdn Australia Limited
Level 10 255 George Street
Sydney, NSW 2000, Australia
Notice is hereby given in
accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that the Fund may purchase, from time to time, shares of its common stock in the open market.
Shares of abrdn Australia
Equity Fund, Inc. are traded on the NYSE American under the symbol “IAF”. Information about the Fund’s net asset value and market price is available at www.abrdniaf.com.
This report, including
the financial information herein, is transmitted to the shareholders of abrdn Australia Equity Fund, Inc. for their general information only. It does not have regard to the specific investment objectives, financial
situation and the particular needs of any specific person. Past performance is no guarantee of future results.
IAF-ANNUAL
C:
Item 2. Code of Ethics.
(a)
As of October 31, 2022, abrdn Australia Equity Fund, Inc. (the “Fund”
or the “Registrant”) had adopted a Code of Ethics that applies to the Registrant’s principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals
are employed by the Registrant or a third party (the “Code of Ethics”).
(b)
Definitional.
(c)
There have been no amendments, during the period covered by this report, to a provision of
the Code of Ethics.
(d)
During the period covered by this report, there were no waivers to the provisions of the
Code of Ethics.
(e)
Not applicable
(f)
A copy of the Code of Ethics has been filed as an exhibit to this Form N-CSR.
Item 3. Audit Committee Financial Expert.
The Registrant's Board of Directors has determined
that Moritz Sell, a member of the Board of Directors’ Audit Committee, possesses the attributes, and has acquired such attributes
through means, identified in instruction 2 of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,”
and has designated Mr. Sell as the Audit Committee’s financial expert. Mr. Sell is considered to be an “independent”
director, as such term is defined in paragraph (a)(2) of Item 3 to Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) –
(d) Below is a table reflecting the fee information requested in Items 4(a) through (d):
Percentage approved pursuant to pre-approval exception5
0
%
0
%
0
%
0
%
1“Audit Fees” are the aggregate fees billed for professional services for the audit of the Fund’s annual financial statements
and services provided in connection with statutory and regulatory filings or engagements.
2“Audit Related Fees” are the aggregate fees billed for assurance and related services reasonably related to the performance
of the audit or review of financial statements that are not reported under “Audit Fees”. These fees include offerings related
to the Fund’s common shares.
3“Tax Fees” are the aggregate fees billed for professional services for tax advice, tax compliance, and tax planning. These
fees include: federal and state income tax returns, review of excise tax distribution calculations and federal excise tax return.
C:
4“All Other Fees” are the aggregate fees billed for products and services other than “Audit Fees”, “Audit-Related
Fees” and “Tax Fees”.
5
Pre-approval exception under Rule 2-01 of Regulation S-X. The pre-approval exception for services provided directly to the Fund waives
the pre-approval requirement for services other than audit, review or attest services if: (A) the aggregate amount of all such services
provided constitutes no more than 5% of the total amount of revenues paid by the Fund to its accountant during the fiscal year in which
the services are provided; (B) the Fund did not recognize the services as non-audit services at the time of the engagement; and (C) the
services are promptly brought to the Audit Committee’s attention, and the Committee (or its delegate) approves the services before
the audit is completed.
(e)(1)
The Registrant’s Audit Committee (the “Committee”) has adopted a Charter that provides that the Committee shall annually select, retain or terminate, and recommend to the Independent Trustees for their ratification, the selection, retention or termination, the Registrant’s independent auditor and, in connection therewith, to evaluate the terms of the engagement (including compensation of the independent auditor) and the qualifications and independence of the independent auditor, including whether the independent auditor provides any consulting, auditing or tax services to the Registrant’s investment adviser (the “Adviser”) or any sub-adviser, and to receive the independent
auditor’s specific representations as to their independence, delineating all relationships that may affect the independent auditor’s independence, including the disclosures required by PCAOB Rule 3526 or any other applicable auditing standard. PCAOB Rule 3526 requires that, at least annually, the auditor: (1) disclose to the Committee in writing all relationships between the auditor and its related entities and the Registrant and its related entities that in the auditor’s professional judgment may reasonably be thought to bear on independence; (2) confirm in the letter that, in its professional judgment, it is independent of the Registrant within the meaning of the Securities Acts administered by the SEC; and (3) discuss the auditor’s independence with the audit committee. The Committee is responsible
for actively engaging in a dialogue with the independent auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the independent auditor and for taking, or recommending that the full Board take, appropriate action to oversee the independence of the independent auditor. The Committee Charter also provides that the Committee shall review in advance, and consider approval of, any and all proposals by Management or the Adviser that the Registrant, the Adviser or their affiliated persons, employ the independent auditor to render “permissible non-audit services” to the Registrant and to consider whether such services are consistent with the independent auditor’s independence. “Permissible non-audit services” include any professional
services, including tax services, provided to the Registrant by the independent auditor, other than those provided to the Registrant in connection with an audit or a review of the financial statements of the Registrant. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Registrant; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources;
(vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the PCAOB determines, by regulation, is impermissible. Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Registrant constitutes not more than 5% of the total amount of revenues paid by the Registrant to its auditor during the fiscal year in which the permissible non-audit services are provided; (ii) the permissible non-audit services were not recognized by the Registrant at the time of the engagement to be non-audit services;
and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee or its Delegate(s) prior to the completion of the audit.
The Committee may delegate to one or more of its members (“Delegates”) authority to pre-approve permissible non-audit services to be provided to the Registrant. Any pre-approval determination of a Delegate shall be presented to the full Committee at its next meeting. Any pre-approval determination of a Delegate shall be presented to the full Committee at its next meeting. Pursuant to this authority, the Registrant’s Committee delegates to the Committee Chair, subject to subsequent ratification by the full Committee, up to a maximum amount of $25,000, which includes any professional services, including tax services, provided to the Registrant by its independent registered public accounting firm other than those
provided to the Registrant in connection with an audit or a review of the financial statements of the Registrant. The Committee shall communicate any pre-approval made by it or a Delegate to the Adviser, who will ensure that the appropriate disclosure is made in the Registrant’s periodic reports required by Section 30 of the Investment Company Act of 1940, as amended, and other documents as required under the federal securities laws.
C:
(e)(2)
None of the services described in each of paragraphs (b) through (d) of this Item involved a waiver of the pre-approval requirement by the Audit Committee pursuant to Rule 2-01 (c)(7)(i)(C) of Regulation S-X.
(f)
Not applicable.
(g)
Non-Audit Fees
The following table shows the amount of fees that KPMG LLP
billed during the Fund’s last two fiscal years for non-audit services to the Registrant, and to the Adviser, and any entity controlling,
controlled by or under common control with the Adviser that provides ongoing services to the Fund (“Affiliated Fund Service Provider”):
Fiscal Year Ended
Total Non-Audit Fees
Billed to Fund
Total Non-Audit Fees
billed to Adviser and
Affiliated Fund Service
Providers (engagements
related directly to the
operations and financial
reporting of the Fund)
Total Non-Audit Fees
billed to Adviser and
Affiliated Fund Service
Providers (all other
engagements)
“Non-Audit Fees billed to Fund” for both fiscal years represent
“Tax Fees” and “All Other Fees” billed to Fund in their respective amounts from the previous table.
(h)
Not applicable.
(i)
Not applicable.
(j)
Not applicable.
Item 5. Audit Committee of Listed Registrants.
(a)
The Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)).
As of the fiscal year ended October 31,2021, the Audit Committee members were:
Radhika Ajmera
P. Gerald Malone
William J. Potter
Moritz Sell
(b)
Not applicable.
Item 6. Schedule of Investments.
(a) Included as part of the Report to Shareholders
filed under Item 1 of this Form N-CSR.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Pursuant to the Registrant's Proxy Voting Policy
and Procedures, the Registrant has delegated responsibility for its proxy voting to its Adviser, provided that the Registrant's Board
of Directors has the opportunity to periodically review the Adviser's proxy voting policies and material amendments thereto.
C:
The proxy voting policies of the Registrant are
included herewith as Exhibit (c) and policies of the Adviser are included as Exhibit (d).
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a)(1) PORTFOLIO MANAGER BIOGRAPHIES
The Fund is managed by abrdn’s Asia-Pacific equity team. The
Asia-Pacific equity team works in a collaborative fashion; all team members have both portfolio management and research responsibilities.
The team is responsible for the day-to-day management of the Fund. As of the date of filing this report, the following individuals have
primary responsibility for the day-to-day management of the Fund’s portfolio:
Individual & Position
Past Business Experience
Flavia Cheong
Head of Equities – Asia Pacific
Flavia Cheong is the Head of Equities - Asia Pacific on the Asian Equities team, where, as well as sharing responsibility for company research, she oversees regional portfolio construction. Before joining abrdn in 1996, she was an economist with the Investment Company of the People’s Republic of China, and earlier with the Development Bank of Singapore. She graduated with a BA in Economics and an MA (Hons) in Economics from the University of Auckland. She is a CFA® charterholder
Camille Simeon
Investment Director, Australian Equities
Camille Simeon is an Investment Director on the Australian equities team and is a portfolio manager for the Australian Equities Funds and stock analyst covering the mining, energy and technology sectors. She joined the company in April 2008. She has over 10 years of industry experience. Previously, she worked at Citi Australia, where she was a Vice President, Institutional Equity Research Sales. She has also worked at Foster Stockbroking, BNP Paribas and Burdett Buckeridge Young. She graduated with a Bachelor of Business from University of Technology, Sydney and Post Graduate Diploma in Applied Financial Analysis from the Securities Institute of Australia.
Natalie Tam
Deputy Head of Australian Equities
Natalie Tam is Deputy Head of Australian Equities. She has over 16 years’ experience in equity markets. She joined abrdn in 2005 from Deutsche Bank, where she worked as a research analyst covering the Media sector. She previously worked at Rothschild (Investment Banking), Coca Cola Amatil (Corporate Strategy) and Royal & Sun Alliance (Group Finance). She graduated with a Bachelor of Commerce from the University of New South Wales where she was awarded a UNSW co-op program scholarship in accounting & finance. She is a CFA charterholder.
Christina Woon
Investment Director
Christina Woon is an Investment Director on the Asian Equities Team. She joined abrdn in January 2013 as a graduate. She holds a Bachelor of Accountancy from Singapore Management University. She is a CFA® charterholder.
(a)(2) OTHER ACCOUNTS
MANAGED BY PORTFOLIO MANAGERS.
The following chart summarizes information regarding
other accounts for which each portfolio manager has day-to-day management responsibilities. Accounts are grouped into the following three
categories: (1) registered investment companies; (2) other pooled investment vehicles; and (3) other accounts. To the extent
that any of these accounts pay advisory fees that are based on account performance (“performance-based fees”), information
on those accounts is provided separately. The figures in the chart below for the category of “registered investment companies”
include the Fund. The “Other Accounts Managed” represents the accounts managed by the teams of which the portfolio manager
is a member. The information in the table below is as of October 31, 2022.
C:
Name of
Portfolio Manager
Type of Accounts
Other Accounts
Managed
Total Assets ($M)
Number of
Accounts
Managed for
Which
Advisory
Fee is Based
on
Performance
Total Assets for
Which
Advisory Fee is
Based on
Performance ($M)
Flavia Cheong1
Registered Investment Companies
4
$
774.79
0
$
0
Pooled Investment Vehicles
59
$
16,006.64
0
$
0
Other Accounts
44
$
12,993.48
0
$
0
Camille Simeon1
Registered Investment Companies
4
$
774.79
0
$
0
Pooled Investment Vehicles
59
$
16,006.64
0
$
0
Other Accounts
44
$
12,993.48
0
$
0
Natalie Tam1
Registered Investment Companies
4
$
774.79
0
$
0
Pooled Investment Vehicles
59
$
16,006.64
0
$
0
Other Accounts
44
$
12,993.48
0
$
0
Christina Woon1
Registered Investment Companies
4
$
774.79
0
$
0
Pooled Investment Vehicles
59
$
16,006.64
0
$
0
Other Accounts
44
$
12,993.48
0
$
0
1 Includes
accounts managed by the Asia-Pacific Equities Team, of which the portfolio manager is a member.
POTENTIAL CONFLICTS OF INTEREST
The Adviser and its affiliates (collectively referred
to herein as “abrdn”) serve as investment advisers for multiple clients, including the Registrant and other investment companies
registered under the 1940 Act and private funds (such clients are also referred to below as “accounts”). The portfolio managers’
management of “other accounts” may give rise to potential conflicts of interest in connection with their management of the
Registrant’s investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have
the same investment objective as the Registrant. Therefore, a potential conflict of interest may arise as a result of the identical investment
objectives, whereby the portfolio manager could favor one account over another. However, the Adviser believes that these risks are mitigated
by the fact that: (i) accounts with like investment strategies managed by a particular portfolio manager are generally managed in
a similar fashion, subject to exceptions to account for particular investment restrictions or policies applicable only to certain accounts,
differences in cash flows and account sizes, and similar factors; and (ii) portfolio manager personal trading is monitored to avoid
potential conflicts. In addition, the Adviser has adopted trade allocation procedures that require equitable allocation of trade orders
for a particular security among participating accounts.
In some cases, another account managed by the
same portfolio manager may compensate Aberdeen based on the performance-based fees with qualified clients. The existence of such a performance-based
fee may create additional conflicts of interest for the portfolio manager in the allocation of management time, resources and investment
opportunities.
Another potential conflict could include instances
in which securities considered as investments for the Registrant also may be appropriate for other investment accounts managed by the
Adviser or its affiliates. Whenever decisions are made to buy or sell securities for the Registrant and one or more of the other accounts
simultaneously, the Adviser may aggregate the purchases and sales of the securities and will allocate the securities transactions in a
manner that it believes to be equitable under the circumstances. As a result of the allocations, there may be instances where the Registrant
will not participate in a transaction that is allocated among other accounts. While these aggregation and allocation policies could have
a detrimental effect on the price or amount of the securities available to the Registrant from time to time, it is the opinion of the
Adviser that the benefits from the policies outweigh any disadvantage that may arise from exposure to simultaneous transactions. The Registrant
has adopted policies that are designed to eliminate or minimize conflicts of interest, although there is no guarantee that procedures
adopted under such policies will detect each and every situation in which a conflict arises.
With respect to non-discretionary model delivery
accounts (including UMA accounts) and discretionary SMA accounts, abrdn Inc. will utilize a third party service provider to deliver model
portfolio recommendations and model changes to the Sponsors. abrdn Inc. seeks to treat clients fairly and equitably over time, by delivering
model changes to our service provider and investment instructions for our other discretionary accounts to our trading desk, simultaneously
or approximately at the same time. The service provider will then deliver the model changes to each Sponsor on a when-traded, randomized
full rotation schedule. All Sponsors will be included in the rotation schedule, including SMA and UMA.
C:
UMA Sponsors will be responsible for determining
how and whether to implement the model portfolio or model changes and implementation of any client specific investment restrictions. The
Sponsors are solely responsible for determining the suitability of the model portfolio for each model delivery client, executing trades
and seeking best execution for such clients.
As it relates to SMA accounts, abrdn Inc. will
be responsible for managing the account on the basis of each client’s financial situation and objectives, the day to day investment
decisions, best execution, accepting or rejecting client specific investment restrictions and performance. The SMA Sponsors will collect
suitability information and will provide a summary questionnaire for our review and approval or rejection. For dual contract SMAs, abrdn
Inc. will collect a suitability assessment from the client, along with the Sponsor suitability assessment. Our third party service provider
will monitor client specific investment restrictions on a day to day basis. For SMA accounts, model trades will be traded by the Sponsor
or may be executed through a “step-out transaction,”- or traded away- from the client’s Sponsor if doing so is consistent
with abrdn’s obligation to obtain best execution. When placing trades through Sponsor Firms (instead of stepping them out), we will
generally aggregate orders where it is possible and in the client’s best interests. In the event we are not comfortable that a Sponsor
can obtain best execution for a specific security and trading away is infeasible, we may exclude the security from the model.
Trading costs are not covered by the Wrap Program
fee and may result in additional costs to the client. In some instances, step-out trades are executed without any additional commission,
mark-up, or mark-down, but in many instances, the executing broker-dealer may impose a commission or a mark-up or mark-down on the trade.
Typically, the executing broker will embed the added costs into the price of the trade execution, making it difficult to determine and
disclose the exact added cost to clients. In this instance, these additional trading costs will be reflected in the price received for
the security, not as a separate commission, on trade confirmations or on account statements. In determining best execution for SMA accounts,
abrdn Inc. takes into consideration that the client will not pay additional trading costs or commission if executing with the Sponsor.
While UMA accounts are invested in the same strategies
as and may perform similarly to SMA accounts, there are expected to be performance differences between them. There will be performance
dispersions between UMAs and other types of accounts because abrdn does not have discretion over trading and there may be client specific
restrictions for SMA accounts.
abrdn may have already commenced trading for its
discretionary client accounts before the model delivery accounts have executed abrdn's recommendations. In this event, trades placed by
the model delivery clients may be subject to price movements, particularly with large orders or where securities are thinly traded, that
may result in model delivery clients receiving less favorable prices than our discretionary clients. abrdn has no discretion over transactions
executed by model delivery clients and is unable to control the market impact of those transactions.
Timing delays or other operational factors associated
with the implementation of trades may result in non-discretionary and model delivery clients receiving materially different prices relative
to other client accounts. In addition, the constitution and weights of stocks within model portfolios may not always be exactly aligned
with similar discretionary accounts. This may create performance dispersions within accounts with the same or similar investment mandate.
(a)(3)
DESCRIPTION OF COMPENSATION STRUCTURE
abrdn’s remuneration policies are designed
to support its business strategy as a leading international asset manager. The objective is to attract, retain and reward talented
individuals for the delivery of sustained, superior returns for abrdn’s clients and shareholders. abrdn operates in a highly
competitive international employment market, and aims to maintain its strong track record of success in developing and retaining talent.
C:
abrdn’s policy is to recognize corporate
and individual achievements each year through an appropriate annual bonus scheme. The bonus is a single, fully discretionary variable
pay award. The aggregate value of awards in any year is dependent on the group’s overall performance and profitability. Consideration
is also given to the levels of bonuses paid in the market. Individual awards, which are payable to all members of staff, are determined
by a rigorous assessment of achievement against defined objectives.
The variable pay award is composed of a mixture
of cash and a deferred award, the portion of which varies based on the size of the award. Deferred awards are by default abrdn plc
shares, with an option to put up to 50% of the deferred award into funds managed by abrdn. Overall compensation packages are designed
to be competitive relative to the investment management industry.
Base Salary
abrdn’s policy is to pay a fair salary commensurate
with the individual’s role, responsibilities and experience, and having regard to the market rates being offered for similar roles
in the asset management sector and other comparable companies. Any increase is generally to reflect inflation and is applied in a manner
consistent with other abrdn employees; any other increases must be justified by reference to promotion or changes in responsibilities.
Annual Bonus
The Remuneration Committee determines the key performance
indicators that will be applied in considering the overall size of the bonus pool. In line with practices amongst other asset management
companies, individual bonuses are not subject to an absolute cap. However, the aggregate size of the bonus pool is dependent on
the group’s overall performance and profitability. Consideration is also given to the levels of bonuses paid in the market.
Individual awards are determined by a rigorous assessment of achievement against defined objectives, and are reviewed and approved by
the Remuneration Committee.
abrdn has a deferral policy which is intended to
assist in the retention of talent and to create additional alignment of executives’ interests with abrdn’s sustained performance
and, in respect of the deferral into funds managed by abrdn, to align the interest of portfolio managers with our clients.
Staff performance is reviewed formally at least
once a year. The review process evaluates the various aspects that the individual has contributed to abrdn, and specifically, in the case
of portfolio managers, to the relevant investment team. Discretionary bonuses are based on client service, asset growth and the performance
of the respective portfolio manager. Overall participation in team meetings, generation of original research ideas and contribution to
presenting the team externally are also evaluated.
In the calculation of a portfolio management team’s
bonus, abrdn takes into consideration investment matters (which include the performance of funds, adherence to the company investment
process, and quality of company meetings) as well as more subjective issues such as team participation and effectiveness at client presentations
through key performance indicator scorecards. To the extent performance is factored in, such performance is not judged against any
specific benchmark and is evaluated over the period of a year - January to December. The pre- or after-tax performance of an individual
account is not considered in the determination of a portfolio manager’s discretionary bonus; rather the review process evaluates
the overall performance of the team for all of the accounts the team manages.
Portfolio manager performance on investment matters
is judged over all of the accounts the portfolio manager contributes to and is documented in the appraisal process. A combination
of the team’s and individual’s performance is considered and evaluated.
Although performance is not a substantial portion
of a portfolio manager’s compensation, abrdn also recognizes that fund performance can often be driven by factors outside one’s
control, such as (irrational) markets, and as such pays attention to the effort by portfolio managers to ensure integrity of our core
process by sticking to disciplines and processes set, regardless of momentum and ‘hot’ themes. Short-terming is thus
discouraged and trading-oriented managers will thus find it difficult to thrive in the abrdn environment. Additionally, if any of
the aforementioned undue risks were to be taken by a portfolio manager, such trend would be identified via abrdn’s dynamic compliance
monitoring system.
C:
In rendering investment management
services, the Adviser may use the resources of additional investment adviser subsidiaries of abrdn plc. These affiliates have entered
into a memorandum of understanding (“MOU”) pursuant to which investment professionals from each affiliate may render portfolio
management, research or trading services to abrdn clients. Each investment professional who renders portfolio management, research or
trading services under a MOU or personnel sharing arrangement (“Participating Affiliate”) must comply with the provisions
of the Advisers Act, the 1940 Act, the Securities Act of 1933, the Exchange Act, and the Employee Retirement Income Security Act of 1974,
and the laws of states or countries in which the Adviser does business or has clients. No remuneration is paid by the Fund with respect
to the MOU/personnel sharing arrangements.
(a)(4)
Dollar Range of Equity Securities in the
Registrant Beneficially Owned by the Portfolio
Manager as of October 31, 2022
Flavia Cheong
None
Camille Simeon
None
Natalie Tam
None
Christina Woon
None
(b) Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers.
No such purchases were made by or on behalf of the Registrant during
the period covered by the report.
Item 10. Submission of Matters to a Vote of Security Holders.
During the period ended October 31, 2022, there were no material
changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Directors.
Item 11. Controls and Procedures.
(a)
The Registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “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 the evaluation of these controls and procedures required by Rule 30a-3(b) under the Act (17 CFR 270.30a3(b)) and Rule 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d15(b)).
(b)
There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d))) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
Item 12. Disclosure of Securities Lending Activities for Closed-End
Management Investment Companies
Any written solicitation to purchase securities under Rule 23c-1 under the 1940 Act (17 CFR 270.23c-1) sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable.
(a)(4)
Change in Registrant’s independent public accountant. Not applicable.
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.
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.
