FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN FUND
Dear Shareholder:
The Flaherty & Crumrine/Claymore Total Return Fund ("FLC") got off to a
good start in fiscal 2004. The total return on net asset value ("NAV") for
fiscal first quarter ending February 29th was +3.8% 1. Since the Fund's
inception on August 26, 2003 through the end of the fiscal quarter, the total
return was +6.7%1.
As of February 29th, 35.9% of the portfolio was invested in corporate debt
securities and 60.6% in preferred securities (with the balance comprised of
cash, common stocks and hedge instruments). These allocations will change over
time as we identify trading opportunities, although preferreds will normally
constitute at least half of the portfolio.
With interest rates hovering near all-time lows, individual investors have
increasingly turned to preferred securities as they try to increase the income
from their portfolios. At the same time, the size of the market has remained
fairly stable. There has been a steady stream of new issues brought to market,
but older issues are being redeemed at about the same pace. As expected, issuers
are replacing older high coupon preferred issues with similar but less expensive
ones.
These refinancing transactions are very important to the Fund--if the trend
persists for a period of time, there may be downward pressure on the income
generated by the portfolio. On the other hand, at the current level of interest
rates, the cost of the Fund's leverage is at historically low levels. So far
these two effects have roughly offset each other.
The Fund's hedging strategy also performed as expected. To refresh your
memory, FLC normally hedges by purchasing put options on U.S. Treasury bond
futures. As interest rates go up or down, the prices of these put options
typically move in the opposite direction of the preferred securities. There is,
however, an important and valuable feature to a put option hedge--in a period of
falling interest rates (as in recent months), the value of the preferred
portfolio usually goes up by more than the drop in the value of the put options.
Although the value of the hedge positions declined during the period, when
compared to appreciation in the preferred and corporate bond positions, this
hedging loss was small. Of course, if we knew interest rates were going to fall,
the best hedge would have been no hedge at all, but our crystal ball is a bit
too cloudy for that! We prefer to hedge consistently, knowing that the portfolio
should participate in a rally but be protected if interest rates rise
significantly.
The Fund's combination of preferred securities and the put option hedge
creates an unusual investment product, and we have yet to find a perfect
benchmark for comparison. When measured against LONG-TERM fixed income
investments, we expect the returns on NAV to lag (but generally only a little!)
during periods of falling interest rates (because the hedge will hurt returns),
and to perform much better if rates rise substantially. In most interest rate
scenarios, the Fund's returns on NAV should out-perform SHORT-TERM investments,
although the Fund's returns on NAV may lag briefly during periods of rising
short-term rates. In any event, investors should always bear in mind that
changes in the Fund's premium or discount to NAV can significantly affect the
performance and volatility of the Fund's common share price.
Economic conditions in the United States continue to show signs of
improvement. This rising economic tide has benefited corporate profitability and
enabled companies to improve the quality of their balance sheets. At the same
time, sluggish job formation and subdued inflation have persuaded the Federal
Reserve to keep monetary policy accommodative, which has held down the cost of
the Fund's leverage.
In the coming weeks, the Fund's adviser, Flaherty & Crumrine, will launch a
new web site, WWW.PREFERREDSTOCKGUIDE.COM. The site will contain useful
information about most of the issues that make up the preferred securities
universe. We've tried to make the site informative and easy to use. We hope you
take the opportunity to explore it, and when you do, we'd like your feedback on
ways to make it even better. We hope you will also continue to visit the Fund's
web site at WWW.FCCLAYMORE.COM.
Sincerely,
/S/DONALD F. CRUMRINE /S/ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
April 12, 2004
(1) Based on monthly data provided by Lipper Inc. Distributions are assumed
to be reinvested at NAV in accordance with Lipper's practice.
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Flaherty & Crumrine/Claymore Total Return Fund
SUMMARY OF INVESTMENTS
FEBRUARY 29, 2004 (UNAUDITED)
----------------------------
PERCENT
VALUE OF TOTAL
(000'S) NET ASSETS
-------- ----------
ADJUSTABLE RATE PREFERRED SECURITIES
Banking .......................................................................... $ 11,853 3.2%
Financial Services ............................................................... 4,563 1.3
-------- ------
TOTAL ADJUSTABLE RATE ........................................................ 16,416 4.5
FIXED RATE PREFERRED SECURITIES
Utilities ........................................................................ 34,931 9.5
Banking .......................................................................... 109,579 29.7
Financial Services ............................................................... 21,356 5.8
Insurance ........................................................................ 27,625 7.5
Oil and Gas ...................................................................... 3,175 0.8
Miscellaneous Industries ......................................................... 10,223 2.8
-------- ------
TOTAL FIXED RATE ............................................................. 206,889 56.1
TOTAL PREFERRED SECURITIES ............................................................ 223,305 60.6
CORPORATE DEBT SECURITIES
Utilities ........................................................................ 52,054 14.1
Banking .......................................................................... 10,302 2.8
Oil and Gas ...................................................................... 6,125 1.7
Insurance ........................................................................ 54,301 14.7
Other ............................................................................ 9,412 2.6
-------- ------
TOTAL CORPORATE DEBT SECURITIES .............................................. 132,194 35.9
COMMON STOCKS AND CONVERTIBLE SECURITIES
Utilities ........................................................................ 5,714 1.6
Insurance ........................................................................ 1,607 0.4
-------- ------
TOTAL COMMON STOCKS AND CONVERTIBLE SECURITIES ............................... 7,321 2.0
PURCHASED PUT OPTIONS ................................................................. 1,675 0.4
MONEY MARKET FUNDS .................................................................... 1,470 0.4
-------- ------
TOTAL INVESTMENTS ..................................................................... 365,965 99.3
OTHER ASSETS AND LIABILITIES (NET) .................................................... 2,720 0.7
-------- ------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ..................... $ 368,685 100.0%
======== ======
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
-------------------------------------
TOTAL DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
-------- --------- ------------- ------------
December 31, 2003 - Extra ........................... $0.0400 $24.41 $25.85 $24.56
December 31, 2003 ................................... 0.1625 24.41 25.85 24.56
January 31, 2004 .................................... 0.1625 24.65 25.80 24.65
February 29, 2004 ................................... 0.1625 24.72 25.86 24.72
--------------------
(1) Whenever the net asset value per share of the Fund's common stock is less than or equal to the market
price per share on the payment date, new shares issued will be valued at the higher of net asset value
or 95% of the then current market price. Otherwise, the reinvestment shares of common stock will be
purchased in the open market.
2
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STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
THREE MONTHS ENDED FEBRUARY 29, 2004 (UNAUDITED)
------------------------------------------------
VALUE
(000'S)
--------
OPERATIONS:
Net investment income ........................................................................... $ 4,364
Net realized loss on investments sold during the period ......................................... (5,032)
Change in net unrealized appreciation of investments held during the period ..................... 9,998
Distributions to Auction Market Preferred Stock (AMPS*) Shareholders from net investment
income, including changes in accumulated undeclared distributions ........................... (388)
-----------
Net increase in net assets from operations .................................................. 8,942
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders (2) ...................... (5,118)
Distributions paid from net realized capital gains to Common Stock Shareholders ................. 0
-----------
Total Distributions ......................................................................... (5,118)
FUND SHARES TRANSACTIONS:
Increase from Common Stock Transactions ......................................................... 844
-----------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD .................................. 4,668
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ............................................................................. 235,499
-----------
End of period ................................................................................... $ 240,167
===========
FINANCIAL HIGHLIGHTS(1)
THREE MONTHS ENDED FEBRUARY 29, 2004 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............................................................ $ 24.33
-----------
INVESTMENT OPERATIONS:
Net investment income ........................................................................... 0.45
Net realized loss and unrealized appreciation on investments .................................... 0.51
DISTRIBUTIONS TO AMPS* SHAREHOLDERS:
From net investment income ...................................................................... (0.04)
From net realized capital gains ................................................................. 0.00
-----------
Total from investment operations ................................................................ 0.92
-----------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ...................................................................... (0.53)
From net realized capital gains ................................................................. 0.00
-----------
Total distributions to Common Shareholders ...................................................... (0.53)
-----------
Net asset value, end of period .................................................................. $ 24.72
===========
Market value, end of period ..................................................................... $ 25.86
===========
Common shares outstanding, end of period ........................................................ 9,713,668
===========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income + ......................................................................... 6.76%**
Operating expenses .............................................................................. 1.57%**
--------------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate fiscal year to date ..................................................... 31%***
Total net assets available to Common and Preferred Stock, end of period (in 000's) .............. $ 368,685
Ratio of operating expenses to total average net assets available to Common and Preferred Stock . 1.02%**
(1) These tables summarize the three months ended February 29, 2004 and should be read in conjunction with the Fund's
audited financial statements, including footnotes, contained in its Annual Report dated November 30, 2003.
(2) Includes income earned, but not paid out, in prior fiscal year.
* Auction Market Preferred Stock.
** Annualized.
*** Not Annualized.
+ The net investment income ratios reflect income net of operating expenses and payments to AMPS* Shareholders.
++ Information presented under heading Supplemental Data includes AMPS*.
3
DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Nicholas Dalmaso
David Gale
Morgan Gust
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chairman of the Board
and Chief Executive Officer
Robert M. Ettinger, CFA
President
Peter C. Stimes, CFA
Chief Financial and Accounting
Officer, Vice President and
Treasurer
Nicholas Dalmaso
Vice President
R. Eric Chadwick, CFA
Vice President and Secretary
Bradford S. Stone
Vice President
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@fin-mail.com
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY &
CRUMRINE/CLAYMORE TOTAL RETURN FUND?
o If your shares are held in a brokerage
Account, contact your broker.
o If you have physical possession of your shares
in certificate form, contact
the Fund's Transfer
Agent & Shareholder Servicing Agent --
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE/CLAYMORE TOTAL RETURN
FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.
[GRAPHIC OMITTED]
LIGHTHOUSE
Flaherty & Crumrine/Claymore
============================
TOTAL RETURN FUND
QUARTERLY
REPORT
FEBRUARY 29, 2004
web site: www.fcclaymore.com