<![CDATA[Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated]]>

Item 1. Schedule of Investments.

The Schedule(s) of Investments is attached herewith.


FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND

To the Shareholders of Flaherty & Crumrine Preferred Income Opportunity Fund:

Your Fund continues to benefit from strong markets, active management, and efficient use of leverage. During the third fiscal quarter1, total return on net asset value2 was +7.6%. Since the fiscal year began on December 1, 2011, total return on NAV was an eye-popping +22.8%. Total return based on market price of Fund shares for the comparable periods was +8.9% and +21.2% respectively.

Conditions in the preferred market have been, and remain, positive. Redemptions of securities have significantly outpaced new issues, leaving many investors scrambling to find replacements. In addition, it appears that fixed-income investors are increasingly turning to preferred securities, attracted to relatively high yields.

Since June 1, redemptions of preferred securities totaled roughly $44 billion. Redemptions of trust preferred securities issued by U.S. banks accounted for almost $34 billion. As discussed in the past, over the coming years certain important regulatory benefits of trust preferreds available to banks will be phased out as a result of Dodd-Frank reform legislation. Changes in regulatory treatment of preferred securities and historically low current interest rates made many older issues ripe for redemption.

New issue activity has been robust, but the amount of new issuance, almost $29 billion since June 1, has fallen well short of redemptions. Of this amount, only $6.5 billion was issued by U.S. banks in the new form of qualifying Tier 1 capital. This is largely as expected—most banks have chosen to build up capital by retaining earnings and issuing common stock. The balance of new issues came from a variety of industries, including insurance ($3.6b), other finance ($5.5b), REIT ($5.7b), foreign banks, ($2.0b) and miscellaneous industrials and energy ($5.7b).

Fundamental credit quality has improved steadily since the financial crisis, despite sluggish economic growth. As preferred investors, we focus primarily on an issuer’s balance sheet to ensure the company’s ability to meet its obligations. From our perspective, corporate balance sheets are healthier now than at any time in recent memory. Of course, not all companies are thriving. The ongoing European crisis has strained issuers in that region. However, our approach of owning preferred securities issued by strong, diversified European companies paid off recently—this segment of the portfolio (13% as of August 31st) was the Fund’s top performer during the quarter.

Leverage is an essential component of Fund strategy. We expect the cost of leverage to be below the yield on the Fund’s investment portfolio, providing a boost to income available to shareholders. In addition, leverage magnifies the principal change of securities in the portfolio. With leverage, if total return (the sum of income plus principal change) on portfolio holdings is positive (negative), total return on net asset value of the Fund will be even higher (lower) than an unleveraged portfolio. The Fund’s leverage has worked exactly as expected and helped produce this year’s excellent returns.

While we welcome strong performance for the Fund, shareholders should understand that the decline in preferred securities’ yields in the years since the financial crisis, if they persist, will put downward pressure on Fund income over time. The Fund continues to have holdings in bank trust preferred securities that will

 

 

1 

June 1, 2012—August 31, 2012

2 

Following the methodology required by the SEC, total return includes income and principal change, plus the impact of the Fund’s leverage and expenses.


likely be redeemed (approximately 7.4% of its total net assets as of August 31, 2012) and which have a weighted average current yield of approximately 8.04% as of August 31, 2012. New issue preferred securities have been coming at yields in the range of 5.20-6.25%. We are working hard to reinvest proceeds from called issues into attractive securities, but in most cases, yields on those securities are lower than the called securities.

On the flip side, the Fund’s cost of leverage has remained low, as the Federal Reserve has increased its monetary accommodation. In addition, the Fund increased its dollar amount of leverage as preferred securities’ values increased while its percentage amount of leverage remained at around 33% as of August 31, 2012. Both have helped support the Fund’s distributable income per common share. However, leverage costs cannot drop much further. At some point, the lower yield on preferred securities—again, if they persist—will reduce Fund income. While the distribution rate probably will be lower at some point in the future, we believe preferred securities offer attractive total return potential and the Fund will continue to offer a competitive distribution rate.

As always, we encourage you to visit the Fund’s website www.preferredincome.com for a more in-depth discussion of conditions in both preferred markets and the broader economy.

Sincerely,

 

LOGO   LOGO

Donald F. Crumrine

Chairman

 

Robert M. Ettinger

President

October 5, 2012  

 

 

 

 

2


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OVERVIEW

August 31, 2012 (Unaudited)

 

Fund Statistics       
Net Asset Value   $ 10.80   
Market Price   $ 11.98   
Premium     10.93
Yield on Market Price     7.56
Common Stock Shares Outstanding     12,172,241   

 

Moody’s Ratings   % of Net Assets†  
A     0.7%   
BBB     64.0%   
BB     28.6%   
Below “BB”     3.1%   
Not Rated*     2.1%   
Below Investment Grade**     20.2%   

 

* Does not include net other assets and liabilities of 1.5%.
** Below investment grade by all of Moody’s, S&P, and Fitch.
Industry Categories   % of Net Assets†

 

LOGO

 

Top 10 Holdings by Issuer   % of Net Assets†  
Liberty Mutual Group     4.5%   
HSBC PLC     4.2%   
MetLife     4.0%   
Banco Santander, S.A.     3.9%   
Capital One Financial     3.8%   
Goldman Sachs Group     3.5%   
XL Group PLC     2.8%   
Enbridge Energy Partners     2.6%   
Axis Capital     2.5%   
Wells Fargo     2.4%   
 
     % of Net Assets***†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     44%   
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)     28%   

 

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

 

3


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS

August 31, 2012 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — 88.1%

      
        
        Banking — 34.4%               
 

Astoria Financial:

      
$ 2,750,000     

Astoria Capital Trust I, 9.75% 11/01/29, Series B

     $ 2,853,345 (1)   
 

Banco Bilbao Vizcaya Argentaria, S.A.:

      
$ 1,375,000     

BBVA International Preferred, 5.919%

       912,567 **(1)(3)   
 

Banco Santander, S.A.:

      
  280,123     

Banco Santander, 10.50% Pfd., Series 10

       7,668,367 **(1)(3)   
 

Bank of America:

      
  100,515     

Bank of America Corporation, 8.625% Pfd.

       2,591,407  
  2,500     

Countrywide Capital IV, 6.75% Pfd. 04/01/33

       62,629     
  30,000     

Countrywide Capital V, 7.00% Pfd. 11/01/36

       752,175     
$ 530,000     

NB Capital Trust II, 7.83% 12/15/26

       533,313     
 

Barclays Bank PLC:

      
$ 2,750,000     

Barclays Bank PLC, 6.278%

       2,328,906 **(1)(3)   
  4,700     

Barclays Bank PLC, 7.75% Pfd., Series 4

       118,769 **(3)   
  73,500     

Barclays Bank PLC, 8.125% Pfd., Series 5

       1,879,395 **(1)(3)   
 

BB&T Corp:

      
  87,625     

BB&T Corporation, 5.625% Pfd., Series E

       2,244,952 *(1)   
 

BNP Paribas:

      
$ 1,750,000     

BNP Paribas, 7.195%, 144A****

       1,605,625 **(1)(2)(3)   
 

Capital One Financial:

      
$ 5,250,000     

Capital One Capital III, 7.686% 08/15/36

       5,322,188 (1)(2)   
$ 250,000     

Capital One Capital V, 10.25% 08/15/39

       258,750     
$ 1,750,000     

Capital One Capital VI, 8.875% 05/15/40

       1,799,450 (1)(2)   
 

Citigroup:

      
  13,000     

Citigroup Capital VII, 7.125% Pfd. 07/31/31

       328,250     
  56,700     

Citigroup Capital XIII, 7.875% Pfd. 10/30/40

       1,564,568 (1)(2)   
 

Colonial BancGroup:

      
$ 4,500,000     

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

       9,000 (4)(5)††   
 

FBOP Corp:

      
  4,500     

FBOP Corporation, Adj. Rate Pfd., 144A****

       2,250 *(4)(5)†   
 

Fifth Third Bancorp:

      
$ 700,000     

Fifth Third Capital Trust IV, 6.50% 04/15/37

       702,625 (1)   
 

First Horizon:

      
  3,300     

First Tennessee Bank, Adj. Rate Pfd., 3.75%(6), 144A****

       2,385,281 *(1)   
$ 500,000     

First Tennessee Capital II, 6.30% 04/15/34, Series B

       477,500     
  1     

FT Real Estate Securities Company, 9.50% Pfd., 144A****

       955,000     

 

4


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2012 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — (Continued)

      
        
       

Banking — (Continued)

              
 

First Niagara Financial Group:

      
  100,000     

First Niagara Financial Group, Inc., 8.625% Pfd.

     $ 2,986,150  
 

First Republic Bank:

      
  10,050     

First Republic Bank, 6.70% Pfd.

       274,983  
 

Goldman Sachs Group:

      
$ 1,185,000     

Goldman Sachs, Capital I, 6.345% 02/15/34

       1,181,227 (1)(2)   
 

HSBC PLC:

      
$ 1,000,000     

HSBC Capital Funding LP, 10.176%, 144A****

       1,350,000 (3)   
  127,500     

HSBC Holdings PLC, 8.00% Pfd., Series 2

       3,542,141 **(1)(3)   
$ 120,000     

HSBC USA Capital Trust I, 7.808% 12/15/26, 144A****

       121,800     
  99,850     

HSBC USA, Inc., 6.50% Pfd., Series H

       2,570,389 *(1)   
 

ING Groep NV:

      
  8,200     

ING Groep NV, 7.20% Pfd.

       203,864 **(3)   
  21,000     

ING Groep NV, 7.375% Pfd.

       524,790 **(3)   
 

JPMorgan Chase:

      
$ 1,550,000     

JPMorgan Chase & Company, 7.90%, Series 1

       1,740,033  
 

KeyCorp:

      
  1,000     

KeyCorp, 7.75% Pfd., Series A

       117,750  
 

Lloyds Banking Group PLC:

      
$ 450,000     

Lloyds Banking Group PLC, 6.657%, 144A****

       338,625 **(3)   
 

Morgan Stanley:

      
  10,000     

Morgan Stanley Capital Trust VI, 6.60% Pfd. 02/01/46

       250,825     
 

PNC Financial Services:

      
  19,910     

PNC Financial Services, 6.125% Pfd., Series P

       552,353 *(1)   
  99,000     

PNC Financial Services, 9.875% Pfd., Series L

       2,638,597 *(1)   
$ 1,105,000     

PNC Preferred Funding Trust III, 8.70%, 144A****

       1,127,233 (1)(2)   
 

Sovereign Bancorp:

      
  2,600     

Sovereign REIT, 12.00% Pfd., Series A, 144A****

       2,908,402     
 

Wells Fargo:

  

 
  3,085     

Wells Fargo & Company, 7.50% Pfd., Series L

       3,687,346 *(1)   
  35,000     

Wells Fargo & Company, 8.00% Pfd., Series J

       1,049,737 *(1)   
 

Zions Bancorporation:

      
  85,200     

Zions Bancorporation, 7.90% Pfd., Series F

       2,337,036  
  25,000     

Zions Bancorporation, 9.50% Pfd., Series C

       658,250  

 

 

   
         67,517,843     
      

 

 

   
       

Financial Services — 1.1%

              
 

Ameriprise Financial:

      
$ 250,000     

Ameriprise Financial, Inc., 7.518% 06/01/66

       277,500 (1)(2)   
 

Credit Suisse Group:

      
$ 1,000,000     

Claudius, Ltd. - Credit Suisse AG, 7.875%, Series B, 144A****

       1,051,250 (3)   

 

5


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2012 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — (Continued)

      
        
       

Financial Services — (Continued)

              
 

HSBC PLC:

      
  30,000     

HSBC Finance Corporation, 6.36% Pfd., Series B

     $ 753,075 *(1)   

 

 

   
         2,081,825     
      

 

 

   
       

Insurance — 23.5%

              
 

Ace Ltd.:

      
$ 1,200,000     

Ace Capital Trust II, 9.70% 04/01/30

       1,716,000 (1)(2)(3)   
 

Aon Corporation:

      
$ 275,000     

AON Corp, 8.205% 01/01/27

       334,623     
 

Arch Capital Group:

      
  81,925     

Arch Capital Group, Ltd., 6.75% Pfd., Series C

       2,253,142 **(1)(2)(3)   
 

AXA SA:

      
$ 3,500,000     

AXA SA, 6.379%, 144A****

       3,014,375 **(1)(2)(3)   
 

Axis Capital:

      
  175,000     

Axis Capital Holdings, 6.875% Pfd., Series C

       4,817,977 **(1)(2)(3)   
 

Delphi Financial:

      
  90,000     

Delphi Financial Group, 7.376% Pfd. 05/15/37

       2,238,750 (1)(2)   
 

Everest Re Group:

      
$ 4,000,000     

Everest Re Holdings, 6.60% 05/15/37

       4,020,000 (1)(2)   
 

Liberty Mutual Group:

      
$ 4,600,000     

Liberty Mutual Group, 10.75% 06/15/58, 144A****

       6,497,500 (1)   
 

Lincoln National Corp:

      
$ 175,000     

Lincoln National Corporation, 7.00% 05/17/66

       175,875     
 

MetLife:

  

 
$ 2,154,000     

MetLife, Inc., 10.75% 08/01/39

       3,160,995 (1)(2)   
$ 448,000     

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

       526,400 (1)(2)   
$ 3,325,000     

MetLife Capital Trust X, 9.25% 04/08/38, 144A****

       4,256,000 (1)(2)   
 

PartnerRe Ltd.:

      
  35,535     

PartnerRe Ltd., 7.250% Pfd., Series E

       990,716 **(1)(3)   
 

Principal Financial:

  

 
  22,000     

Principal Financial Group, 5.563% Pfd., Series A

       2,142,939 *(1)   
  70,005     

Principal Financial Group, 6.518% Pfd., Series B

       1,912,012 *(1)   
 

StanCorp Financial Group:

      
$ 1,400,000     

StanCorp Financial Group, 6.90% 06/01/67

       1,358,000 (1)(2)   
 

The Travelers Companies:

      
$ 1,060,000     

USF&G Capital, 8.312% 07/01/46, 144A****

       1,322,756 (1)(2)   

 

6


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2012 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — (Continued)

      
        
       

Insurance — (Continued)

              
 

XL Group PLC:

      
$ 5,900,000     

XL Capital Ltd., 6.50%, Series E

     $ 5,405,875 (1)(2)(3)   

 

 

   
         46,143,935     
      

 

 

   
       

Utilities — 19.5%

              
 

Alabama Power:

      
  7,460     

Alabama Power Company, 6.45% Pfd.

       217,272 *(1)   
 

Baltimore Gas & Electric:

  

 
  6,579     

Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993

       670,647 *(1)   
  2,500     

Baltimore Gas & Electric Company, 7.125% Pfd., Series 1993

       255,859  
 

Commonwealth Edison:

      
$ 2,350,000     

COMED Financing III, 6.35% 03/15/33

       2,373,500 (1)(2)   
 

Constellation Energy:

      
  8,000     

Constellation Energy Group, 8.625% Pfd. 06/15/63, Series A

       213,520     
 

Dominion Resources:

  

 
$ 750,000     

Dominion Resources Capital Trust I, 7.83% 12/01/27

       761,174 (1)   
$ 3,000,000     

Dominion Resources, Inc., 7.50% 06/30/66

       3,246,447 (1)(2)   
 

Energy Future Competitive Holdings Corp:

      
$ 686,000     

TXU Electric Capital V, 8.175% 01/30/37

       171,500 (4)   
 

Entergy Arkansas:

      
  40,000     

Entergy Arkansas, Inc., 6.45% Pfd.

       1,026,252  
 

Entergy Louisiana:

      
  16,500     

Entergy Louisiana, Inc., 6.95% Pfd.

       1,652,062  
 

Entergy Mississippi:

      
  80,000     

Entergy Mississippi, Inc., 6.25% Pfd.

       2,027,504  
 

Georgia Power:

      
  16,937     

Georgia Power Company, 6.50% Pfd., Series 2007A

       1,913,881 *(1)   
 

Gulf Power:

      
  15,035     

Gulf Power Company, 6.00% Pfd., Series 1

       1,525,755 *(1)   
 

Indianapolis Power & Light:

      
  25,000     

Indianapolis Power & Light Company, 5.65% Pfd.

       2,546,095 *(1)   
 

Interstate Power & Light:

      
  137,756     

Interstate Power & Light Company, 8.375% Pfd., Series B

       3,796,900 *(1)   
 

Nextera Energy:

  

 
$ 3,000,000     

FPL Group Capital, Inc., 6.65% 06/15/67

       3,187,005 (1)(2)   
$ 1,000,000     

FPL Group Capital, Inc., 7.30% 09/01/67, Series D

       1,082,382 (1)(2)   

 

7


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2012 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — (Continued)

      
        
       

Utilities — (Continued)

              
 

Peco Energy:

      
$ 1,500,000     

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

     $ 1,554,552 (1)(2)   
 

PPL Corp:

      
$ 1,500,000     

PPL Capital Funding, 6.70% 03/30/67, Series A

       1,540,877     
 

Puget Energy:

      
$ 4,155,000     

Puget Sound Energy, Inc., 6.974% 06/01/67

       4,430,979 (1)   
 

Southern California Edison:

  

 
  12,050     

Southern California Edison, 6.00% Pfd., Series C

       1,217,050 *(1)   
  20,044     

Southern California Edison, 6.50% Pfd., Series D

       2,137,819 *(1)   
 

Virginia Electric & Power:

      
  3,000     

Virginia Electric & Power Company, $6.98 Pfd.

       301,969  
 

Wisconsin Public Service:

      
  3,000     

Wisconsin Public Service Corporation, 6.88% Pfd.

       305,156  

 

 

   
         38,156,157     
      

 

 

   
       

Energy — 6.3%

              
 

Enbridge Energy Partners:

      
$ 4,498,000     

Enbridge Energy Partners LP, 8.05% 10/01/37

       5,031,796 (1)(2)   
 

Enterprise Products Partners:

      
$ 4,150,000     

Enterprise Products Partners, 8.375% 08/01/66, Series A

       4,651,905 (1)(2)   
 

Kinder Morgan:

      
  3,000     

Kinder Morgan GP, Inc., 8.33% Pfd., 144A****

       2,718,938  

 

 

   
         12,402,639     
      

 

 

   
       

Real Estate Investment Trust (REIT) — 0.1%

              
 

PS Business Parks:

      
  2,052     

PS Business Parks, Inc., 6.70% Pfd., Series P

       52,518     
  7,500     

PS Business Parks, Inc., 6.875% Pfd., Series R

       204,000     

 

 

   
         256,518     
      

 

 

   
       

Miscellaneous Industries — 3.2%

              
 

Ocean Spray Cranberries:

      
  32,700     

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

       2,920,519  
 

Stanley Black & Decker:

      
  68,238     

Stanley Black & Decker, Inc., 5.75% Pfd. 07/25/52

       1,791,247 (1)   

 

8


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2012 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — (Continued)

      
        
       

Miscellaneous Industries — (Continued)

              
 

Textron, Inc.:

      
$ 1,950,000     

Textron Financial Corporation, 6.00% 02/15/67, 144A****

     $ 1,628,250     

 

 

   
         6,340,016     
      

 

 

   
 

Total Preferred Securities
(Cost $160,246,603)

       172,898,933     
      

 

 

   

 

Corporate Debt Securities — 10.2%

      
       

Banking — 5.7%

              
 

Goldman Sachs Group:

      
$ 5,540,000     

Goldman Sachs Group, 6.75% 10/01/37, Sub Notes

       5,785,849 (1)(2)   
 

Morgan Stanley:

      
$ 2,650,000     

Morgan Stanley, 6.375% 07/24/42

       2,693,622     
 

Regions Financial:

      
$ 2,500,000     

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

       2,612,500     

 

 

   
         11,091,971     
      

 

 

   
       

Financial Services — 0.3%

              
 

Affiliated Managers Group:

      
  19,230     

Affiliated Managers Group, Inc., 6.375% 08/15/42

       491,567     
 

Raymond James Financial:

      
  5,900     

Raymond James Financial, 6.90% 03/15/42

       162,377     

 

 

   
         653,944     
      

 

 

   
       

Insurance — 2.3%

              
 

Liberty Mutual Group:

      
$ 2,250,000     

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

       2,356,999 (1)(2)   
 

Unum Group:

      
$ 2,000,000     

UnumProvident Corporation, 7.25% 03/15/28

       2,241,118 (1)(2)   

 

 

   
         4,598,117     
      

 

 

   
       

Utilities — 0.9%

              
 

Energy Transfer Equity:

      
$ 1,474,000     

Southern Union Company, 8.25% 11/15/29

       1,855,589 (1)(2)   

 

 

   
         1,855,589     
      

 

 

   

 

9


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2012 (Unaudited)

 

Shares/$ Par           

    Value    

 

 

Corporate Debt Securities — (Continued)

      
        
       

Energy — 1.0%

                  
 

Nexen, Inc.:

      
  72,995     

Nexen, Inc., 7.35% 11/01/43

     $ 1,871,701 (3)   

 

 

   
       1,871,701     
      

 

 

   
 

Total Corporate Debt Securities
(Cost $17,511,689)

       20,071,322     
      

 

 

   

 

Common Stock — 0.2%

      
       

Insurance — 0.0%

                  
 

WMI Holdings Corporation:

      
  17,821     

WMI Holdings Corporation, 144A****

       8,554        * † 

 

 

   
       8,554     
      

 

 

   
       

Utilities — 0.2%

                  
 

Exelon Corp:

      
  8,940     

Exelon Corporation

       326,042        *   

 

 

   
       326,042     
      

 

 

   
 

Total Common Stock
(Cost $1,279,370)

       334,596     
      

 

 

   

 

Money Market Fund — 0.1%

                  
 

BlackRock Liquidity Funds:

      
  184,065     

T-Fund

       184,065     

 

 

   
 

Total Money Market Fund
(Cost $184,065)

       184,065     
      

 

 

   
       

Total Investments (Cost $179,221,727***)

    98.6%        193,488,916     

Other Assets And Liabilities (Net)

    1.4%        2,816,578     
   

 

 

   

 

 

   

Total Managed Assets

    100.0% ‡    $ 196,305,494     
   

 

 

   

 

 

   

Loan Principal Balance

  

    (64,800,000  
     

 

 

   

Total Net Assets Available To Common Stock

  

  $ 131,505,494     
     

 

 

   

 

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

 

10


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2012 (Unaudited)

 

*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. At August 31, 2012, these securities amounted to $37,104,757 or 18.9% of total managed assets.
(1) 

All or a portion of this security is pledged as collateral for the Fund’s loan. The total value of such securities was $130,983,085 at August 31, 2012.

(2) 

All or a portion of this security has been rehypothecated. The total value of such securities was $64,378,676 at August 31, 2012.

(3) 

Foreign Issuer.

(4) 

Illiquid.

(5) 

Valued at fair value as determined in good faith by or under the direction of the Board of Directors as of August 31, 2012.

(6) 

Represents the rate in effect as of the reporting date.

Non-income producing.
†† The issuer has filed for bankruptcy protection. As a result, the Fund may not be able to recover the principal invested and also does not expect to receive income on this security going forward.
The percentage shown for each investment category is the total value of that category as a percentage of total managed assets.

 

    ABBREVIATIONS:

Pfd.

    Preferred Securities

REIT

    Real Estate Investment Trust

 

11


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

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

For the period from December 1, 2011 through August 31, 2012 (Unaudited)

 

     Value  

OPERATIONS:

  

Net investment income

   $ 8,480,616   

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

     (1,585,144

Change in net unrealized appreciation/depreciation of investments

     18,935,186   
  

 

 

 

Net increase in net assets resulting from operations

     25,830,658   

DISTRIBUTIONS:

  

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

     (8,792,451
  

 

 

 

Total Distributions to Common Stock Shareholders

     (8,792,451

FUND SHARE TRANSACTIONS:

  

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

     860,322   
  

 

 

 

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

     860,322   
  

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  

 

 

 

FOR THE PERIOD

   $ 17,898,529   
  

 

 

 
          

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 113,606,965   

Net increase in net assets during the period

     17,898,529   
  

 

 

 

End of period

   $ 131,505,494   
  

 

 

 

 

(1) 

These tables summarize the nine months ended August 31, 2012 and should be read in conjunction with the Fund’s audited financial statements, including footnotes, in its Annual Report dated November 30, 2011.

(2) 

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

 

12


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

FINANCIAL HIGHLIGHTS(1)

For the period from December 1, 2011 through August 31, 2012 (Unaudited)

For a Common Stock share outstanding throughout the period

 

PER SHARE OPERATING PERFORMANCE:

  

Net asset value, beginning of period

   $ 9.40   
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     0.70   

Net realized and unrealized gain/(loss) on investments

     1.42   
  

 

 

 

Total from investment operations

     2.12   
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (0.72
  

 

 

 

Total distributions to Common Stock Shareholders

     (0.72
  

 

 

 

Net asset value, end of period

     10.80   
  

 

 

 

Market value, end of period

   $ 11.98   
  

 

 

 

Common Stock shares outstanding, end of period

     12,172,241   
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

     9.13 %* 

Operating expenses including interest expense

     2.10 %* 

Operating expenses excluding interest expense

     1.46 %* 
        

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     25 %** 

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

   $ 196,305   

Ratio of operating expenses including interest expense to total managed assets

     1.39 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.97 %* 

 

 

(1) 

These tables summarize the nine months ended August 31, 2012 and should be read in conjunction with the Fund’s audited financial statements, including footnotes, in its Annual Report dated November 30, 2011.

* Annualized.
** Not Annualized.
The net investment income ratios reflect income net of operating expenses, including interest expense.
†† Information presented under heading Supplemental Data includes loan principal balance.

 

13


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

FINANCIAL HIGHLIGHTS (Continued)

Per Share of Common Stock (Unaudited)

 

     Total
Dividends
Paid
     Net Asset
Value
     NYSE
Closing Price
     Dividend
Reinvestment
Price(1)
 

December 30, 2011

   $ 0.1205       $ 9.48       $ 11.20       $ 10.64   

January 31, 2012

     0.0755         9.92         11.54         10.96   

February 29, 2012

     0.0755         10.20         11.98         11.38   

March 30, 2012

     0.0755         10.22         10.99         10.44   

April 30, 2012

     0.0755         10.32         11.38         10.81   

May 31, 2012

     0.0755         10.24         11.23         10.67   

June 29, 2012

     0.0755         10.35         11.40         10.83   

July 31, 2012

     0.0755         10.66         11.78         11.19   

August 31, 2012

     0.0755         10.80         11.98         11.38   

 

(1) 

Whenever the net asset value per share of the Fund’s Common Stock is less than or equal to the market price per share on the reinvestment date, new shares issued will be valued at the higher of net asset value or 95% of the then current market price. Otherwise, the reinvestment shares of Common Stock will be purchased in the open market.

 

14


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

1. Aggregate Information for Federal Income Tax Purposes

At August 31, 2012, the aggregate cost of securities for federal income tax purposes was $179,103,626, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $24,856,295 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $10,471,005.

 

2. Additional Accounting Standards

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

 

   

Level 1 – quoted prices in active markets for identical securities

 

   

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

 

   

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

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of levels are recognized at market value at the end of the period. A summary of the inputs used to value the Fund’s investments as of August 31, 2012 is as follows:

 

     Total
Value at
August 31, 2012
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 67,517,843       $ 51,553,246       $ 15,953,347       $ 11,250   

Financial Services

     2,081,825         753,075         1,328,750           

Insurance

     46,143,935         29,996,492         16,147,443           

Utilities

     38,156,157         13,067,131         25,089,026           

Energy

     12,402,639         9,683,701         2,718,938           

Real Estate Investment Trust (REIT)

     256,518         256,518                   

Miscellaneous Industries

     6,340,016         1,791,247         4,548,769           

Corporate Debt Securities

     20,071,322         11,005,116         9,066,206           

Common Stock

           

Insurance

     8,554         8,554                   

Utilities

     326,042         326,042                   

Money Market Fund

     184,065         184,065                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 193,488,916       $ 118,625,187       $ 74,852,479       $ 11,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

During the reporting period, there were no transfers into Level 1 from Level 2. During the reporting period, securities with an aggregate market value of $4,094,339 were transferred into Level 2 from Level 1. The securities were transferred because of a reduction in the amount of observable market data, resulting from: a decrease in market activity for the securities, reduced availability of quoted prices for the securities, or de-listing of securities from a national securities exchange that resulted in a material decrease in activity.

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

Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades—or the same information for securities that are similar in many respects to those being valued—are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market.

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

 

  

  

Preferred Securities

 
   Total Investments     Banking     Financial
Services
 

Balance as of 11/30/11

   $ 137,595      $ 137,250      $ 345   

Accrued discounts/premiums

                     

Realized gain/(loss)

                     

Change in unrealized appreciation/(depreciation)

     (126,000     (126,000       

Purchases

                     

Sales

     (345            (345

Transfer in

                     

Transfer out

                     

Balance as of 8/31/12

   $ 11,250      $ 11,250      $   

For the nine months ended August 31, 2012, total change in unrealized gain/(loss) on Level 3 securities still held at period-end and included in the change in net assets was $(126,000).

 

16


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

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

 

Category   Fair Value
at 8/31/12
    Valuation Technique   Unobservable Input  

Input Range (Wgt Avg)

Preferred Securities

       

    Banking

  $ 11,250      Bankruptcy recovery   Credit/Structure-specific
recovery
  0.00% - 0.50% (0.20%)

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

 

17


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Directors

Donald F. Crumrine, CFA

Chairman of the Board

David Gale

Morgan Gust

Karen H. Hogan

Robert F. Wulf, CFA

Officers

Donald F. Crumrine, CFA

Chief Executive Officer

Robert M. Ettinger, CFA

President

R. Eric Chadwick, CFA

Chief Financial Officer,

Vice President and Treasurer

Chad C. Conwell

Chief Compliance Officer,

Vice President and Secretary

Bradford S. Stone

Vice President and

Assistant Treasurer

Laurie C. Lodolo

Assistant Compliance Officer,

Assistant Treasurer and

Assistant Secretary

Linda M. Puchalski

Assistant Treasurer

Investment Adviser

Flaherty & Crumrine Incorporated

e-mail: flaherty@pfdincome.com

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

   

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

   

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

BNY Mellon Investment Servicing

P.O. Box 358035

Pittsburgh, PA 15252-8035

1-866-351-7446

This report is sent to shareholders of Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated for their information. It is not a Prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in this report.

 

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Report

August 31, 2012

www.preferredincome.com