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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-Q

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number             811-06495                                         

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

(Exact name of registrant as specified in charter)

301 E. Colorado Boulevard, Suite 720

                                                     Pasadena, CA 91101                                                     

(Address of principal executive offices) (Zip code)

Donald F. Crumrine

Flaherty & Crumrine Incorporated

301 E. Colorado Boulevard, Suite 720

                                             Pasadena, CA 91101                                             

(Name and address of agent for service)

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

Date of fiscal year end:     November 30        

Date of reporting period: August 31, 2014

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

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.


Item 1. Schedule of Investments.

The Schedule(s) of Investments is attached herewith.


FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND

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

Your Fund performed well during its third fiscal quarter1, delivering +3.1% total return on net asset value2. For the first nine months of fiscal 2014, the Fund’s return on NAV was an impressive +15.3%. While third quarter market performance was -3.5%, year-to-date market performance was +16.7% at August 31st.

U.S. economic growth appears to be running around 3% currently, after averaging just 1.3% in 2014’s first half. Job growth is up, unemployment is down and inflation remains low. The Fed is not filling its monetary punch bowl as quickly as before, but, while it’s always hard to predict what the Fed will do, it probably won’t start to raise short-term interest rates until mid-2015 or later. In contrast, economic growth abroad has slowed, with most developed countries trailing the U.S. recovery and monetary policy in many of those countries is easing further.

Although long-term interest rates in the U.S. will probably rise modestly over coming quarters, we think any upward movement will be limited by moderate GDP growth and strong investor demand for yield. Credit conditions continue to improve for most issuers of preferred securities, as earnings remain healthy and companies continue to build capital. With this backdrop, we believe prospective returns remain attractive for long-term investors.

The Fund’s portfolio benefited from small declines in intermediate and long-term interest rates during the quarter, as well as on-going demand for higher yields of preferred securities. Supply of new issues remains steady—a key measure of market health. From December 2013 through September 2014, U.S. and foreign companies issued 103 new securities in the United States, raising just under $64 billion. Over the same period, issuers redeemed 67 preferred securities totaling $25 billion.

New issue supply was dominated by banks tailoring their capital to meet new regulatory requirements. Large U.S. banks (those deemed to be a systemically important financial institution, or “SIFI”) have issued traditional non-cumulative perpetual preferred stock. Non-U.S. SIFI banks are utilizing a preferred stock variation termed Contingent Convertible Securities, or CoCos. As you know from prior letters, the Fund has not yet purchased any CoCos, but we continue to evaluate them as potential investments.

With foreign economies lagging recovery in the U.S. and foreign banks issuing securities we have not yet been inclined to buy, the portion of the portfolio invested in foreign securities has drifted lower this fiscal year. Through September 30th, this portion declined from 25.8% of the portfolio to 17.8%. We anticipate this rate could fall further through more issuer redemptions.

As we discussed last quarter, another portfolio trend is a continued shift to “fixed-to-float” securities. These have coupons that are fixed for an initial period, typically five or ten years. Afterwards, coupons float based on a formula set at issuance. Prices on floating rate issues typically are less sensitive to changes in benchmark interest rates; this effect has spilled over to fixed-to-float preferred securities as well. If long-term interest rates begin to rise, as we expect they will eventually, these securities should tend to outperform issues with fixed-for-life coupons, all other things being equal. This fiscal year through September 30th, the

 

 

 

1  June 1, 2014—August 31, 2014
2  Following methodology required by the SEC, total return assumes dividend reinvestment and includes income and principal change, plus the impact of the Fund’s leverage and expenses.


portion of the portfolio in this structure increased from 45.0% to 50.9%. We continue to look for opportunities to add fixed-to-float holdings. Although these issues yield a bit less than many fixed-for-life securities, and thus may reduce portfolio income at the margin, we believe owning fixed-to-float securities is prudent and consistent with our interest-rate outlook.

As always, we encourage you to visit the Fund’s website, www.preferredincome.com, for current information on preferred-securities markets, the Fund and the broader economy.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team:

R. Eric Chadwick

Donald F. Crumrine

Robert M. Ettinger

Bradford S. Stone

October 1, 2014

 

2


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OVERVIEW

August 31, 2014 (Unaudited)

 

Fund Statistics  
Net Asset Value   $ 11.60   
Market Price   $ 11.05   
Discount     4.74
Yield on Market Price     7.93
Common Stock Shares Outstanding     12,329,086   

 

 

Moody’s Ratings*   % of Net Assets†  
A     1.8%   
BBB     54.1%   
BB     33.7%   
Below "BB"     3.3%   
Not Rated**     5.9%   
Below Investment Grade***     24.0%   

 

* Ratings are from Moody’s Investors Service, Inc. “Not Rated” securities are those with no ratings available from Moody’s.
** Does not include net other assets and liabilities of 1.2%.
*** 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†  
JPMorgan Chase     4.7%   
MetLife     4.6%   
HSBC PLC     4.5%   
Liberty Mutual Group     4.4%   

Fifth Third Bancorp

    3.5%   
Banco Santander, S.A.     3.4%   

Wells Fargo & Company

    3.4%   
Citigroup     3.2%   

M&T Bank Corporation

    2.9%   
XL Group PLC     2.7%   
 
% of Net Assets***†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     59%   
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)     43%   

 

*** 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, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — 93.9%

   
       

Banking — 46.0%

           
  15,000     

Astoria Financial Corp., 6.50% Pfd., Series C

  $ 367,970  
  280,123     

Banco Santander, 10.50% Pfd., Series 10

    7,199,581 **(3)   
$ 920,000     

Bank of America Corporation, 8.125%

    1,026,083 *(1)   
 

Barclays Bank PLC:

   
  56,000     

Barclays Bank PLC, 7.10% Pfd.

    1,437,520 **(3)   
  4,700     

Barclays Bank PLC, 7.75% Pfd., Series 4

    121,354 **(3)   
  78,300     

Barclays Bank PLC, 8.125% Pfd., Series 5

    2,029,536 **(1)(3)   
 

Citigroup:

   
  81,200     

Citigroup, Inc., 6.875% Pfd., Series K

    2,198,287 *(1)(2)   
  74,694     

Citigroup, Inc., 7.125% Pfd., Series J

    2,079,481  
$ 2,299,000     

Citigroup, Inc., 8.40%, Series E

    2,639,252  
  26,716     

City National Corporation, 6.75% Pfd., Series D

    748,582  
 

CoBank ACB:

   
  18,100     

CoBank ACB, 6.125% Pfd., Series G, 144A****

    1,654,454  
  10,000     

CoBank ACB, 6.25% Pfd., 144A****

    1,040,938 *(1)   
$ 4,500,000     

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

    6,750 (4)(5)††   
  13,300     

Cullen/Frost Bankers, Inc., 5.375% Pfd., Series A

    324,188  
  274,600     

Fifth Third Bancorp, 6.625% Pfd., Series I

    7,538,182 *(1)(2)   
 

First Horizon:

   
  750     

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

    555,633 *(1)   
$ 500,000     

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

    489,625     
  1     

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

    1,352,500     
  104,000     

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

    2,959,996 *(1)   
  29,050     

First Republic Bank, 6.70% Pfd.

    762,635 *(1)   
 

Goldman Sachs Group:

   
$ 195,000     

Goldman Sachs, 5.70%, Series L

    202,292  
  6,499     

Goldman Sachs, 5.95% Pfd., Series I

    158,617  
  50,000     

Goldman Sachs, 6.375% Pfd., Series K

    1,299,500  
 

HSBC PLC:

   
$ 800,000     

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

    1,204,000 (1)(3)   
  150,000     

HSBC Holdings PLC, 8.00% Pfd., Series 2

    4,035,375 **(1)(3)   
$ 120,000     

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

    121,482     
$ 91,000     

HSBC USA Capital Trust II, 8.38% 05/15/27, 144A****

    92,212     
  106,149     

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

    2,713,434 *(1)   
 

ING Groep NV:

   
  30,000     

ING Groep NV, 7.05% Pfd.

    771,045 **(3)   
  21,700     

ING Groep NV, 7.20% Pfd.

    559,893 **(3)   
  42,500     

ING Groep NV, 7.375% Pfd.

    1,102,875 **(3)   

 

4


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

           
 

JPMorgan Chase:

   
$ 300,000     

JPMorgan Chase & Company, 6.00%, Series R

  $ 309,150  
  60,900     

JPMorgan Chase & Company, 6.70% Pfd., Series T

    1,571,829 *(1)(2)   
$ 3,643,000     

JPMorgan Chase & Company, 6.75%, Series S

    3,929,886 *(1)(2)   
$ 3,750,000     

JPMorgan Chase & Company, 7.90%, Series I

    4,167,187 *(1)   
$ 450,000     

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

    493,875 **(3)   
 

M&T Bank Corporation:

   
$ 1,550,000     

M&T Bank Corporation, 6.450%, Series E

    1,674,000  
$ 4,393,000     

M&T Bank Corporation, 6.875%, Series D, 144A****

    4,506,985 *(1)(2)   
 

Morgan Stanley:

   
$ 500,000     

Morgan Stanley, 5.45%, Series H

    509,375  
  119,500     

Morgan Stanley, 6.875% Pfd., Series F

    3,227,695  
  57,200     

Morgan Stanley, 7.125% Pfd., Series E

    1,599,398 *(1)(2)   
  125,500     

PNC Financial Services Group, Inc., 6.125% Pfd., Series P

    3,478,709 *(1)   
$ 1,775,000     

RaboBank Nederland, 11.00%, 144A****

    2,356,312 (1)(3)   
  35,000     

Regions Financial Corporation, 6.375% Pfd., Series B

    887,250  
 

Royal Bank of Scotland:

   
  7,500     

Royal Bank of Scotland Group PLC, 6.40% Pfd., Series M

    186,675 **(3)   
  15,000     

Royal Bank of Scotland Group PLC, 6.60% Pfd., Series S

    375,450 **(3)   
  99,500     

Royal Bank of Scotland Group PLC, 7.25% Pfd., Series T

    2,555,160 **(1)(3)   
 

Sovereign Bancorp:

   
  2,600     

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

    3,492,538     
  77,200     

State Street Corporation, 5.90% Pfd., Series D

    2,013,569 *(1)   
  10,000     

Texas Capital Bancshares Inc., 6.50% Pfd., Series A

    248,615  
  35,000     

US Bancorp, 6.50% Pfd., Series F

    1,022,753  
 

Wells Fargo:

   
  56,200     

Wells Fargo & Company, 5.85% Pfd.

    1,468,225  
  34,400     

Wells Fargo & Company, 6.625% Pfd., Series R

    968,016  
$ 939,000     

Wells Fargo & Company, 7.98%, Series K

    1,065,765  
  123,500     

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

    3,643,250 *(1)   
 

Zions Bancorporation:

   
$ 1,000,000     

Zions Bancorporation, 7.20%, Series J

    1,059,700 *(1)   
  85,200     

Zions Bancorporation, 7.90% Pfd., Series F

    2,385,600 *(1)   

 

 

   
      97,990,239     
   

 

 

   
       

Financial Services — 1.2%

           
$ 950,000     

General Electric Capital Corp., 7.125%, Series A

    1,121,529 *(1)   

 

5


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Financial Services — (Continued)

           
 

HSBC PLC:

   
  55,000     

HSBC Finance Corporation, 6.36% Pfd., Series B

  $ 1,382,783 *(1)   

 

 

   
      2,504,312     
   

 

 

   
       

Insurance — 24.1%

           
 

Ace Ltd.:

   
$ 1,200,000     

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

    1,770,000 (1)(2)(3)   
  40,000     

Allstate Corp., 6.625% Pfd., Series E

    1,048,060 *(1)   
$ 375,000     

Aon Corporation, 8.205% 01/01/27

    482,728 (1)(2)   
  105,000     

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

    2,825,812 **(1)(3)   
 

AXA SA:

   
$ 1,453,000     

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

    1,583,770 **(1)(2)(3)   
$ 500,000     

AXA SA, 8.60% 12/15/30

    677,190 (3)   
  187,000     

Axis Capital Holdings Ltd., 6.875% Pfd., Series C

    5,060,687 **(1)(3)   
  95,000     

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

    2,380,938 (1)(2)   
  27,250     

Endurance Specialty Holdings, 7.50% Pfd., Series B

    717,016 **(3)   
$ 3,650,000     

Everest Re Holdings, 6.60% 05/15/37

    3,855,312 (1)(2)   
$ 4,600,000     

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

    7,176,000 (1)   
 

MetLife:

   
$ 2,704,000     

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

    4,394,000 (1)(2)   
$ 350,000     

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

    448,875 (1)(2)   
$ 3,350,000     

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

    4,882,625 (1)(2)   
  35,535     

PartnerRe Ltd., 7.25% Pfd., Series E

    954,115 **(1)(3)   
  65,800     

Principal Financial Group, 6.518% Pfd., Series B

    1,714,913 *(1)   
$ 241,000     

Prudential Financial, Inc., 5.625% 06/15/43

    259,677     
 

QBE Insurance:

   
$ 1,020,000     

QBE Capital Funding III Ltd., 7.25% 05/24/41, 144A****

    1,110,735 (1)(3)   
 

The Travelers Companies:

   
$ 695,400     

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

    955,760 (1)(2)   
 

Unum Group:

   
$ 2,750,000     

Provident Financing Trust I, 7.405% 03/15/38

    3,243,952 (1)(2)   
  8,300     

W.R. Berkley Corporation, 5.625% Pfd.

    197,146     
 

XL Group PLC:

   
$ 5,900,000     

XL Capital Ltd., 6.50%, Series E

    5,715,625 (1)(3)   

 

 

   
      51,454,936     
   

 

 

   

 

6


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Utilities — 15.6%

           
  7,460     

Alabama Power Company, 6.45% Pfd.

  $ 200,487 *(1)   
 

Baltimore Gas & Electric:

   
  6,579     

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

    668,180 *(1)   
  2,500     

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

    254,141  
 

Commonwealth Edison:

   
$ 2,350,000     

COMED Financing III, 6.35% 03/15/33

    2,426,375 (1)(2)   
$ 2,700,000     

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

    2,928,150 (1)(2)   
 

Energy Future Competitive Holdings Corp:

   
$ 636,000     

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

    6,360 (4)††   
  58,000     

Entergy Arkansas, Inc., 6.45% Pfd.

    1,473,565  
  22,500     

Entergy Louisiana, Inc., 6.95% Pfd.

    2,253,517  
  80,000     

Entergy Mississippi, Inc., 6.25% Pfd.

    1,982,504  
  16,937     

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

    1,849,839 *(1)   
  15,035     

Gulf Power Company, 6.00% Pfd., Series 1

    1,506,408 *(1)   
  24,000     

Indianapolis Power & Light Company, 5.65% Pfd.

    2,517,000 *(1)   
  38,000     

Integrys Energy Group, Inc., 6.00% Pfd.

    1,001,015 (1)(2)   
 

Nextera Energy:

   
$ 1,600,000     

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

    1,637,030 (1)(2)   
$ 750,000     

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

    829,311 (1)(2)   
 

PECO Energy:

   
$ 1,500,000     

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

    1,796,169 (1)(2)   
 

PPL Corp:

   
  55,000     

PPL Capital Funding, Inc., 5.90% Pfd., Series B

    1,344,063 (1)(2)   
$ 1,250,000     

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

    1,275,609 (1)(2)   
$ 3,350,000     

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

    3,525,721 (1)(2)   
  31,000     

Southern California Edison, 6.50% Pfd., Series D

    3,294,720 *(1)   
  3,000     

Virginia Electric & Power Company, $6.98 Pfd.

    298,125  
  3,000     

Wisconsin Public Service Corporation, 6.88% Pfd.

    304,219  

 

 

   
      33,372,508     
   

 

 

   
       

Energy — 2.4%

           
$ 4,498,000     

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

    5,082,740 (1)(2)   

 

 

   
      5,082,740     
   

 

 

   

 

7


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Real Estate Investment Trust (REIT) — 3.2%

           
 

Duke Realty Corp.:

   
  4,000     

Duke Realty Corp, 6.50% Pfd., Series K

  $ 100,650     
  3,500     

Duke Realty Corp, 6.60% Pfd., Series L

    88,047     
 

Kimco Realty Corporation:

   
  2,500     

Kimco Realty Corporation, 5.50% Pfd., Series J

    58,500     
  30,206     

Kimco Realty Corporation, 6.90% Pfd., Series H

    796,230     
 

National Retail Properties:

   
  40,000     

National Retail Properties, Inc., 5.70% Pfd., Series E

    943,752 (1)   
  15,460     

National Retail Properties, Inc., 6.625% Pfd., Series D

    409,419     
 

PS Business Parks:

   
  8,243     

PS Business Parks, Inc., 5.70% Pfd., Series V

    197,276     
  40,000     

PS Business Parks, Inc., 6.45% Pfd., Series S

    1,027,300 (1)(2)   
  7,500     

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

    196,500     
  110,329     

Realty Income Corporation, 6.625% Pfd., Series F

    2,899,446 (1)(2)   
  7,285     

Regency Centers Corporation, 6.625% Pfd., Series 6

    195,402     

 

 

   
      6,912,522     
   

 

 

   
       

Miscellaneous Industries — 1.4%

           
  32,700     

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

    2,969,569  

 

 

   
      2,969,569     
   

 

 

   
 

Total Preferred Securities
(Cost $188,438,241)

    200,286,826     
   

 

 

   

 

Corporate Debt Securities — 4.9%

   
       

Banking — 2.6%

           
$ 2,500,000     

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

    3,219,372 (1)(2)   
  75,000     

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

    1,842,188 (1)(2)   
  20,000     

Zions Bancorporation, 6.95% 09/15/28, Sub Notes

    535,000     

 

 

   
      5,596,560     
   

 

 

   
       

Financial Services — 0.3%

           
  20,082     

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

    513,125     
  5,048     

Raymond James Financial, 6.90% 03/15/42

    137,116     

 

 

   
      650,241     
   

 

 

   

 

8


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Corporate Debt Securities — (Continued)

   
       

Insurance — 1.0%

           
$ 1,850,000     

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

  $ 2,238,992 (1)(2)   

 

 

   
      2,238,992     
   

 

 

   
       

Energy — 0.6%

           
$ 904,000     

Energy Transfer Partners LP, 8.25% 11/15/2029

    1,293,819 (1)   

 

 

   
      1,293,819     
   

 

 

   
       

Real Estate Investment Trust (REIT) — 0.1%

           
  5,281     

Equity CommonWealth, 7.50% 11/15/19

    108,577     

 

 

   
      108,577     
   

 

 

   
       

Communication — 0.3%

           
  24,200     

Qwest Corporation, 7.375% 06/01/51

    632,891     

 

 

   
      632,891     
   

 

 

   
 

Total Corporate Debt Securities
(Cost $8,728,169)

    10,521,080     
   

 

 

   

 

Common Stock — 0.0%

   
       

Insurance — 0.0%

           
  17,821     

WMI Holdings Corporation, 144A****

    49,008 *†   

 

 

   
      49,008     
   

 

 

   
 

Total Common Stock
(Cost $900,000)

    49,008     
   

 

 

   

 

9


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Money Market Fund — 0.2%

           
 

BlackRock Liquidity Funds:

   
  305,189     

T-Fund, Institutional Class

  $ 305,189     

 

 

   
 

Total Money Market Fund
(Cost $305,189)

    305,189     
   

 

 

   

Total Investments (Cost $198,371,599***)

     99.0%      $ 211,162,103   

Other Assets And Liabilities (Net)

     1.0%        2,083,908   
  

 

 

   

 

 

 

Total Managed Assets

         100.0% ‡      213,246,011   
  

 

 

   

 

 

 

Loan Principal Balance

  

    (70,200,000
    

 

 

 

Total Net Assets Available To Common Stock

  

  $   143,046,011   
    

 

 

 

 

* Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. At August 31, 2014, these securities amounted to $38,293,013 or 18.0% 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 $133,460,580 at August 31, 2014.

(2) 

All or a portion of this security has been rehypothecated. The total value of such securities was $66,369,610 at August 31, 2014.

(3) 

Foreign Issuer.

(4) 

Illiquid security (designation is unaudited).

(5) 

Valued at fair value as determined in good faith by or under the direction of the Board of Directors as of August 31, 2014.

(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

 

10


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

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

For the period from December 1, 2013 through August 31, 2014 (Unaudited)

 

 

     Value  

OPERATIONS:

  

Net investment income

   $ 8,335,985   

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

     6,020,603   

Change in net unrealized appreciation (depreciation) of investments

     5,029,399   
  

 

 

 

Net increase in net assets resulting from operations

     19,385,987   

DISTRIBUTIONS:

  

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

     (8,985,936
  

 

 

 

Total Distributions to Common Stock Shareholders

     (8,985,936

FUND SHARE TRANSACTIONS:

  

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

     342,333   
  

 

 

 

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

     342,333   

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  

 

 

 

FOR THE PERIOD

   $ 10,742,384   
  

 

 

 
          

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 132,303,627   

Net increase in net assets during the period

     10,742,384   
  

 

 

 

End of period

   $ 143,046,011   
  

 

 

 

 

(1) 

These tables summarize the nine months ended August 31, 2014 and should be read in conjunction with the Fund’s audited financial statements, including footnotes, in its Annual Report dated November 30, 2013.

(2) 

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

 

11


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

FINANCIAL HIGHLIGHTS(1)

For the period from December 1, 2013 through August 31, 2014 (Unaudited)

For a Common Stock share outstanding throughout the period

 

PER SHARE OPERATING PERFORMANCE:

  

Net asset value, beginning of period

   $ 10.76   
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     0.68   

Net realized and unrealized gain/(loss) on investments

     0.89   
  

 

 

 

Total from investment operations

     1.57   
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (0.73
  

 

 

 

Total distributions to Common Stock Shareholders

     (0.73
  

 

 

 

Net asset value, end of period

   $ 11.60   
  

 

 

 

Market value, end of period

   $ 11.05   
  

 

 

 

Common Stock shares outstanding, end of period

     12,329,086   
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

     8.08 %* 

Operating expenses including interest expense

     1.87 %* 

Operating expenses excluding interest expense

     1.36 %* 
        

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     22 %** 

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

   $ 213,246   

Ratio of operating expenses including interest expense to total managed assets

     1.24 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.90 %* 

 

 

(1) 

These tables summarize the nine months ended August 31, 2014 and should be read in conjunction with the Fund’s audited financial statements, including footnotes, in its Annual Report dated November 30, 2013.

* 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.

 

12


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

FINANCIAL HIGHLIGHTS (Continued)

Per Share of Common Stock (Unaudited)

 

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

December 31, 2013

   $ 0.1460       $ 10.55       $ 10.08       $ 10.14   

January 31, 2014

     0.0730         10.77         10.40         10.47   

February 28, 2014

     0.0730         10.97         10.86         10.86   

March 31, 2014

     0.0730         11.10         11.35         11.10   

April 30, 2014

     0.0730         11.24         11.61         11.24   

May 30, 2014

     0.0730         11.47         11.68         11.47   

June 30, 2014

     0.0730         11.52         11.61         11.52   

July 31, 2014

     0.0730         11.48         10.96         10.85   

August 29, 2014

     0.0730         11.60         11.05         11.09   

 

(1) 

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

 

13


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

1. Aggregate Information for Federal Income Tax Purposes

At August 31, 2014, the aggregate cost of securities for federal income tax purposes was $202,598,681, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $18,631,195 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $10,067,773.

 

2. Additional Accounting Standards

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

 

   

Level 1 – quoted prices in active markets for identical securities

 

   

Level 2 – other significant observable inputs (including quoted prices for similar securities, interest

                    rates, prepayment speeds, credit risk, etc.)

 

   

Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the

                    fair value of investments)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of levels are recognized at market value at the end of the period. A summary of the inputs used to value the Fund’s investments as of August 31, 2014 is as follows:

 

     Total
Value at
August 31, 2014
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 97,990,239       $ 77,417,858       $ 20,565,631       $ 6,750   

Financial Services

     2,504,312         2,504,312                   

Insurance

     51,454,936         35,394,551         16,060,385           

Utilities

     33,372,508         9,015,178         24,357,330           

Energy

     5,082,740         5,082,740                   

Real Estate Investment Trust (REIT)

     6,912,522         6,912,522                   

Miscellaneous Industries

     2,969,569                 2,969,569           

Corporate Debt Securities

           

Banking

     5,596,560         2,377,188         3,219,372           

Financial Services

     650,241         650,241                   

Insurance

     2,238,992                 2,238,992           

Energy

     1,293,819                 1,293,819           

Real Estate Investment Trust (REIT)

     108,577         108,577                   

Communication

     632,891         632,891                   

 

14


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

     Total
Value at
August 31, 2014
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Common Stock

           

Insurance

   $ 49,008       $ 49,008       $       $   

Money Market Fund

     305,189         305,189                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 211,162,103       $ 140,450,255       $ 70,705,098       $ 6,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the reporting period, there were no transfers into Level 1 from Level 2 or into Level 2 from Level 1.

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 of Directors 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 market participant.

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

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

 

 

  

 

    

Preferred
Securities

 
   Total Investments      Banking  

Balance as of 11/30/13

   $ 6,750       $ 6,750   

Accrued discounts/premiums

               

Realized gain/(loss)

    

  
    

  

Change in unrealized appreciation/(depreciation)

    

  
    

  

Purchases

               

Sales

               

Transfer in

               

Transfer out

               

Balance as of 08/31/14

   $ 6,750       $ 6,750   

For the nine months ended August 31, 2014, total change in unrealized gain/(loss) on Level 3 securities still held at period-end and included in the change in net assets was $0.

 

15


 

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 08/31/14
    Valuation Technique   Unobservable Input   Input Range (Wgt Avg)

Preferred Securities

       

    Banking

  $ 6,750      Bankruptcy recovery   Credit/Structure-specific
recovery
  0.00% - 0.50% (0.15%)

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.

 

16


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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

Roger Ko

Assistant Treasurer

Laurie C. Lodolo

Assistant Compliance Officer,

Assistant Treasurer and

Assistant Secretary

Linda M. Puchalski

Assistant Treasurer

Investment Adviser

Flaherty & Crumrine Incorporated

e-mail: flaherty@pfdincome.com

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

   

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

   

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

BNY Mellon c/o Computershare

P.O. Box 30170

College Station, TX 77842-3170

1-866-351-7446

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

 

LOGO

 

Quarterly

Report

August 31, 2014

www.preferredincome.com

 


Item 2. Controls and Procedures.

 

  (a)

The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

 

  (b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 3. Exhibits.

Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(Registrant)  

      Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

 

 

By (Signature and Title)*  

         /s/ Donald F. Crumrine

 
    Donald F. Crumrine, Director, Chairman of the Board and Chief Executive officer
    (principal executive officer)

 

Date  

    October 27, 2014

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By (Signature and Title)*  

         /s/ Donald F. Crumrine

 
    Donald F. Crumrine, Director, Chairman of the Board and Chief Executive Officer
    (principal executive officer)

 

Date  

    October 27, 2014

 

 

By (Signature and Title)*  

         /s/ R. Eric Chadwick

 
    R. Eric Chadwick, Chief Financial Officer, Treasurer and Vice President
    (principal financial officer)

 

Date  

    October 27, 2014

 

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