Flaherty & Crumrine Total Return Fund : FLC 2021 Semi-Annual Report

Flaherty&Crumrine

Total Return Fund

Semi-Annual Report

May 31, 2021

Important Information on Paperless Delivery

As permitted by the Securities and Exchange Commission, paper copies of the Fund's shareholder reports are no longer sent by mail, unless you specifically request paper copies of the shareholder reports from your financial intermediary or from the Fund. The Fund recommends that shareholders request electronic delivery of the reports ("edelivery") from your financial intermediary (shares held in a brokerage account) or from the Fund (registered shareholders). With edelivery, shareholders will receive notice by email each time a shareholder report is posted, including a website link to access the report. If you do not make any election, you will be notified of each shareholder report by postal mail and provided with a website link to access the report on the Fund's website, www.preferredincome.com.

Postal mailing of notices containing only a website link - while required in the absence of an edelivery election - is not cost effective for the Fund, which is why an edelivery election is the recommended option.

Under any delivery method (edelivery, mailed paper reports, or mailed notices with website access), shareholder reports are provided to shareholders free of charge. To elect or change your delivery method, contact your financial intermediary or, if you hold your shares directly through the Fund, call the Fund's Transfer Agent, BNY Mellon c/o Computershare, toll-free at 1-866-351-7446 or write to BNY Mellon c/o Computershare, P.O. Box 505000, Louisville, KY 40233-5000. Your election to receive shareholder reports either by edelivery or in paper will apply to all Flaherty & Crumrine Funds that you hold through your financial intermediary or directly with the Flaherty & Crumrine Funds.

Please see "Electing Delivery Preferences" in the Discussion Topics section inside this Semi-Annual Report for more details on setting your delivery preferences.

www.preferredincome.com

Flaherty & Crumrine Total Return Fund

To the Shareholders of Flaherty & Crumrine Total Return Fund ("FLC"):

Preferred securities and contingent-capital securities ("CoCos") had a strong showing during the second fiscal quarter, resulting in very good returns for the first six months of the fiscal year. Total return1 on net asset value ("NAV") was 4.9% for the second fiscal quarter2 and 6.2% for the first half of the fiscal year. Total return on market price of Fund shares over the same periods was 5.5% and 6.0%, respectively.

TOTAL RETURN ON NET ASSET VALUE

For Periods Ended May 31, 2021

	Actual Returns		Average Annualized Returns
	Three	Six	One		Three	Five	Ten	Life of
	Months	Months	Year		Years	Years	Years	Fund(1)
Flaherty & Crumrine Total Return Fund . . . . . . .	4.9%	6.2%	23.3%	10.8%	9.8%	10.5%	8.7%
Bloomberg Barclays U.S. Aggregate Index(2) . . . . .	-0.1%	-2.2%	-0.4%	5.1%	3.2%	3.3%	4.2%
S&P 500 Index(3) . . . . . . . . . . . . . . . . .	10.7%	16.9%	40.3%	18.0%	17.2%	14.4%	10.6%

1. Since inception on August 29, 2003.
2. The Bloomberg Barclays U.S. Aggregate Index is an unmanaged index considered representative of the U.S. investment grade, fixed-rate bond market.
3. The S&P 500 is a capitalization-weighted index of 500 common stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. In addition, NAV performance will vary from market price performance, and you may have a taxable gain or loss when you sell your shares.

The first fiscal quarter of 2021 was only slightly positive as markets juggled a mix of news on the economy, interest rates, and COVID-19. December and January were the highest months on record for COVID infections. A combination of holidays, related travel, and variable compliance with safer-at-home restrictions all contributed to increased infections and concern about continued spread of this dangerous virus. At the same time, progress on vaccine development and deployment were extremely positive. Uncertainty on one hand, and optimism on the other kept markets in a state of flux.

Throughout this pandemic, the most consistent - and arguably most important - market force has been the Federal Reserve. In addition to supporting markets as the pandemic unfolded in 2020, the Fed updated its policy approach to help ensure full recovery of the U.S. economy - keeping monetary policy highly accommodative through continued asset purchases and low rates, and expressing a desire for higher near-term inflation in hopes of moving average inflation closer to the Fed's 2% target. Except for U.S. Treasuries, nearly all markets have reacted positively to these policies.

U.S. Treasury markets were less enthusiastic and began to reflect this sentiment starting in February. Expectations for higher inflation, and probably materially higher over the short run, were inconsistent with 10- and 30-year Treasury yields of 0.9% and 1.6%, respectively, and intermediate and long-term interest rates began moving higher. In February alone, 10- and 30-year interest rates rose by 36 bps and 33 bps, respectively. Ten-and30-year Treasury yields peaked in late March around 1.75% and 2.48%, respectively, and have since trended lower again as markets settled into a new range that is reflective of

1. Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.
2. March 1, 2021 - May 31, 2021

Fed policy and current economic data. While there is a risk of policy error, with inflation moving higher than expected, markets continue to have faith in both an economic recovery and the Fed's ability to manage inflation around that recovery.

Preferred and CoCo markets initially reacted negatively in February to higher interest rates, even though duration metrics are quite moderate overall. Developments in the second fiscal quarter, however, have caused markets to improve dramatically from Q1 levels. Progress on vaccination rollout and re-opening of the economy have been impressive and very positive for corporate credit metrics. A global search for yield continues, and fear of missing out by not being invested has taken precedence over higher Treasury rates, causing credit spreads to tighten and prices to rise. Cash continues to flow into fixed-income securities, and preferreds/CoCos continue to offer higher yields than most alternatives - especially risk-adjusted.

In preferred and CoCo markets, call protection allows investors to tolerate lower interest rates for a period of time without reinvestment risk - and we place a high value on call protection in the Fund's portfolio. Low interest rates and tighter credit spreads arrived as non-call periods ended for a wide swath of the broader preferred market, resulting in advantageous refinancing opportunities for issuers during fiscal Q2. Many securities have been refinanced into lower coupons, but part of the market has been redeemed without replacement. Recent redemptions resulted in a large reinvestment exercise across the preferred market, adding demand to an already technically strong market. Having more call protection in the portfolio than the broader market (especially compared to passive ETF products) and prioritizing it in our management process has resulted in a moderate level of reinvestment within the portfolio, which has helped sustain the Fund's distributable income. However, persistently low interest rates could outlast call protection and put pressure on income. None of this is new or unusual. The Fund has been through numerous interest rate cycles in the past, and our focus remains on generating attractive long-term income to shareholders.

Broadly speaking, the Fund's portfolio didn't change much during the first half of the fiscal year, as current holdings continue to be preferable to most new-issue alternatives - especially in terms of current income. Banks remain our favorite credits, as reflected in our high allocation to the sector. Bank balance sheets strengthened through the pandemic, and earnings are rebounding from already respectable levels in the second half of 2020. Please see our separate discussion topic on recent bank stress test results, as the credit outlook is very positive. Spreads have tightened in the sector, causing certain new-issue coupons to be lower than we might hope - but that properly reflects banks' strong credit profile. Insurance has also done well, although insurers' earnings continue to be a step behind banks due to lower investment yields and higher catastrophe losses in recent years.

Progress on COVID vaccine distribution, accommodative monetary policy, and optimism for economic recovery all contributed to a rebound in energy markets. Oil is now back above $70/barrel, up from $40 as recently as Oct 2020 (and of course much lower levels earlier in the pandemic). While the Fund's modest energy holdings are primarily in pipeline companies that have little direct exposure to oil prices, they do benefit from improved market sentiment and perhaps more reliable pipeline volume estimates looking forward. Increased focus on climate change, especially from the new administration, may continue to cast a shadow on this sector. However, we see ongoing need for a variety of energy sources. While demand for fossil fuels is likely to gradually diminish, pipelines are the most efficient and safest means of distributing them, and we expect these companies will continue to scale back growth plans and adjust to a changing landscape.

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There is no question the economic outlook has brightened as the COVID-19 pandemic has eased. Most markets have been out ahead of this improvement, and spread levels already reflect much of this improvement. The low interest-rate environment (although higher than levels six months ago) cuts both ways in terms of outlook - with continued demand for income supporting preferreds and CoCos near- term while also increasing the amount of refinancing available to issuers (call risk), resulting in potentially lower portfolio yields over time. The recent increase in longer-term interest rates has been a welcome change, in our opinion, as it may help keep yields from dropping further. Spreads have tightened to offset much of that move, but if inflation expectations continue to rise as the economy recovers, it could lead to future opportunities in the market.

In the meantime, preferreds and CoCos continue to compare favorably to most other fixed-income alternatives, especially on a risk-adjusted basis. Leverage costs remain near historical lows (given steepness of the yield curve), and the Fund continues to deliver attractive levels of income for shareholders.

We encourage you to read the discussion topics that follow, as we dig deeper into subjects of interest to shareholders. In addition, the Fund's website, www.preferredincome.com, has been completely redesigned and offers timely and important information. If you haven't visited recently, please take a moment to enjoy the new design and content.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team

June 30, 2021

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DISCUSSION TOPICS

(Unaudited)

The Fund's Portfolio Results and Components of Total Return on NAV

The table below presents a breakdown of the components that comprise the Fund's total return on NAV over the recent six months. These components include: (a) the total return on the Fund's portfolio of securities; (b) any returns from hedging the portfolio against significant increases in long-term interest rates; (c) the impact of utilizing leverage to enhance returns to shareholders; and (d) the Fund's operating expenses. Together, these components comprise total return on NAV.

Components of FLC's Total Return on NAV for the Six Months Ended May 31, 20211

Total Return on Unleveraged Securities Portfolio (including principal change and income) . . . . .	4.8%
Impact of Leverage (including leverage expense) . . . . . . . . . . . . . . . . . . . . . . .	2.0%
Expenses (excluding leverage expense) . . . . . . . . . . . . . . . . . . . . . . . . . . .	(0.6)%
1Actual, not annualized	Total Return on NAV	6.2%

For the six months ended May 31, 2021 the ICE BofA 8% Constrained Core West Preferred & Jr Subordinated Securities IndexSM (P8JC)1,2 returned 3.2%. This index reflects the various segments of the preferred securities market constituting the Fund's primary focus. Since this index return excludes all expenses and the impact of leverage, it compares most directly to the top line in the Fund's performance table above (Total Return on Unleveraged Securities Portfolio).

Total Return on Market Price of Fund Shares

While our focus is primarily on managing the Fund's investment portfolio, our shareholders' actual return is comprised of the Fund's monthly dividend payments plus changes in the market price of Fund shares. During the six-month period ending May 31, 2021, total return on market price of Fund shares was 6.0%.

Historically, the preferred securities market has experienced price volatility consistent with those of other fixed- income securities. However, since mid-2007 it has become clear that preferred-security valuations, including both the Fund's NAV and the market price of its shares, can move dramatically when there is volatility in financial markets. The chart below contrasts the relative stability of the Fund's earlier period with the more recent volatility in both its NAV and market price. Many fixed-income asset classes experienced increased volatility over this period.

1. The ICE BofA 8% Constrained Core West Preferred & Jr Subordinated Securities Index (P8JC) includes U.S. dollar-denominatedinvestment-grade or below investment-grade, fixed rate, floating rate or fixed-to-floating rate, retail or institutionally structured preferred securities of U.S. and foreign issuers with issuer concentration capped at 8%. All index returns include interest and dividend income, and, unlike the Fund's returns, are unmanaged and do not reflect any expenses.
2. The benchmarks from ICE Data Indices, LLC ("ICE Data") are used with permission. ICE Data, its affiliates and their respective third party suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the indices, index data and any data included in, related to, or derived therefrom. Neither ICE Data, its affiliates nor their respective third party providers shall be subject to any damages or liability with respect to the adequacy, accuracy, timeliness or completeness of the indices or the index data or any component thereof, and the indices and index data and all components thereof are provided on an "as is" basis and your use is at your own risk. ICE Data, its affiliates and their respective third party suppliers do not sponsor, endorse, or recommend Flaherty & Crumrine Incorporated, or any of its products or services.

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