UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED
SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22473
Virtus Stone Harbor Emerging Markets Income Fund (formerly known as Stone Harbor Emerging Markets Income Fund)
(Exact name of registrant as specified in charter)
101 Munson
Street
Greenfield, MA 01301-9683
(Address of principal executive offices) (Zip code)
Jennifer
Fromm, Esq.
Vice President, Chief Legal Officer, Counsel and Secretary for Registrant
One Financial Plaza
Hartford, CT 06103-2608
(Name and address of agent for service)
Registrant’s telephone number, including area code: (866) 270-7788
Date of fiscal year end: November 30
Date of reporting period: November 30, 2022
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days
after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR
270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this
information public. A registrant is not required to respond to the collection of information contained in Form N-CSR 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 Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC
20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
| Item 1. |
Reports to Stockholders. |
| |
(a) |
The Report to Shareholders is attached herewith. |
Virtus Stone Harbor Emerging Markets Income Fund
Not FDIC Insured • No Bank Guarantee • May Lose
Value
Table of Contents
Virtus Stone Harbor Emerging Markets Income
Fund
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To Virtus Stone
Harbor Emerging Markets Income Fund Shareholders:
I am pleased to present this
annual report, which reviews the performance of your Fund for the 12 months ended November 30, 2022.
The fiscal year was marked by
higher inflation, rising interest rates, the war in Ukraine, and increased market volatility. For the 12 months ended November 30, 2022, the Fund’s net asset value (NAV) returned -22.31%, and its market price returned -25.98%. For the same
period, the Fund’s composite benchmark, which is composed of the three sectors of emerging markets (EM) debt, returned -14.09%. The performance of the underlying sectors was -16.90% for hard currency sovereign debt, as represented by the
JPMorgan EMBI Global Diversified Index, -12.21% for local currency sovereign debt, as represented by the JPMorgan GBI-EM Global Diversified Index, and -13.25% for corporate debt, as represented by the JPMorgan CEMBI Broad Diversified Index.
As 2023 begins, inflation has shown signs of
slowing, and the Federal Reserve (the “Fed”) has indicated it may reduce the size of its interest rate increases. We maintain our focus on the long term, and our commitment to your financial success. Please call our customer service team
at 866-270-7788 if you have questions about your account or require assistance.
Sincerely,
George R.
Aylward
President, Chief Executive Officer, and Trustee
Virtus Stone Harbor Emerging Markets Income Fund
January 2023
Refer to the Manager’s Discussion section for your
Fund’s performance. Performance data quoted represents past results. Past performance is no guarantee of future results, and current performance may be higher or lower than the performance shown above. Investing involves risk, including the
risk of loss of principal invested.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited)
November 30, 2022
About the
Fund:
Virtus Stone Harbor Emerging
Markets Income Fund’s (NYSE: EDF) (the “Fund”) investment objective is to maximize total return, which consists of income and capital appreciation from investments in emerging markets securities. The Fund normally will invest at
least 80% of its net assets (plus borrowings for investment purposes) in emerging markets debt. There is no guarantee that the Fund will achieve its investment objective.
The use of leverage currently enables the
Fund to borrow at short-term rates with the expectation of investing at higher yields on its investments. During the period, the Fund utilized short-term reverse repurchase agreements through which it borrowed money by selling securities under the
obligation to repurchase them at a later date at a fixed price. The Fund’s management team adjusted borrowing levels to reflect the team’s outlook on emerging markets risk, increasing borrowings when it felt opportunities had improved
and reducing borrowings when, in the team’s judgment, macroeconomic risk had risen. At November 30, 2022, the Fund had borrowings of approximately $28.6 million, which represented about 29% of the Fund’s managed assets.
The Fund uses various derivative instruments
to implement its strategies. These derivatives are utilized to manage the Fund’s credit risk, interest rate risk, and foreign exchange risk, and to efficiently gain certain investment exposures. These derivative positions may increase or
decrease the Fund’s exposure to these risks. At the end of the reporting period, the Fund had derivative liabilities with a fair value of approximately $20 million (the value as represented on pages 14-16 of the Schedule of Investments). Over
the course of the reporting period, derivative positions generated a net realized gain of approximately $5 million and $6 million in unrealized depreciation, for a net decrease in operations of approximately $1 million.
Manager Comments – Stone Harbor Investment Partners (Stone
Harbor)
Stone Harbor is a global credit
specialist with expertise in emerging and developed markets debt. With three decades of informed experience allocating risk in complex areas of the fixed income markets, Stone Harbor manages global credit portfolios for institutional clients
around the world. The following commentary is provided by the respective portfolio team at Stone Harbor and covers the Fund’s portfolio for the year ended November 30, 2022.
How did the markets perform during the Fund’s fiscal year
ended November 30, 2022?
The 12-month
period ended November 30, 2022 presented a challenging and volatile environment for global markets amid persistent macroeconomic concerns, namely slowing global growth, high inflation, and China’s embattled property sector. Stubbornly high
inflation in most parts of the world necessitated multiple, and in some cases aggressive, interest rate hikes by central banks. Throughout the reporting period, global markets remained focused on the pace of interest rate increases, particularly a
series of 0.75% increases delivered by the U.S. Fed, as well as speculation on the timing of a potential downshift in interest rates. In late November, tentative signs of easing inflation in the U.S. prompted cautious optimism about the global
inflation outlook, with hopes for less aggressive monetary tightening in 2023.
For information regarding the indexes and certain key investment terms, see
Key Investment Terms starting on page 7.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
November 30, 2022
In China, the crisis in the property sector
continued, pressuring the government to deliver several rounds of support to this largest segment of the Chinese economy. China’s growth was also negatively impacted by the country’s strict zero-COVID policy and lockdowns, which weighed
heavily on market sentiment and caused large public protests. In other key developments, President Xi Jinping was reelected as party leader following the National Congress of the Communist Party of China. The longer-term implication of Xi’s
historic third term and the overarching message from China’s 20th Party Congress was the government’s willingness to sacrifice some potential growth and individual prosperity for more national economic independence and state
control.
U.S. Treasury yields increased
in response to rising price pressures and the Fed’s restrictive monetary policy. Rising U.S. Treasury yields had the greatest impact on the returns of external, or U.S. dollar-denominated, sovereign bonds, but also affected yields on domestic
emerging markets (EM) treasury bonds as inflation pressures broadened globally.
What factors affected the Fund’s performance during fiscal
year?
The Fund’s total return on
net asset value (NAV) for the 12 months ended November 30, 2022 was -22.31%. Total return based on market value was -25.98%. For the same period, the Fund’s composite benchmark, which is comprised of the three sectors of emerging markets debt,
returned -14.09%. Returns for the three sectors of EM debt for the reporting period were -16.90% for hard currency sovereign debt, as represented by the J.P. Morgan EMBI Global Diversified Index, -12.21% for local currency sovereign debt, as
represented by the J.P. Morgan GBI-EM Global Diversified Index, and -13.25% for corporate debt, as represented by the J.P. Morgan CEMBI Broad Diversified Index.
The top detractors from the Fund’s
performance were its allocations to U.S. dollar-denominated sovereign bonds in countries that were most impacted by the Russian invasion of Ukraine, including Belarus and Ukraine. Hard currency sovereign debt exposure in Ecuador, Ghana, and Pakistan
also detracted from performance. Local currency sovereign bonds from Russia and Colombia also detracted from performance, as did hard currency corporate bond exposure in Brazil, Indonesia, and Mexico.
The largest positive contributors to
performance were sovereign and corporate debt of select commodity oil exporters, including Angola and Mexico. Other positive contributors to performance included hard currency sovereign debt exposure in Tunisia, corporate debt exposure in Jamaica,
and local currency sovereign debt exposure in Mexico and Brazil.
The preceding information is the opinion of
portfolio management only through the end of the period of the report as stated on the cover. Any such opinions are subject to change at any time based upon market conditions and should not be relied upon as investment advice.
The Fund’s portfolio holdings are
subject to change and may not be representative of the portfolio managers’ current or future investment decisions. The mention of individual securities held by the Fund is for informational purposes only and should not be construed as a
recommendation to purchase or sell any securities. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional.
For
information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 7.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
November 30, 2022
Average Annual Total Returns1 for periods ended 11/30/22
| |
1
Year |
5
Years |
10
Years |
| Market
Value1,2 |
-25.98%
|
-9.58%
|
-3.26%
|
| Net
Asset Value1,2 |
-22.31%
|
-7.61%
|
-2.28%
|
| Composite
Index1,3 |
-14.09%
|
-0.92%
|
0.83%
|
| J.P.
Morgan GBI-EM Global Diversified Index1,3 |
-12.21%
|
-2.53%
|
-2.03%
|
| J.P.
Morgan CEMBI Broad Diversified Index1,3 |
-13.25%
|
0.83%
|
2.75%
|
| J.P.
Morgan EMBI Global Diversified Index1,3 |
-16.90%
|
-1.23%
|
1.63%
|
All returns represent past
performance which is no guarantee of future results. Current performance may be higher or lower than the performance shown. Please visit Virtus.com for performance data current to the most recent month-end.
Growth of $10,000 for periods ended 11/30
This graph shows the change in value of a hypothetical
investment of $10,000 in the Fund for the years indicated. For comparison, the same investment is shown in the indicated index.
|
1 |
Past
performance is not indicative of future results. Current performance may be lower or higher than performance in historical periods. |
For information regarding the indexes and certain key investment terms, see
Key Investment Terms starting on page 7.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
November 30, 2022
|
2 |
Total
return on market value is calculated assuming a purchase of common shares on the opening of the first day and sale on the closing of the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to
be reinvested at prices obtained under the Fund’s Automatic Reinvestment and Cash Purchase Plan. Total return on market value is not annualized for periods of less than one year. Brokerage commissions that a shareholder may pay are not
reflected. Total return on market value does not reflect the deduction of taxes that a shareholder may pay on fund distributions or the sale of fund shares. Total return on net asset value uses the same methodology, but with use of net asset value
for the beginning and ending values. |
|
3 |
The
indexes are unmanaged and not available for direct investment; therefore, their performance does not reflect the expenses associated with active management of an actual portfolio. |
For information
regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 7.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND PORTFOLIO HOLDINGS SUMMARY WEIGHTINGS (Unaudited)
November 30, 2022
The
following tables present the portfolio holdings within certain industry or countries as a
percentage of total investments (excluding reverse repurchase agreements,
swaps and forward
foreign currency contracts) at November 30, 2022.
Asset
Allocations
| Foreign
Government Securities |
|
54%
|
| Corporate
Bonds and Notes |
|
36
|
| Exploration
& Production |
25%
|
|
| Financial
& Lease |
4
|
|
| Electric
|
2
|
|
| Metals,
Mining & Steel |
2
|
|
| All
other Corporate Bonds and Notes |
3
|
|
| Short-Term
Investment |
|
6
|
| Credit
Linked Notes |
|
4
|
| Total
|
|
100%
|
Country
Weightings
| Mexico
|
23%
|
| Angola
|
8
|
| Ecuador
|
8
|
| United
States |
6
|
| Indonesia
|
6
|
| Malaysia
|
5
|
| Colombia
|
5
|
| Other
|
39
|
| Total
|
100%
|
| Item 7. |
Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. |
The Fund has adopted a Policy Regarding Proxy Voting (the “Policy”) stating the
Fund’s intention to exercise stock ownership rights with respect to portfolio securities in a manner that is reasonably anticipated to further the best economic interests of shareholders of the Fund. The Fund or its voting delegates will
endeavor to analyze and vote all proxies that are likely to have financial implications, and where appropriate, to participate in corporate governance, shareholder proposals, management communications and legal proceedings. The Fund or its voting
delegates must also identify potential or actual conflicts of interest in voting proxies and must address any such conflict of interest in accordance with the Policy.
In the absence of a specific direction to the contrary from the Board, the Adviser or the subadviser that is managing the Fund is responsible for voting
proxies for such fund, or for delegating such responsibility to a qualified, independent organization engaged by the Adviser or respective subadviser to vote proxies on its behalf. The applicable voting party will vote proxies in accordance with the
Policy or its own policies and procedures, which must be reasonably designed to further the best economic interests of the affected fund shareholders. Because the Policy and the applicable voting party’s policies and procedures used to vote
proxies for the funds both are designed to further the best economic interests of the affected fund shareholders, they are not expected to conflict with one another although the types of factors considered by the applicable voting party under its
own policies and procedures may be in addition to or different from the ones listed below for the Policy.
The Policy specifies the types of factors to be
considered when analyzing and voting proxies on certain issues when voting in accordance with the Policy, including, but not limited to:
| |
• |
|
Anti-takeover measures – the overall long-term financial performance of the target company relative to its
industry competition. |
| |
• |
|
Corporate Governance Matters – tax and economic benefits of changes in the state of incorporation; dilution
or improved accountability associated with changes in capital structure. |
| |
• |
|
Contested elections – the qualifications of all nominees; independence and attendance record of board and
key committee members; entrenchment devices in place that may reduce accountability. |
| |
• |
|
Stock Option and Other Management Compensation Issues—executive pay and spending on perquisites,
particularly in conjunction with sub-par performance and employee layoffs. |
| |
• |
|
Shareholder proposals – whether the proposal is likely to enhance or protect shareholder value; whether
identified issues are more appropriately or effectively addressed by legal or regulatory changes; whether the issuer has already appropriately addressed the identified issues; whether the proposal is unduly burdensome or prescriptive; whether the
issuer’s existing approach to the identified issues is comparable to industry best practice. |
The Fund and its voting delegates
seek to avoid actual or perceived conflicts of interest of Fund shareholders, on the one hand, and those of the Adviser, subadviser, other voting delegate, Distributor, or any affiliated person of the Fund, on the other hand.
Depending on the type and materiality, the Board or its delegates may take the following actions, among others, in addressing any material conflicts of
interest that arise with respect to voting (or directing voting delegates to vote): (i) rely on the recommendations of an established, independent third party proxy voting vendor; (ii) vote pursuant to the recommendation of the proposing
delegate; (iii) abstain; (iv) where two or more delegates provide conflicting requests, vote shares in proportion to the assets under management of each proposing delegate; (v) vote shares in the same proportion as the vote of all other
shareholders of such issuer; or (vi) the Adviser may vote proxies where the subadviser has a direct conflict of interest. The Policy requires each Adviser/subadviser that is a voting delegate to notify the Chief Compliance Officer of the Fund
(or, in the case of a subadviser, the Chief Compliance Officer of the Adviser) of any actual or potential conflict of interest that is identified, and provide a recommended course of action for protecting the best interests of the affected
fund’s shareholders. No Adviser/subadviser or other voting delegate may waive any conflict of interest or vote any conflicted proxies without the prior written approval of the Board (or the Executive Committee thereof) or the Chief Compliance
Officer of the Fund.
The Policy further imposes certain record-keeping and reporting requirements on each Adviser/subadviser or other voting delegate.
Information regarding how the funds voted proxies relating to portfolio securities during the most recent
12-month period ended September 30 will be available, no later than August 31 of each year, free of charge by calling, toll-free, 800.243.1574, or on the SEC’s Web site at www.sec.gov.
During the period of the report, any proxies for the Fund were handled by the Fund’s subadviser, Stone Harbor Investment Partners, a division of Virtus
Fixed Income Advisers, LLC (“Stone Harbor”). Following is a summary of Stone Harbor’s proxy voting policies.
In voting proxies, Stone
Harbor is responsible for making investment decisions that seek to add value to its client assets and that are in the best interest of its clients. Stone Harbor has adopted proxy voting policies, general guidelines and procedures. As an adviser that
primarily invests in fixed-income securities, Stone Harbor does not frequently have to vote proxies on behalf of its clients. In voting proxies, Stone Harbor is guided by general fiduciary principles. Stone Harbor’s goal is to act prudently,
solely in the best interest of the beneficial owners of the accounts it manages. Stone Harbor attempts to consider all factors of its vote that could affect the value of the investment and will vote proxies in the manner that it believes will be
consistent with efforts to maximize such value.
It is anticipated that Stone Harbor will generally follow its proxy voting general guidelines. If deemed
to be in the best interests of a client, a portfolio manager may override the general guidelines without consultation with Stone Harbor’s Compliance & Risk Committee, unless the situation involves a conflict of interest. All overrides
are subject to review by the Stone Harbor Compliance & Risk Committee.
In voting client proxies, Stone Harbor may encounter various potential conflicts of interest, such as when voting
proxies pertaining to existing clients, potential clients, existing vendors, or lenders. In any case involving a potential or known conflict of interest, Stone Harbor personnel will consult with the Stone Harbor Compliance & Risk Committee
in an attempt to resolve an actual or potential conflict. In addition, the Stone Harbor Compliance & Risk Committee reviews the proxy voting guidelines and portfolio manager overrides on at least an annual basis.
A complete copy of Stone Harbor’s current Proxy Voting Policies, Procedures and Guidelines may be obtained by sending a written request to Stone Harbor
Investment Partners, LLC, Attn: Compliance, 31 West 52nd Street, 16th Floor, New York, New York 10019.
| Item 8. |
Portfolio Managers of Closed-End Management Investment Companies.
|
| (a)(1) |
Identification of Portfolio Manager(s) or Management Team Members and Description of Role of Portfolio
Manager(s) or Management Team Members |
Peter J. Wilby, CFA. Mr. Wilby is the
co-chief investment officer of SHIP strategies and co-founder of Stone Harbor Investment Partners, an affiliated manager of Virtus Investment Partners
(“Virtus”).
Prior to founding Stone Harbor in 2006, Mr. Wilby was a chief investment officer of North American Fixed Income at Citigroup
Asset Management, as well as a member of Citigroup Asset Management’s executive committee. Additionally, he served as senior portfolio manager responsible for directing investment policy and strategy for all emerging markets debt and high yield
portfolios. Before joining Citigroup, Mr. Wilby was the head of fixed income, a senior portfolio manager for emerging markets debt and high yield, and a member of the investment policy committee at Salomon Brothers Asset Management. Earlier in
his career, Mr. Wilby was a fixed income portfolio manager specializing in high yield debt securities at Prudential Investment Co., and also held the role of director of the credit research unit, responsible for all corporate and sovereign
credit research. He began his career at Deloitte, Haskin & Sells where he served in the Audit and Tax Department.
Mr. Wilby earned a B.B.A.
and an M.B.A. in accounting from Pace University. He is a Chartered Financial Analyst® (CFA®) charterholder and a member of the CFA
Institute and the CFA Society New York. Mr. Wilby is a certified public accountant. He began working in the investment industry in 1980.
James E.
Craige, CFA. Mr. Craige is a co-chief investment officer, head of emerging markets, and co-founder of Stone Harbor Investment Partners, an affiliated manager of
Virtus Investment Partners. In this role. Mr. Craige heads a team that manages emerging markets and global high yield portfolios for institutions including public and private pension plans, sovereign wealth funds, and insurance companies
globally.
Prior to helping found Stone Harbor in 2006, Mr. Craige was a managing director and senior portfolio manager for emerging markets debt,
and a member of the investment policy committee at Citigroup Asset Management. He held similar positions at Salomon Brothers, which he joined in 1992, prior to it being purchased by Citigroup in 1998. He began his career as a fixed income trading
associate at Lehman Brothers in 1989.
Mr. Craige earned a B.S. in finance from the University of Vermont and serves on the Board of Advisors for the
Grossman School of Business. He is a Chartered Financial Analyst® (CFA®) charterholder and member of the CFA Institute and the CFA
Society New York. He began working in the investment industry in 1988.
Kumaran Damodaran, PhD. Mr. Damodaran is a portfolio manager for
emerging markets debt, global sovereign, and asset allocation at Stone Harbor Investment Partners, an affiliated manager of Virtus Investment Partners.
Prior to joining Stone Harbor in 2015, Mr. Damodaran was the lead emerging markets macro portfolio manager at GLG Partners in London. Previously, he was
an executive vice president and emerging markets portfolio manager at PIMCO in Newport Beach, California. Before joining PIMCO, Mr. Damodaran was a senior vice president and trader in Latin American local market rates at Lehman Brothers in New
York. Earlier in his career, he served as a director at Credit Suisse where he held various positions in emerging markets credit, rates, and currency derivatives trading in both London and New York.
Mr. Damodaran earned a Ph.D. in theoretical physics from Cambridge University as a Marshall Scholar and
National Science Foundation graduate fellow. He earned an A.B. in physics with a certificate in applied and computational mathematics from Princeton University. He began working in the investment industry in 2000.
Stuart Sclater-Booth. Mr. Sclater-Booth is a portfolio manager for emerging markets debt, global sovereign, and asset allocation at Stone Harbor
Investment Partners, an affiliated manager of Virtus Investment Partners.
Prior to joining Stone Harbor in 2014, Mr. Sclater-Booth was a managing
director / head of emerging markets desk strategy at Goldman Sachs. Before joining Goldman Sachs, he served as executive director / global head of emerging markets macro strategy at J.P. Morgan Chase Securities. There, he held a series of roles,
including executive director of emerging markets proprietary trading and vice president / head of trade strategy. Earlier in his career, Mr. Sclater-Booth was a research assistant in the U.S. macro research department at PaineWebber and an
assistant economist in the domestic research department at the Federal Reserve Bank of New York.
Mr. Sclater-Booth earned a B.A. in economics from
Vassar College and an M.A. in economics from Boston University. He began working in the investment industry in 1992.
William Perry. Mr. Perry
is the head of global high yield and a portfolio manager for emerging markets corporate debt at Stone Harbor Investment Partners, an affiliated manager of Virtus Investment Partners./
Prior to joining Stone Harbor in 2012, Mr. Perry was an emerging markets corporate portfolio manager at Morgan Stanley Investment Management. Before
joining Morgan Stanley, he served as a managing director / portfolio manager in the global special opportunities group for Latin American special situations at J.P. Morgan / Chase. While there, he also held several roles including credit risk
manager for the global head of emerging markets; co-head of emerging markets corporate research; and vice president for global emerging markets debt restructuring and Latin American capital market. Before
joining J.P. Morgan, Mr. Perry was a senior associate in the investment banking group at Bank of America Securities Inc. He began his career as an associate in the petroleum division at Irving Trust Company.
Mr. Perry earned a B.A. in international relations and economics from Colgate University and an M.B.A. in finance from the Columbia Business School. He
began working in the investment industry in 1984.
David A. Oliver, CFA. Mr. Oliver is a portfolio manager for emerging markets debt, global
sovereign at Stone Harbor Investment Partners, an affiliated manager of Virtus Investment Partners.
Prior to joining Stone Harbor in 2008,
Mr. Oliver was a managing director for sales and trading in emerging markets debt at Citigroup Global Markets.
Mr. Oliver earned a B.A. from
Northwestern University, an M.A from the University of Delaware, and an M.B.A. from the Tuck School of Business at Dartmouth College. He is a Chartered Financial Analyst® (CFA®) charterholder and a member of the CFA Institute and the CFA Society New York. He began working in the investment industry in 1986.
| (a)(2) |
Other Accounts Managed by Portfolio Manager(s) or Management Team Member and Potential Conflicts of Interest
|
There may be certain inherent conflicts of interest that arise in connection with the portfolio managers’ management of the
Fund’s investments and the investments of any other accounts they manage. Such conflicts could include the aggregation of orders for all accounts managed by a particular portfolio manager, the allocation of purchases across all such accounts,
the allocation of IPOs and any soft dollar
arrangements that the adviser/subadviser may have in place that could benefit the Fund and/or such other accounts. The Board of Trustees has adopted policies and procedures designed to address
any such conflicts of interest to ensure that all transactions are executed in the best interest of the Fund’s shareholders. Each adviser/subadviser is required to certify its compliance with these procedures on a quarterly basis. There have
been no material compliance issues with respect to any of these policies and procedures during the Fund’s most recent fiscal year. Additionally, there are no material conflicts of interest between the investment strategy of the Fund and the
investment strategy of other accounts managed by portfolio managers since the portfolio managers generally manage funds and other accounts having similar investment strategies.
The following table provides information as of November 30, 2022, regarding any other accounts managed by the portfolio managers and portfolio management
team members for the Fund. As noted in the table, the portfolio managers managing the Fund may also manage or be members of management teams for other mutual funds within the Virtus Fund complex or other similar accounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Portfolio Manager or
Team Member |
|
Type of Accounts |
|
Total
No. of
Accounts
Managed |
|
|
Total
Assets
(in
millions) |
|
|
No. of
Accounts
where
Advisory
Fee is Based
on
Performance |
|
|
Total Assets
in Accounts
where
Advisory
Fee is Based
on
Performance
(in millions) |
|
| Peter J. Wilby |
|
Registered Investment Companies: |
|
|
10 |
|
|
$ |
1,257 |
|
|
|
1 |
|
|
$ |
37 |
|
|
|
Other Pooled Investment Vehicles: |
|
|
30 |
|
|
$ |
4,125 |
|
|
|
1 |
|
|
$ |
167 |
|
|
|
Other Accounts: |
|
|
22 |
|
|
$ |
5,460 |
|
|
|
1 |
|
|
$ |
1,375 |
|
| James E. Craige |
|
Registered Investment Companies: |
|
|
8 |
|
|
$ |
1,204 |
|
|
|
0 |
|
|
|
0 |
|
|
|
Other Pooled Investment Vehicles: |
|
|
23 |
|
|
$ |
1,853 |
|
|
|
1 |
|
|
$ |
167 |
|
|
|
Other Accounts: |
|
|
16 |
|
|
$ |
3,861 |
|
|
|
0 |
|
|
|
0 |
|
| Kumaran Damodaran |
|
Registered Investment Companies: |
|
|
7 |
|
|
$ |
1,105 |
|
|
|
0 |
|
|
|
0 |
|
|
|
Other Pooled Investment Vehicles: |
|
|
17 |
|
|
$ |
1,742 |
|
|
|
1 |
|
|
$ |
167 |
|
|
|
Other Accounts: |
|
|
13 |
|
|
$ |
3,730 |
|
|
|
0 |
|
|
|
0 |
|
| Stuart Sclater-Booth |
|
Registered Investment Companies: |
|
|
7 |
|
|
$ |
1,105 |
|
|
|
0 |
|
|
|
0 |
|
|
|
Other Pooled Investment Vehicles: |
|
|
17 |
|
|
$ |
1,742 |
|
|
|
1 |
|
|
$ |
167 |
|
|
|
Other Accounts: |
|
|
13 |
|
|
$ |
3,730 |
|
|
|
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| William Perry |
|
Registered Investment Companies: |
|
|
7 |
|
|
$ |
1,105 |
|
|
|
0 |
|
|
$ |
0 |
|
|
|
Other Pooled Investment Vehicles: |
|
|
17 |
|
|
$ |
1,742 |
|
|
|
1 |
|
|
$ |
167 |
|
|
|
Other Accounts: |
|
|
13 |
|
|
$ |
3,730 |
|
|
|
0 |
|
|
|
0 |
|
| David A. Oliver |
|
Registered Investment Companies: |
|
|
7 |
|
|
$ |
1,105 |
|
|
|
0 |
|
|
|
0 |
|
|
|
Other Pooled Investment Vehicles: |
|
|
17 |
|
|
$ |
1,742 |
|
|
|
1 |
|
|
$ |
167 |
|
|
|
Other Accounts: |
|
|
13 |
|
|
$ |
3,730 |
|
|
|
0 |
|
|
|
0 |
|
| (a)(3) |
Compensation Structure of Portfolio Manager(s) or Management Team Members |
Virtus, along with certain of its affiliated investment management firms, including Stone Harbor Investment Partners, a division of Virtus
Fixed Income Advisers, LLC (collectively, “Virtus”), believe that the firm’s compensation program is adequate and competitive to attract and retain high-caliber investment professionals. Investment professionals at Virtus receive a
competitive base salary, an incentive bonus opportunity, and a benefits package. Certain professionals who supervise and manage others also participate in a management incentive program reflecting their personal contribution and team performance.
Certain key individuals also have the opportunity to take advantage of a long-term incentive compensation program, including potential awards of Virtus restricted stock units (“RSUs”) with multi-year vesting, subject to Virtus board of
directors’ approval.
Following is a more detailed description of the compensation structure:
| |
• |
|
Base Salary: Each portfolio manager is paid a fixed based salary, which is designed to be competitive in
light of the individual’s experience and responsibilities. Base salary is determined using compensation survey results of investment industry compensation conducted by an independent third party in evaluating competitive market compensation for
its investment management professionals. |
| |
• |
|
Incentive Bonus: Annual incentive payments are based on targeted compensation levels, adjusted based on
profitability investment performance factors and a subjective assessment of contribution to the team effort. The short-term incentive payment is generally paid in cash, but a portion may be payable in RSUs and mutual fund investments that appreciate
or depreciate in value based on the returns of one or more mutual funds managed by the investment professional. Individual payments are assessed using comparisons of actual investment performance with specific peer group or index measures.
Performance of funds managed is generally measured over one-, three-, and five-year periods and an individual manager’s participation is based on the performance of each fund/account managed.
|
| |
• |
|
Other Benefits: Portfolio managers are also eligible to participate in broad-based plans offered generally
to employees of Virtus and its affiliates, including 401(k), health, and other employee benefit plans. |
While portfolio managers
compensation contains a performance component, this component is adjusted to reward investment personnel for managing within the stated framework and for not taking unnecessary risk. This approach helps ensure that investment management personnel
remain focused on managing and acquiring securities that correspond to a fund’s mandate and risk profile and are discouraged from taking on more risk and unnecessary exposure to chase performance for personal gain. Virtus believes it has
appropriate controls in place to handle any potential conflicts that may result from a substantial portion of portfolio manager compensation being tied to performance.
| (a)(4) |
Disclosure of Securities Ownership |
For the most recently completed fiscal year ended November 30, 2022, beneficial ownership of shares of the Fund by Messrs. Wilby, Craige,
Damodaran, Oliver, Perry, and Sclater-Booth, are as follows. Beneficial ownership was determined in accordance with rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (17 CFR 240.161-1(a)(2)).
|
|
|
| Name of Portfolio Manager or Team
Member |
|
Dollar ($) Range of Fund Shares
Beneficially Owned |
| Peter J. Wilby, CFA |
|
$100,001-$500,000 |
| James E. Craige, CFA |
|
$500,001 -$1,000,000 |
| Kumaran Damodaran, PhD |
|
$0 |
| David A. Oliver, CFA |
|
$0 |
| William Perry |
|
$0 |
| Stuart Sclater-Booth |
|
$0 |
| Item 9. |
Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. |
Not applicable.
| Item 10. |
Submission of Matters to a Vote of Security Holders. |
Effective April 8, 2022, the following are the procedures by which shareholders may recommend nominees to the registrant’s board of trustees:
(i) Any shareholder group submitting a proposed nominee must beneficially own, either individually or in the aggregate, more than 4% of the Fund’s
securities that are eligible to vote both at the time of submission of the nominee and at the time of the Board member election. Each of the securities used for purposes of calculating this ownership must have been held continuously for at least two
years as of the date of the nominating. In addition, such securities must continue to be held through the date of the nomination. In addition, such securities must continue to be held through the date of the meeting and the nominating shareholder or
shareholder group must bear the economic risk of the investment.
(ii) The nominating shareholder or shareholder group may not qualify as an adverse holder
– i.e., if such shareholder were required to report beneficial ownership of its securities, its report would be filed on Securities Exchange Act Schedule 13G instead of Schedule 13D in reliance on Securities Exchange Act Rule 13d-1(b) or (c).
(iii) No eligible shareholder or shareholder group may submit more than one Independent Trustee
recommendation each calendar year.
(iv) The nominee must satisfy all qualifications provided in the Charter of the Fund’s Governance and Nominating
Committee, including qualification as a possible Independent Trustee.
(v) The nominee may not be the nominating shareholder, a member of a nominating
shareholder group or a member of the immediate family of the nominating shareholder or any member of the nominating shareholder group. (“Immediate family member” and “control” throughout these procedures shall be interpreted in
accordance with the federal securities laws.)
(vi) Neither the nominee nor any member of the nominee’s immediate family may be currently employed or
employed within the last year by any nominating shareholder entity or entity in a nominating shareholder group.
(vii) Neither the nominee nor any
immediate family member of the nominee may have accepted directly or indirectly, during the year of the election for which the nominee’s name was submitted, during the immediately preceding calendar year, or during the year when the
nominee’s name was submitted, any consulting, advisory, or other compensatory fee from the nominating shareholder or any member of a nominating shareholder group.
(viii) The nominee may not be an executive officer or trustee (or person fulfilling similar functions) of the nominating shareholder or any member of the
nominating shareholder group, or of an affiliate of the nominating shareholder or any such member of the nominating shareholder group.
(ix) The nominee
may not control the nominating shareholder or any member of the nominating shareholder group (or, in the case of a holder or member that is a fund, an interested person of such holder or member as defined by Section 2(a)(19) of the Investment
Company Act of 1940, as amended).
(x) A shareholder or shareholder group may not submit for consideration a nominee who has previously been considered by
the Fund’s Governance and Nominating Committee.
(xi) In order for a submission of a nominee to be considered, such submission must include, as applicable:
(a) the shareholder’s contact information; (b) the nominee’s contact information and the number of Fund shares owned by the proposed nominee; (c) all information regarding the nominee that would be required to be disclosed
in solicitations of proxies for elections of trustees required by Regulation 14A of the Securities Exchange Act of 1934, as amended, including business experience for the past ten years and a description of the qualifications of the proposed
nominee; and (d) a notarized letter executed by the nominee, stating his or her intention to serve as a nominee and be named in the Funds’ proxy statement, if so designated by the Fund’s Governance and Nominating Committee and Board
of Trustees. It shall be in the sole discretion of the Fund’s Governance and Nominating Committee whether to seek corrections of a deficient submission or to exclude a nominee from consideration. To the extent the conditions of this section are
met, the Committee shall give candidates recommended by shareholders the same consideration as any other candidate.