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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Virtus Stone Harbor Emerging Markets Income Fund | NYSE:EDF | NYSE | Common Stock |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 5.29 | 0 | 12:00:06 |
As filed with the Securities and Exchange Commission on August 5, 2024
Securities Act File No. 333-[ ]
Investment Company Act File No. 811-22473
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
☒ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
☐ Pre-Effective Amendment No.
☐ Post-Effective Amendment No.
☒ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
☒ Amendment No. 4
Virtus 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)
(866) 270-7788
(Registrants Telephone Number, Including Area Code)
Kathryn Santoro, 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)
Copies to:
Mark D. Perlow, Esq.
Dechert LLP
One Bush Street, Suite 1600
San Francisco, CA 94104
Approximate Date of Proposed Public Offering:
From time to time after the effective date of this Registration Statement.
[ ] Check box if the only securities being registered on this Form are being offered pursuant to dividend or interest
reinvestment plans.
[x] Check box if any securities being registered on this Form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933 (Securities Act), other than securities offered in connection with a dividend reinvestment plan.
[x] Check box if this Form is a registration statement pursuant to General Instruction A.2 or a post-effective amendment thereto.
[ ] Check box if this Form is a registration statement pursuant to General Instruction B or a post-effective amendment thereto that will become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act.
[ ] Check box if this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction B to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act.
It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to section 8(c) of the Securities Act
Check each box that appropriately characterizes the Registrant:
[x] Registered Closed-End Fund (closed-end company that is registered under the Investment Company Act of 1940 (the Investment Company Act)).
[ ] Business Development Company (closed-end company that intends or has elected to be regulated as a business development company under the Investment Company Act.
[ ] Interval Fund (Registered Closed-End Fund or a Business Development Company that makes periodic repurchase offers under Rule 23c-3 under the Investment Company Act).
[x] A.2 Qualified (qualified to register securities pursuant to General Instruction A.2 of this Form).
[ ] Well-Known Seasoned Issuer (as defined by Rule 405 under the Securities Act).
[ ] Emerging Growth Company (as defined by Rule 12b-2 under the Securities and Exchange Act of 1934).
[ ] If an Emerging Growth Company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
[ ] New Registrant (registered or regulated under the Investment Company Act for less than 12 calendar months preceding this filing).
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE FUND MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion
Preliminary Prospectus dated [ ], 2024
PROSPECTUS
[●], 2024
$[]
Virtus Stone Harbor Emerging Markets Income Fund
Common Shares
The Virtus Stone Harbor Emerging Markets Income Fund (the Fund) is a non-diversified closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act). The Fund is organized as a Massachusetts business trust. The Funds investment objective is to maximize total return, which consists of income on its investments and capital appreciation. The Fund pursues this objective by normally investing at least 80% of its net assets (plus any borrowings for investment purposes) in Emerging Markets Securities (the 80% policy). Emerging Markets Securities include fixed income securities and other instruments (including derivatives) that are economically tied to emerging market countries, that are denominated in the predominant currency of the local market of an emerging market country or whose performance is linked to those countries markets, currencies, economies or ability to repay loans.
The Fund has entered into a Distribution Agreement (the Agreement) with [●] relating to the distribution of common shares of beneficial interest (Common Shares), $0.001 par value per share, offered by this prospectus (the Prospectus). Pursuant to the Agreement, the Fund appointed [●] as principal underwriter and placement agent for the Funds Common Shares having an aggregate offering price of up to [$●,] through [●] as agent for the Fund. [●] will be entitled to compensation of [●%] of the gross sales price per share of Common Shares sold under the Agreement. In connection with the sale of Common Shares on behalf of the Fund, [●] may be deemed to be an underwriter within the meaning of the Securities Act of 1933, as amended (the Securities Act), and the compensation to [●] may be deemed to be underwriting commissions or discounts.
Current outstanding shares of the Funds Common Shares are, and the Common Shares offered by this Prospectus will be, listed on the New York Stock Exchange (NYSE) under the symbol EDF. Sales of Common Shares under this Prospectus may be made in negotiated transactions or transactions that are deemed to be at the market as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE or sales made to or through a market maker other than on the NYSE.
As of [●, 2024,] the last reported sale price of the Funds Common Shares was [$●] per share. As of market close on [●, 2024,] the net asset value of the Funds Common Shares was [$●] per share. Shares of closed-end funds often trade at a discount from net asset value. This creates a risk of loss for an investor purchasing shares in a public offering.
This Prospectus sets forth concisely the information about the Fund that a prospective investor should know before investing. Please read it carefully before investing and retain it for future reference. The following documents have been filed with the Securities and Exchange Commission (SEC) and are incorporated into this Prospectus by reference:
● | the Funds statement of additional information, dated [●, 2024,] relating to this Prospectus |
● | the Funds annual report to shareholders on Form N-CSR, filed with the SEC February 5, 2024, for the fiscal period ended November 30, 2023 |
● | the Funds semiannual report to shareholders on Form N-CSRS, filed with the SEC ●, for the fiscal period ended May 31, 2024 |
Additional copies of the foregoing and any more recent reports for the Fund filed after the date of this Prospectus are available upon request without charge and investors may make other shareholder inquiries by contacting the Fund by phone, mail, or internet:
By Phone: | (866) 270-7788 | |
By Mail: | Virtus Funds | |
101 Munson Street | ||
Greenfield, MA 01301-9683 | ||
By Internet: | www.Virtus.com |
The Fund is subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act), as amended, and, in accordance therewith, files reports, proxy statements, proxy materials and other information with the SEC. You may view or obtain the foregoing documents from the SEC:
By e-mail: | publicinfo@sec.gov (duplicating fee required) | |
By Internet: | www.sec.gov | |
By Mail: | 100 F Street, N.E., Washington, D.C. 20549 |
Investing in the Funds Common Shares involves certain risks. See Risk Factors beginning on page of this Prospectus.
You should rely only on the information contained in or incorporated by reference into this Prospectus. The Fund has not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
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28 |
The following summary is qualified in its entirety by reference to the more detailed information appearing elsewhere in this Prospectus. This summary does not contain all the information you should consider before investing in the Fund. You should review the more detailed information contained in this Prospectus and in the Statement of Additional Information, including the information set forth under the heading Risk Factors.
The Fund | Virtus Stone Harbor Emerging Markets Income Fund (the Fund) is a non-diversified closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act). The Fund was organized as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on September 10, 2010. The Funds Common Shares is traded on the New York Stock Exchange (NYSE) under the symbol EDF. The Funds principal office is located at 101 Munson Street, Greenfield, Massachusetts 01301-9683, and its telephone number is (866) 270-7788.
As of [●, 2024,] the Fund had approximately ● shares of Common Shares outstanding, net assets of approximately [$●] and total assets of approximately [$●]. | |
The Offering | Securities offered: shares of Common Shares having an aggregate offering price of up to [$●.]
Common Shares outstanding after the offering (if all Common Shares is sold based on the last reported sale price on [●, 2024]): [●] shares
The Fund has entered into a [●] agreement (the Agreement) with [●] relating to the Common Shares offered by this Prospectus. In accordance with the terms of the Agreement, the Fund may offer and sell shares of Common Shares having an aggregate offering price of up to [$●,] through [●] as agent for the Fund. [●] will be entitled to compensation of [●%] of the [gross] proceeds resulting from the sale of Common Shares under the Agreement. In connection with the sale of Common Shares on behalf of the Fund, [●] may be deemed to be an underwriter within the meaning of the Securities Act of 1933, as amended (the Securities Act), and the compensation to [●] may be deemed to be underwriting commissions or discounts.
Current outstanding shares of the Funds Common Shares are, and the Common Shares offered by this Prospectus will be, listed on the New York Stock Exchange (NYSE) under the symbol EDF. Sales of Common Shares under this Prospectus may be made in negotiated transactions or transactions that are deemed to be at the market as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE or sales made to or through a market maker other than on the NYSE.
The Common Shares may not be sold through agents, underwriters, or dealers without delivery or deemed delivery of the Prospectus. | |
Use of Proceeds | The Fund intends to use the net proceeds of the of the offering to make investments in accordance with the Funds investment objective and policies, as stated in the Prospectus, as appropriate investment opportunities are identified. It is currently anticipated that the Fund will be able to invest substantially all of the net proceeds of the offering in accordance with its investment objective and policies within [●] after the completion of such offering. Pending such investment, the net proceeds will be held in high quality short-term debt securities and instruments. |
1
Adverse market conditions could cause certain investments to be made after [●] but no later than [●]. A delay in the anticipated use of net proceeds could lower returns and reduce the Funds distribution to Common Shares shareholders. | ||
Investment Objective | The Funds investment objective is to maximize total return, which consists of income on its investments and capital appreciation. | |
Principal Investment Strategies | The Fund seeks to achieve its investment objective by normally investing at least 80% of its net assets (plus any borrowings for investment purposes) in Emerging Markets Securities (the 80% policy). Emerging Markets Securities include fixed income securities and other instruments (including derivatives) that are economically tied to emerging market countries, that are denominated in the predominant currency of the local market of an emerging market country or whose performance is linked to those countries markets, currencies, economies or ability to repay loans. A security or instrument is economically tied to an emerging market country if it is principally traded on the countrys securities markets or if the issuer is organized or principally operates in the country, derives a majority of its income from its operations within the country or has a majority of its assets within the country.
For more information about the Funds investment strategies and policies, see The Funds Investments and Risk Factors. | |
Risk Factors | Investing in the Fund involves risks, including the risk that you may receive little or no return on your investment or that you may lose part or all of your investment. Please refer to the section of the Funds most recent annual report on Form N-CSR entitled Principal Risk Factors, which is incorporated by reference herein, for a discussion of the risks of investing in the Fund. | |
Leverage | The Fund may use leverage to the extent permitted by the 1940 Act. The Funds strategy relating to its use of leverage may not be successful, and the Funds use of leverage will cause its NAV to be more volatile than it would otherwise be. There can be no guarantee that the Fund will leverage its assets or, to the extent the Fund utilizes leverage, the percentage of its assets such leverage will represent.
As of [●, 2024], the Fund had an aggregate financial leverage ratio from reverse repurchase agreements as a percentage of its total Managed Assets (as defined below) of [●%]. | |
Distributions | The Fund currently pays a monthly distribution of $0.06 per share. The Fund intends to continue making a level dividend distribution each month to common shareholders after deduction of interest on any outstanding Borrowings (as defined below) or dividend on any outstanding preferred shares. The level dividend rate may be modified by the Board from time to time and will be based upon the past and projected performance and expenses of the Fund. The Fund will also make a distribution during or with respect to each calendar year (which may be combined with a regular monthly distribution), which will generally include any net investment income and net realized capital gain for the year not otherwise distributed.
For more information about the Funds distributions, see Distributions. |
2
Dividend Reinvestment Plan | Unless a Common Shares shareholder elects otherwise, Common Shares distributions will be reinvested in additional Common Shares under the Funds dividend reinvestment plan (the Plan). Common Shares holders who elect not to participate in the Plan will receive all distributions in cash paid by check mailed directly to the shareholder of record (or, if the Common Shares is held in street or other nominee name, then to such nominee). For more information on the Plan, see Dividend Reinvestment Plan. | |
Investment Adviser and Subadviser | The Funds investment adviser is Virtus Alternative Investment Advisers, Inc. (the Adviser or VAIA). Virtus Fixed Income Advisers, LLC (VFIA), an indirect, wholly-owned subsidiary of Virtus, acting through its division, Stone Harbor Investment Partners (Stone Harbor or Subadviser), is the subadviser to the Fund. Subject to the overall control of the Funds board of trustees (the Board) the Funds portfolio management team is primarily responsible for the day-to-day management of the Funds portfolio.
VAIA and VFIA are wholly owned indirect subsidiaries of Virtus Investment Partners, Inc., a publicly traded company that operates a multi-manager investment management business and whose common stock is traded on the NYSE under the trading symbol VRTS.
For more information about the Adviser and Subadviser, see The Adviser and Subadviser. | |
Administrator | Virtus Fund Services, LLC, 101 Munson Street, Greenfield, Massachusetts 01301-9683, serves as the Funds administrator pursuant to a fund administration agreement. | |
Custodian | The Bank of New York, 240 Greenwich Street, New York, NY 10286-1048, serves as the Funds custodian pursuant to a custody agreement. The Bank of New York also serves as fund accounting agent, performing certain accounting services. | |
Transfer Agent | Computershare Trust Company, N.A., P.O. Box 43078, Providence, RI 02940-3078, serves as the Funds transfer agent pursuant to a transfer agency agreement. |
Fees and Expenses Table
The following table is intended to assist investors in understanding the annualized fees and expenses that an investor in the Funds Common Shares would bear, directly or indirectly. The table is based on the Funds capital structure as of [●, 2024.]
SHAREHOLDER TRANSACTION EXPENSES |
|
|||||||
Sales Load (as a percentage of offering price) 1 |
[●] | % | ||||||
Offering Expenses Borne by the Fund (as a percentage of offering price) 2 |
[●] | % | ||||||
Dividend Reinvestment and Cash Purchase Plan Fees 3 |
[$●] | |||||||
ANNUAL EXPENSES (as a percentage of net assets attributable to Common Shares) | ||||||||
Management Fees4 |
[●] | % | ||||||
Administration Fees4 |
[●] | % | ||||||
Interest Payments on Borrowed Funds5 |
[●] | % | ||||||
Other Expenses6 |
[●] | % | ||||||
Total Annual Expenses: |
[●] | % |
3
1 Represents the estimated commission the Fund will pay to [●] with respect to the Common Shares being sold in this offering. Pursuant to the Distribution Agreement, [●] will be entitled to compensation of [●%] of the gross sales price per share of Common Shares sold under the Agreement. Commission payments will reduce the net proceeds from this offering and will be indirectly borne by all holders of the Funds Common Shares.
2 Offering expenses payable by the Fund will reduce the net proceeds from this offering and will be indirectly borne by all holders of the Funds Common Shares.
3 There will be no brokerage charges with respect to Common Shares issued directly by the Fund under its dividend reinvestment plan. You will pay brokerage charges in connection with open market purchases or if you direct the Plan Administrator, as defined below, to sell your Common Shares held in a dividend reinvestment account.
4 The contractual management fee and administration fee are asset-based fees calculated using the average daily Managed Assets, as defined below, of the Fund. The calculation reflects the Funds use of leverage during the period. The management fee cannot exceed 1.50% of the Funds net assets.
5 Assumed Borrowings, as defined below, in an aggregate amount of ●% of average Managed Assets for the 12 months ended November 30, 2023. The expenses and rates associated with leverage may vary as and when Borrowings are made.
6 Other Expenses are based on estimated amounts for the current fiscal year.
The Adviser has contractually agreed to limit the Funds annual total operating expenses, subject to the exclusions listed below, so that such expenses do not exceed, on an annualized basis, 0.58% of average daily net assets through April 10, 2025. Following the contractual period, the Adviser may discontinue these expense reimbursement arrangements at any time. The exclusions include investment advisory fees, interest, any other fees or expenses relating to financial leverage, preferred shares (such as dividends on preferred shares, auction agent fees and commissions and rating agency fees) or borrowing (such as interest, commitment, amendment and renewal expense on credit or redemption facilities), taxes, extraordinary, unusual or infrequently occurring expenses (such as litigation), costs related to share offerings, brokerage commissions, expenses incurred in connection with any merger or reorganization, underlying fund expenses and dividend expenses, if any (each expressed as a percentage of average daily net assets attributable to common shares).
THE FOREGOING FEE TABLE IS INTENDED TO ASSIST FUND INVESTORS IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR INDIRECTLY.
Expense Example
The following example illustrates the expenses that a shareholder would pay on a $1,000 investment that is held for the time periods provided in the table. The examples assume that all dividends and other distributions are reinvested and that the Funds Total Annual Expenses of [●%] remain the same for the time periods shown. The example set forth below assumes a 5% annual rate of return. Actual annual rates of return may be greater or lesser than 5%. The example should not be considered a representation of future expenses. Actual expenses may be greater or lesser than those shown.
The following example does not include the sales load:
1 Year | 3 Years | 5 Years | 10 Years | |||||
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return: |
[$●] | [$●] | [$●] | [$●] |
The following example assumes a sales load of [●%] as a percentage of the Common Shares offering price:
1 Year | 3 Years | 5 Years | 10 Years | |||||
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return: |
[$●] | [$●] | [$●] | [$●] |
The Funds financial highlights for the fiscal years ended November 30, 2019 through November 30, 2023, may be found in the Funds annual report to shareholders as filed with the SEC on Form N-CSR on February 5, 2024 and the Funds financial highlights for the six months ended May 31, 2024, may be found in the Funds semi-annual report to shareholders as filed with the SEC on Form N-CSRS on [●], 2024. The financial highlights contained within those reports are intended to help you understand the Funds financial performance. They are derived from the relevant financial statements audited by ●, the Funds independent registered public accounting firm, and are incorporated by reference into this Prospectus.
The Fund is a non-diversified closed-end management investment company registered under the 1940 Act. The Fund was organized as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on September 10, 2010. The Funds Common Shares is traded on the NYSE under the symbol EDF. The Funds principal office is located at 101 Munson Street, Greenfield, Massachusetts 01301-9683, and its telephone number is (866) 270-7788.
4
As of [●, 2024,] the Fund had approximately ● shares of Common Shares outstanding, net assets of approximately [$●] and total assets of approximately [$●].
Fiscal Quarter | Market Price | NAV per Common Share on Date of Market Price High and Low(1) |
Premium/(Discount) on Date of Market Price High and Low(2) | |||||||||
High | Low | High | Low | High | Low | |||||||
November 30, 2023 |
$[ ] | $[ ] | $[ ] | $[ ] | [ ]% | [ ]% | ||||||
August 31, 2023 |
$[ ] | $[ ] | $[ ] | $[ ] | [ ]% | [ ]% | ||||||
May 31, 2023 |
$[ ] | $[ ] | $[ ] | $[ ] | [ ]% | [ ]% | ||||||
February 28, 2023 |
$[ ] | $[ ] | $[ ] | $[ ] | [ ]% | [ ]% | ||||||
November 30, 2022 |
$[ ] | $[ ] | $[ ] | $[ ] | [ ]% | [ ]% | ||||||
August 31, 2022 |
$[ ] | $[ ] | $[ ] | $[ ] | [ ]% | [ ]% | ||||||
May 31, 2022 |
$[ ] | $[ ] | $[ ] | $[ ] | [ ]% | [ ]% | ||||||
February 28, 2022 |
$[ ] | $[ ] | $[ ] | $[ ] | [ ]% | [ ]% |
The Fund intends to use the net proceeds of the offering to make investments in accordance with the Funds investment objective and policies, as stated in the Prospectus, as appropriate investment opportunities are identified. It is currently anticipated that the Fund will be able to invest substantially all the net proceeds of the offering in accordance with its investment objective and policies within [●] after the completion of such offering. Pending such investment, the net proceeds will be held in [high quality short-term debt securities and instruments.]
Adverse market conditions could cause certain investments to be made after [●] but no later than [●]. A delay in the anticipated use of net proceeds could lower returns and could reduce the Funds distribution to Common Shares shareholders.
This section provides additional information about the Funds investments and certain portfolio management techniques the Fund may use. More information about the Funds investments and portfolio management techniques and the associated risks is included in the Statement of Additional Information.
Investment Objectives and Principal Investment Strategies
The Funds investment objective is to maximize total return, which consists of income on its investments and capital appreciation.
The Fund normally will invest at least 80% of its net assets (plus any borrowings for investment purposes) in Emerging Markets Securities (the 80% policy). Emerging Markets Securities include fixed income securities and other instruments (including derivatives) that are economically tied to emerging market countries, that are denominated in the predominant currency of the local market of an emerging market country or whose performance is linked to those countries markets, currencies, economies or ability to repay loans. A security or instrument is economically tied to an emerging market country if it is principally traded on the countrys securities markets or if the issuer is organized or principally operates in the country, derives a majority of its income from its operations within the country or has a majority of its assets within the country.
The Fund considers emerging market countries as those countries identified by the World Bank Group as being low income economies or which are included in a J.P. Morgan emerging market bond index. It is anticipated that the Fund will focus most of its investments in Asia, Africa, the Middle East, Latin America and the developing countries of Europe. The Funds investments may include, among other things, sovereign debt obligations, corporate debt securities, structured notes, convertible securities, securities issued by supranational organizations, floating rate commercial loans, securitized loan participations, restricted securities, non-U.S. currencies, currency forward contracts and other foreign currency transactions, and derivatives related to or referencing these types of securities and instruments. The Fund may use derivatives to a significant extent for hedging, investment or leverage purposes. Although Emerging Markets Securities may include any derivative or other instrument that provides the Fund exposure to emerging markets, the Fund currently expects that its derivatives transactions or instruments will consist primarily of the following instruments and transactions: credit linked notes, foreign currency forward contracts, credit default swaps, interest rate swaps, total return swaps on individual securities and groups or indices of securities, and interest rate futures contracts and options. The Fund may use these instruments for hedging purposes, for leverage or otherwise to gain, or reduce, long or short exposure to emerging securities markets (for example, credit linked notes may be used to gain exposure to certain emerging markets fixed income securities). Emerging Markets Securities may be denominated in non-U.S. currencies or the U.S. dollar.
5
The Fund seeks income and capital appreciation through country selection, sector selection, security selection and currency selection. In selecting Emerging Markets Securities for investment, the Funds Subadviser will apply a market risk analysis contemplating the assessment of various factors, such as liquidity, volatility, tax implications, interest rate sensitivity, counterparty risks, economic factors, currency exchange rates and technical market considerations.
The Fund may invest, without limitation, in debt securities that are rated below investment grade by a nationally recognized statistical rating organization or unrated securities that are deemed to be of comparable quality by the Funds Subadviser, including defaulted securities. Debt securities rated below investment grade are commonly known as junk bonds and are regarded as predominantly speculative with respect to the issuers capacity to pay interest and repay principal in accordance with the terms of the obligations and involve major risk exposure to adverse conditions.
The Funds holdings may range in maturity from overnight to 30 years or more. The Funds Subadviser does not manage the Fund to have a specific average maturity or duration. The Fund may also invest in currencies, money market and short-term debt securities and cash equivalents, warrants, structured investments or other derivatives, which may be used to maintain exposure of at least 80% of its net assets (plus borrowings for investment purposes) to Emerging Markets Securities. Under certain limited circumstances, the Fund may obtain substantially all of its investment exposure to Emerging Markets Securities through the use of derivatives.
The Fund intends to invest less than 50% of its assets in a single country. In addition, the Fund may invest the remainder of its assets in securities which will not be used to achieve the Funds 80% policy, such as shares of open- and closed-end investment companies, common stocks, bonds and convertible securities.
The Funds investment objective and 80% policy are non-fundamental, and may be changed without shareholder approval; however, shareholders will be notified in writing of any material changes to the investment objective or the 80% policy at least 60 days prior to any change.
The Fund may borrow from banks and other financial institutions and may also borrow additional funds through reverse repurchase agreements or the issuance of debt securities (collectively, Borrowings). Under normal market conditions, the Fund intends to leverage the Fund by engaging in Borrowings and/or issuing preferred shares. The aggregate amount of the Funds Borrowings and the liquidation value of any preferred shares will generally not exceed 33 1/3% of the Funds Managed Assets (as defined below) measured immediately after the transaction giving rise to the leverage. The Fund may also enter into other transactions that are not subject to this 33 1/3% threshold but that may give rise to a form of leverage including, among others, credit default swaps and other derivatives transactions, loans of portfolio securities and when-issued, delayed delivery or forward commitment transactions. Managed Assets are the average daily value of the funds total assets, including any assets attributable to any leverage used, minus the funds accrued liabilities, other than the fund liabilities incurred for any leverage.
Investment Restrictions and Policies
The Fund has adopted investment restrictions that are designated as fundamental policies and as such cannot be changed without the approval of the holders of a majority of the Funds outstanding Common Shares which, as used in the Statement of Additional Information, means the lesser of (a) 67% of the shares of the Fund present or represented by proxy at a meeting if the holders of more than 50% of the outstanding shares are present or represented at the meeting or (b) more than 50% of outstanding shares of the Fund. See Additional Investment Activities and Restrictions in the Statement of Additional Information for a complete list of the fundamental investment policies of the Fund.
Portfolio Composition
The Funds permitted investments include, but are not limited to:
Sovereign Debt Obligations. Sovereign debt obligations are obligations of governmental issuers in foreign developed and emerging market countries (Sovereign Debt Obligations). Sovereign Debt Obligations include, but are not limited to, (i) debt securities issued or guaranteed by governments, government agencies or instrumentalities and political subdivisions, (ii) debt securities issued by government owned, controlled or sponsored entities and supranational government entities, (iii) interests in entities organized and operated for the purposes of restructuring the investment characteristics of instruments issued by any of the above issuers or (iv) participation in loans between governments and financial institutions. Supranational entities include international organizations that are organized or supported by one or more government entities to promote economic reconstruction or development and by international banking institutions and related governmental agencies. As a holder of Sovereign Debt Obligations, the Fund may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In addition, there are generally no bankruptcy proceedings similar to those in the United States by which defaulted Sovereign Debt Obligations may be collected. Investing in foreign securities involves special risks and considerations not typically associated with investing in U.S. securities.
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High Yield Securities. The Fund may invest without limit in debt securities that are rated below investment grade (below Baa by Moodys Investor Service, Inc. (Moodys) or below BBB by either S&P Global Ratings (S&P) or Fitch Ratings (Fitch)) or unrated but judged by the Subadviser to be of comparable quality (Non-Investment Grade Bonds). Non-Investment Grade Bonds are commonly referred to as high yield securities or junk bonds. Non-Investment Grade Bonds involve a greater degree of risk (in particular, a greater risk of default) than, and special risks in addition to the risks associated with, investment grade debt obligations. While offering a greater potential opportunity for capital appreciation and higher yields, Non-Investment Grade Bonds typically entail greater potential price volatility and may be less liquid than higher-rated securities. Non-Investment Grade Bonds may be regarded as predominantly speculative with respect to the issuers continuing ability to make timely principal and interest payments. They also may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher-rated securities. Debt securities in the lowest investment grade category also may be considered to possess some speculative characteristics by one or more ratings agencies.
The market values of Non-Investment Grade Bonds tend to reflect individual developments of the issuer to a greater extent than do higher-quality securities, which tend to react mainly to fluctuations in the general level of interest rates. In addition, lower-quality debt securities tend to be more sensitive to general economic conditions. Certain emerging market governments that issue Non-Investment Grade Bonds in which the Fund may invest are among the largest debtors to commercial banks, foreign governments and supranational organizations, such as the World Bank, and may not be able or willing to make principal and/or interest payments as they come due.
Corporate Debt Securities. The Fund may invest in debt securities of non-governmental issuers. Like all debt securities, corporate debt securities generally represent an issuers obligation to repay to the investor (or lender) the amount borrowed plus interest over a specified time period. A typical corporate bond specifies a fixed date when the amount borrowed (principal) is due in full, known as the maturity date, and specifies dates when periodic interest (coupon) payments will be made over the life of the security.
Corporate debt securities come in many varieties and may differ in the way that interest is calculated, the amount and frequency of payments, the type of collateral, if any, and the presence of special features (e.g., conversion rights). The Funds investments in corporate debt securities may include, but are not limited to, senior, junior, secured and unsecured bonds, notes and other debt securities, and may be fixed rate, floating rate, zero coupon and inflation linked, among other things. The Fund may invest in convertible bonds and warrant structures, which are fixed income securities with imbedded warrants that are exercisable into other debt or equity securities.
Bonds. The Fund may invest in a wide variety of bonds of varying maturities issued by U.S. and foreign corporations and other business entities, governments and municipalities and other issuers. Bonds are fixed or variable/floating-rate debt obligations, including bills, notes, debentures, money market instruments and similar instruments and securities. Bonds generally are used by corporations as well as governments and other issuers to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Some bonds are perpetual in that they have no maturity date.
Currency. The Fund may engage in foreign currency exchange transactions in connection with its investments in emerging markets securities. The Fund will conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market or in the derivatives markets, including through entering into forward, futures or options contracts to purchase or sell foreign currencies. Additional instruments that provide exposure to currencies include, but are not limited to, currency swap contracts, currency futures contracts and options on such futures contracts, purchasing put or call options on currencies in U.S. or foreign markets and other currency derivatives.
Loan Participations and Assignments. The Fund may invest in fixed and floating rate loans arranged through private negotiations between an issuer and one or more financial institutions. The Funds investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. The Funds investment in participations typically will result in the Fund having a contractual relationship only with the lender and not with the borrower. The Fund will have the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the participation and only upon receipt by the lender of the payments from the borrower.
The purchaser of an assignment acquires direct rights against the borrower on the loan. Because assignments are arranged through private negotiations between potential assignees and potential assignors, however, the rights and obligations so acquired may differ from, and be more limited than, those held by the assigning lender. The assignability of certain loans, especially with respect to Sovereign Debt Obligations, is restricted by the governing documentation as to the nature of the assignee such that the only way in which the Fund may acquire an interest in such a loan is through a participation and not through an assignment.
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Forward Foreign Currency Exchange Contracts. The Fund may enter into forward foreign currency exchange contracts (forward contracts) for purposes of gaining exposure to the currency of an emerging markets or other foreign country or as a hedge against fluctuations in future foreign currency exchange rates. A forward contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large, commercial and investment banks) and their customers. A non-deliverable currency forward contract is a short-term forward contract on a foreign currency where the profit and loss is the difference between a specified exchange rate and the spot rate at the time of settlement.
At times, the Fund may enter cross-currency hedging transactions involving currencies other than those in which securities are held or proposed to be purchased are denominated.
By entering a forward contract for the purchase or sale, for a fixed amount of dollars or other currency, of the amount of foreign currency involved in an underlying security transaction, the Fund may be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the currency which is being used for the security transaction.
Although the Fund values its assets daily in terms of U.S. dollars, it does not intend to actually convert its holdings of foreign currencies into U.S. dollars on a daily basis. It will, however, do so with respect to a portion of the Funds assets from time to time, and investors should be aware of the costs of currency conversion. Although foreign currency exchange dealers typically do not charge a fee for conversion, they do realize a profit based on the spread between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer.
The Fund may be limited in its ability to enter hedging transactions involving forward contracts by the Internal Revenue Code of 1986, as amended (the Code) requirements relating to qualification as a regulated investment company.
Forward contracts may limit gains on portfolio securities that could otherwise be realized had they not been utilized and could result in losses. The contracts also may increase the Funds volatility and may involve a significant amount of risk relative to the investment of cash.
Options. A put option gives the purchaser of the option, upon payment of a premium, the right to sell, and the writer of the option the obligation to buy, the underlying security, commodity, index or other instrument at the exercise price. The Funds purchase of a put option on a security might be designed to protect its holdings in the underlying instrument (or, in some cases, a similar instrument) against a substantial decline in the market value by giving the Fund the right to sell such instrument at the option exercise price. A call option, upon payment of a premium, gives the purchaser of the option the right to buy, and the seller the obligation to sell, the underlying instrument at the exercise price. The Funds purchase of a call option on a security, financial future contract, index or other instrument might be intended to protect the Fund against an increase in the price of the underlying instrument that it intends to purchase in the future by fixing the price at which it may purchase such instrument. An American style put or call option may be exercised at any time during the option exercise period while a European style put or call option may be exercised only upon expiration. A Bermudan style put or call may be exercised on fixed dates occurring during the term of the option. Put options and call options typically have similar structural characteristics and operational mechanics regardless of the underlying instrument on which they are purchased or sold.
Futures Contracts. The Fund may enter into contracts for the purchase or sale for future delivery of securities or foreign currencies, or contracts based on financial indices, including any stock index or index of government or other securities. A futures contract purchaser incurs an obligation to take delivery of a specified amount of the security, currency or other asset underlying the contract at a specified time in the future for a specified price. A seller of a futures contract incurs an obligation to deliver the specified amount of the underlying security, currency or other asset at a specified time in return for an agreed upon price. The purchase of a futures contract enables the Fund, during the term of the contract, to lock in a price at which it may purchase a security, currency or other asset and protect against a rise in prices pending purchase. The sale of a futures contract enables the Fund to lock in a price at which it may sell a security, currency or other asset and protect against declines pending sale.
Although most futures contracts call for actual delivery or acceptance of the underlying security, currency or other asset, the contracts usually are closed out before the settlement date without the making or taking of delivery. Index futures contracts provide for the delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the open or close of the last trading day of the contract and the futures contract price. A futures contract sale is closed out by effecting a futures contract purchase for the same aggregate amount of the specific type of security, currency or other asset and the same delivery date. If the sale price exceeds the offsetting purchase price, the seller would be paid the difference and would realize a gain. If the offsetting purchase price exceeds the sale price, the seller would pay the difference and would realize a loss. Similarly, a futures contract purchase is closed out by effecting a futures contract sale for the same aggregate amount of the specific type of security, currency or other asset and the same delivery date. If the offsetting sale price exceeds the purchase price, the purchaser would realize a gain, whereas if the purchase price exceeds the offsetting sale price, the purchaser would realize a loss. There is no assurance that the Fund will be able to enter into a closing transaction.
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Currently, securities index futures contracts can be purchased with respect to several indices on various exchanges. Differences in the securities included in the indices may result in differences in correlation of the futures contracts with movements in the value of the securities being hedged. The Fund also may invest in foreign stock index futures contracts traded outside the United States which involve additional risks, including fluctuations in foreign exchange rates, foreign currency exchange controls, political and economic instability, differences in financial reporting and securities regulation and trading, and foreign taxation issues.
In addition, the Fund may enter into financial futures contracts or purchase or sell put and call options on futures contracts as a hedge against anticipated interest rate or debt market changes, to gain exposure to a market, for duration management or for risk management purposes. Futures contracts are generally bought and sold on the exchanges where they are listed with payment of initial and variation margin as described below. The purchase of a financial futures contract creates a firm obligation by the Fund, as purchaser, to take delivery from the seller the specific type of financial instrument called for in the contract at a specific future time for a specified price (or, with respect to index futures contracts and Eurodollar instruments, the net cash amount). The sale of a futures contract creates a firm obligation by the Fund, as seller, to deliver to the buyer the specific type of financial instrument called for in the contract at a specific future time for a specified price (or, with respect to index futures contracts and Eurodollar instruments, the net cash amount). Options on futures contracts are similar to options on securities except that an option on a futures contract gives the purchaser the right in return for the premium paid to assume a position in a futures contract and obligates the seller to assume the opposite position.
Futures Contracts Strategies. When a significant market advance is anticipated, the purchase of a futures contract by the Fund affords a hedge against not participating in the advance at a time when the Fund is otherwise fully invested. Such purchase of a futures contract would serve as a temporary substitute for the purchase of individual securities, which may be purchased in an orderly fashion once the market has stabilized. As individual securities are purchased, an equivalent amount of futures contracts could be terminated by offsetting sales. The Fund may sell futures contracts in anticipation of or in a general market decline that may adversely affect the market value of the Funds securities. To the extent that the value of the Funds portfolio of securities changes in correlation with the value of the underlying security or index, the sale of futures contracts would substantially reduce the risk to the Fund of a market decline and, by so doing, provides an alternative to the liquidation of securities positions in the Fund. Ordinarily transaction costs associated with futures contracts transactions are lower than transaction costs that would be incurred in the purchase and sale of the underlying securities.
Typically, maintaining a futures contract or selling an option on a futures contract requires the Fund to deposit with a financial intermediary as security for its obligations an amount of cash or other specified assets (initial margin), which initially is typically 1% to 10% of the face amount of the contract (but may be higher in some circumstances). Additional cash or assets (variation margin) may be required to be deposited thereafter on a daily basis as the mark to market value of the contract fluctuates. The purchase of options on financial futures contracts involves payment of a premium for the option without any further obligation on the part of the Fund. If the Fund exercises an option on a futures contract it will be obligated to post initial margin (and potential subsequent variation margin) for the resulting futures contract position just as it would for any position. Futures contracts and options on futures contracts are generally settled by entering into an offsetting transaction but there can be no assurance that the position can be offset prior to settlement at an advantageous price nor that delivery will occur.
Because the initial margin required to maintain a futures contract is a fraction of the face value of the contract, the value of the contract can be much higher or lower than the value of the Funds assets used to take the position. The Fund may therefore use futures as form of leverage and may be exposed to the associated risks.
There currently are limited futures markets for certain currencies of emerging market countries, securities and indexes and the nature of the strategies adopted by Stone Harbor and the extent to which those strategies are used will depend on the development of those markets. To the extent the Fund engages in transactions in options and futures, the Fund will normally transact in options and futures that are traded on a recognized securities or futures exchange, including non-U.S. exchanges.
Structured Products. The Fund may invest a portion of its assets in structured investments, structured notes and other types of similarly structured products consistent with the Funds investment objective and policies. Generally, structured investments are interests in entities organized and operated for the purpose of restructuring the investment characteristics of underlying investment interests or securities. These investment entities may be structured as trusts or other types of pooled investment vehicles. This type of structuring generally involves the deposit with or purchase by an entity of the underlying investments and the issuance by that entity of one or more classes of securities backed by, or representing interests in, the underlying investments or referencing an indicator related to such investments. The cash flow or rate of return on the underlying investments may be apportioned among the newly issued securities to create different investment characteristics, such as varying maturities, credit quality, payment priorities and interest rate provisions.
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Structured notes are derivative securities for which the amount of principal repayment and/or interest payments is based on the movement of one or more factors. These factors may include, but are not limited to, currency exchange rates, interest rates (such as the prime lending rate or Secured Overnight Financing Rate), referenced bonds and stock indices. Some of these factors may or may not correlate to the total rate of return on one or more underlying instruments referenced in such notes. In some cases, the impact of the movements of these factors may increase or decrease through the use of multipliers or deflators.
The cash flow or rate of return on a structured investment may be determined by applying a multiplier to the rate of total return on the underlying investments or referenced indicator. Application of a multiplier is comparable to the use of financial leverage, a speculative technique. Leverage magnifies the potential for gain and the risk of loss. As a result, a relatively small decline in the value of the underlying investments or referenced indicator could result in a relatively large loss in the value of a structured product.
Swaps. The Fund may enter into swap transactions, such as interest rate swaps, cross currency swaps, total return swaps, and options on swaps, caps, floors or collars. A swap is a derivative in the form of an agreement to exchange the return generated by one instrument for the return generated by another instrument. The payment streams are often calculated by reference to a specified index and agreed upon notional amount. The term specified index may include currencies, interest rates, prices, total return on interest rate indices, debt indices, stock indices and commodity indices (as well as amounts derived from arithmetic operations on these indices). For example, the Fund may agree to swap the return generated by a debt index for the return generated by a second debt index. Such swaps may involve initial and final exchanges that correspond to the agreed upon national amount.
The swaps in which the Fund may engage also include rate caps, floors, collars and other combinations of options, forwards, swaps and/or futures under which one party pays a single or periodic fixed amount(s) (or premium), and the other party pays periodic amounts based on the movement of a specified index. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps, floors and collars are more recent innovations for which standardized documentation has not yet been fully developed and, accordingly, they are less liquid than swaps.
The Fund will usually enter into swaps on a net basis, i.e., the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The Funds obligations under a swap agreement will generally be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the designation of cash or liquid securities in an amount equal to the Funds net obligations under the swap. These transactions are not subject to the Funds borrowing restrictions. The Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty.
The Fund will engage in any swap transactions in a manner consistent with its intention to qualify as a regulated investment company under the Code.
Options on Swaps. The Fund may engage in options on swaps for hedging purposes to manage and mitigate the credit and interest rate risks. A swap option (sometimes called a swaption) is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement at some designated future time on specified terms. The Fund may write (sell) and purchase put and call swap options. The use of swap options involves risks, including, among others, that (i) the changes in the market value of securities held by the Fund and in the swap options relating to those securities may not be proportionate, which could result in an imperfect hedge leaving the Fund economically over or under exposed to such securities, (ii) there may not be a liquid market to sell a swap option, which could result in difficulty closing a position, (iii) swap options can magnify the extent of losses incurred due to changes in the market value of the securities to which they relate, and (iv) counterparty risk.
Credit Default Swaps. The Fund may enter into credit default swap contracts for hedging purposes or to add investment exposure to certain securities or markets to the Fund. As the seller in a credit default swap contract, the Fund would be required to pay the par (or other agreed-upon) value of a referenced debt obligation to the counterparty in the event of a default by a third party, such as an emerging market corporate issuer, on the debt obligation. In return, the Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Fund would keep the stream of payments and would have no payment obligations. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total assets, the Fund would be subject to investment exposure to the reference instrument in the amount of the notional amount of the swap.
The Fund may also purchase credit default swap contracts in order to hedge against the risk of default of debt securities held in its portfolio, in which case the Fund would function as the counterparty referenced in the preceding paragraph. This would involve the risk that the investment may expire worthless and would generate income only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial instability). It would also involve credit risk that the seller may fail to satisfy its payment obligations to the Fund in the event of a default.
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If the Fund sells credit protection through a credit default swap, although the Fund may not be required to pay the par (or other agreed upon) value of the referenced debt instrument absent a default of the underlying debt obligation, a credit downgrade or other indication of financial distress with respect to the reference issuer may cause the value of the credit default swap to decrease, causing a loss to the Fund, and may also require the Fund to deposit additional margin with the counterparty, possibly requiring it to sell other assets at disadvantageous times or prices.
The market for credit default swaps has become more volatile recently as the creditworthiness of certain counterparties has been questioned and/or downgraded. If a counterpartys credit becomes significantly impaired, multiple requests for collateral posting in a short period of time could increase the risk that the Fund may not receive adequate collateral. The Fund generally may exit its obligations under a credit default swap only by terminating the contract and paying applicable breakage fees, or by entering into an offsetting credit default swap position, which may cause the Fund to incur more losses.
Credit-Linked Notes. The Fund may invest in credit-linked notes, which are types of derivative instruments. A credit linked note is a synthetic obligation between two or more parties where the payment of principal and/or interest is based on the performance of some obligation (a reference obligation, such as an underlying emerging market bond). The Fund will typically be a purchaser of credit linked notes, in that it will pay the counterparty a sum of money in exchange for the right to payments corresponding to interest and principal payments actually made by the issuer of the reference obligation. In addition to credit risk and other risks of the reference obligations and interest rate risk, a purchaser of a credit linked note is subject to counterparty risk.
Leverage. The Fund may use leverage through Borrowings and possibly through issuing preferred shares, in an aggregate amount of up to 33 1/3% of the Funds total assets immediately after such transactions. The Fund may also engage in other transactions that result in leverage, such as credit default swaps and other derivatives, but are not subject to this restriction.
Zero Coupon Bonds. Certain debt securities purchased by the Fund may take the form of zero coupon bonds. A zero coupon bond is a bond that does not pay interest either for the entire life of the obligation or for an initial period after the issuance of the obligation. When held to its maturity, its return comes from the difference between the purchase price and its maturity value. A zero coupon bond is normally issued and traded at a discount from face value. Zero coupon bonds allow an issuer to avoid or delay the need to generate cash to meet current interest payments and, as a result, may involve greater credit risk than bonds that pay interest currently or in cash. The Fund would be required to distribute the income on any of these instruments as it accrues, even though the Fund will not receive all of the income on a current basis or in cash. Thus, the Fund may have to sell other investments, including when it may not be advisable to do so, to make income distributions to its common shareholders.
Yankee Dollar Obligations, Eurobonds, Global Bonds. Certain debt securities purchased by the Fund may take the forms of Yankee dollar obligations, eurobonds or global bonds. Yankee dollar obligations are dollar-denominated obligations issued in the U.S. capital markets by foreign issuers, such as corporations and banks. A eurobond is a bond issued in a currency other than the currency of the country or market in which it is issued. Global bonds are bonds that can be offered within multiple markets simultaneously. Unlike eurobonds, global bonds can be issued in the local currency of the country of issuance.
Brady Bonds. The Fund may invest in Brady bonds, which are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with a debt restructuring. Investments in Brady bonds may be viewed as speculative. Brady bonds acquired by the Fund may be subject to restructuring arrangements or to requests for new credit, which may cause the Fund to realize a loss of interest or principal on any of its portfolio holdings.
Repurchase Agreements. The Fund may engage in repurchase agreements with broker-dealers, banks and other financial institutions to earn incremental income on temporarily available cash which would otherwise be uninvested. A repurchase agreement is a short-term investment in which the purchaser (i.e., the Fund) acquires ownership of a security and the seller agrees to repurchase the obligation at a future time and set price, thereby determining the yield during the holding period. Repurchase agreements involve risks in the event of default by the other party. The Fund may enter into repurchase agreements with broker-dealers, banks and other financial institutions deemed to be creditworthy by Stone Harbor. Repurchase agreements maturing in more than seven days may be considered illiquid.
Repurchase agreements are fully collateralized by the underlying securities. The Fund pays for such securities only upon physical delivery or evidence of book entry transfer to the account of a custodian or bank acting as agent. The seller under a repurchase agreement will be required to maintain the value of the underlying securities marked-to-market daily at not less than the repurchase price. The underlying securities (normally securities of emerging market countries, the U.S. government and their agencies or instrumentalities) may have maturity dates exceeding one year.
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Reverse Repurchase Agreements. The Fund may generate leverage by entering into reverse repurchase agreements. Under a reverse repurchase agreement, the Fund sells securities to a bank or broker dealer and agrees to repurchase the securities at a mutually agreed future date and price. Generally, the effect of a reverse repurchase agreement transaction is that the Fund can recover and reinvest all or most of the cash invested in the portfolio securities involved during the term of the agreement and still be entitled to the returns associated with those portfolio securities, thereby resulting in a transaction similar to a borrowing and giving rise to leverage for the Fund. The Fund will incur interest expense as a cost of utilizing reverse repurchase agreements. In the event the buyer of securities under a reverse repurchase agreement or dollar roll files for bankruptcy or becomes insolvent, the Funds use of the proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Funds obligation to repurchase the securities.
When-Issued and Delayed Delivery Securities. The Fund may purchase and sell securities on a when-issued or delayed delivery basis whereby the Fund buys or sells a security with payment and delivery taking place in the future. The payment obligation and the interest rate are fixed at the time the Fund enters into the commitment. No income accrues to the Fund on securities in connection with such transactions prior to the date the Fund actually takes delivery of such securities. These transactions are subject to market risk as the value or yield of a security at delivery may be more or less than the purchase price or the yield generally available on securities when delivery occurs. In addition, the Fund is subject to counterparty risk because it relies on the buyer or seller, as the case may be, to consummate the transaction, and failure by the other party to complete the transaction may result in the Fund missing the opportunity of obtaining a price or yield considered to be advantageous. An increase in the percentage of the Funds assets committed to the purchase of securities on a when issued or delayed delivery basis may increase the volatility of the Funds net asset value (NAV).
Asset-Backed Securities. Asset-backed securities are interests in pools of debt securities backed by various types of loans such as credit card, auto and home equity loans. Payment of principal and interest may be guaranteed up to certain amounts and for certain time periods by a letter of credit issued by a financial institution unaffiliated with the entities issuing the securities. These securities involve prepayment risk as well as risk that the underlying debt securities will default.
Private Placements and Restricted Securities. The Fund may invest in securities which are subject to restrictions on resale because they have not been registered under the Securities Act of 1933 (the Securities Act), or which are otherwise not readily marketable. These securities are generally referred to as private placements or restricted securities. Limitations on the resale of these securities may have an adverse effect on their marketability, and may prevent the Fund from disposing of them promptly at reasonable prices. The Fund may have to bear the expense of registering the securities for resale and the risk of substantial delays in effecting the registration.
Rule 144A permits the Fund to sell certain restricted securities to qualified institutional buyers without limitation. However, investing in Rule 144A securities could have the effect of increasing the level of Fund illiquidity to the extent the Fund, at a particular point in time, may be unable to find qualified institutional buyers interested in purchasing such securities.
Short Sales. A short sale is a transaction in which the Fund sells an instrument that it does not own in anticipation that the market price will decline. The Fund may use short sales for investment purposes or for hedging and risk management purposes. The Fund may also take short positions with respect to the performance of securities, indexes, interest rates, currencies and other assets or markets through the use of derivative or forward instruments. When the Fund engages in a short sale of a security, it must borrow the security sold short and deliver it to the counterparty. The Fund may have to pay a fee to borrow particular securities and would often be obligated to pay over any payments received on such borrowed securities. The Funds obligation to replace the borrowed security will be secured by collateral deposited with the lender, which is usually a broker-dealer, and/or with the Funds custodian. The Fund may not receive any payments (including interest) on its collateral. Short sales expose the Fund to the risk that it will be required to cover its short position at a time when the securities have appreciated in value, thus resulting in a loss to the Fund. The Fund may engage in so-called naked short sales when it does not own or have the immediate right to acquire the security sold short at no additional cost, in which case the Funds losses theoretically could be unlimited. If the price of the security sold short increases between the time of the short sale and the time that the Fund replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. The successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and securities being hedged if the short sale is being used for hedging purposes. The Fund may engage in short selling to the extent permitted by the 1940 Act and the rules and interpretations thereunder and other federal securities laws. If the Fund engages in short selling in foreign (non-U.S.) jurisdictions, the Fund will do so only to the extent permitted by the laws and regulations of such jurisdiction. The Fund will not make a short sale if, after giving effect to such sale, the market value of all securities sold short by the Fund exceeds 25% of the value of its total assets.
Convertible Securities. Convertible securities are generally issued as bonds or shares preferred stock that, at the holders option, may be exchanged for a fixed number of the issuers common shares or other equity securities.
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In addition to traditional convertible securities, the Fund may invest in exchangeable and synthetic convertible securities. The Fund may also invest in traditional convertible securities whose conversion values are based on the common stock of the issuer of the convertible security. Synthetic and exchangeable convertible securities are preferred stocks or debt obligations of an issuer which are combined with an equity component whose conversion value is based on the value of the common stock of a different issuer or a particular benchmark (which may include a foreign issuer or basket of foreign stocks, or a company whose stock is not yet publicly traded). In many cases, synthetic and exchangeable convertible securities are not convertible prior to maturity, at which time the value of the security is paid in cash by the issuer.
Money Market Instruments. Money market instruments are high quality short-term debt securities. Money market instruments in which the Fund may invest may include obligations of governments, government agencies, banks, corporations and special purpose entities including time deposits and certificates of deposit and repurchase agreements relating to these obligations. Certain money market instruments may be denominated in foreign currencies.
Common Stock. Common stock generally represents an ownership or equity interest in an issuer, without preference over any other class of securities, including such issuers debt securities, preferred stock and other senior equity securities. Common stocks are entitled to the income and increase in the value of the assets and business of the issuer after all its debt obligations and obligations to preferred stockholders are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. They may or may not pay dividends, as some issuers reinvest all of their profits back into their businesses, while others pay out some of their profits to stockholders as dividends.
Preferred Stock. Preferred stock, like common stock, represents an equity ownership in an issuer. Generally, preferred stock has a priority of claim over common stock in dividend payments and upon liquidation of the issuer. Unlike common stock, preferred stock does not usually have voting rights. Preferred stock in some instances is convertible into common stock.
Although they are equity securities, preferred stocks have characteristics of both debt and common stock. Like debt, their promised income is contractually fixed. Like common stock, they do not have rights to precipitate bankruptcy proceedings or collection activities in the event of missed payments. Other equity characteristics are their subordinated position in an issuers capital structure and that their quality and value are heavily dependent on the profitability of the issuer rather than on any legal claims to specific assets or cash flows.
Distributions on preferred stock are declared by the board of directors of the issuer and may be subject to deferral, and thus may not be automatically payable. Income payments on preferred stocks may be cumulative, causing dividends and distributions to accrue even if not declared by the board or otherwise made payable, or non-cumulative, so that skipped dividends and distributions do not continue to accrue. There is no assurance that dividends on preferred stocks in which the Fund invests will be declared or otherwise made payable. The Fund is permitted to invest in non-cumulative preferred stock, although Stone Harbor will consider, among other factors, the non-cumulative nature in making any decision to purchase or sell such securities on behalf of the Fund.
Inflation Linked Bonds. Inflation linked bonds are government-issued debt securities that offer an investor inflationary protection, by linking yields to the inflation rate.
Warrants. Warrants give holders the right, but not the obligation, to buy common stock or fixed income securities of an issuer at a given price, usually higher than the market price at the time of issuance, during a specified period. Warrants are usually freely transferable. The risk of investing in a warrant is that the warrant may expire prior to the market value of the underlying security exceeding the price fixed by the warrant.
In particular, the Fund may seek to gain exposure to emerging markets securities through warrants, the return on which is linked to one or more securities of issuers located in emerging market countries. Purchasing warrants would entitle the Fund, upon exercise of the warrant, to receive any appreciation in the market price of its securities over approximately the market price at the time of purchase. Warrants are exercisable over specified periods.
Unrated Securities. The Fund may purchase unrated securities (which are not rated by a rating agency) if Stone Harbor determines that the securities are of comparable quality to rated securities that the Fund may purchase. Unrated securities may be less liquid than comparable rated securities and involve the risk that Virtus Alternative Investment Advisers, Inc. (the Adviser) may not accurately evaluate the securitys comparative credit rating. Analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of higher-quality debt obligations. The Funds success in achieving its investment objective may depend more heavily on Stone Harbors credit analysis to the extent that the Fund invests in below investment grade quality and unrated securities.
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Collateralized Debt Obligations. The Fund may invest in collateralized debt obligations (CDOs), which include collateralized bond obligations (CBOs), collateralized loan obligations (CLOs) and other similarly structured securities. CBOs and CLOs are types of asset-backed securities. A CBO is a trust which is backed by a diversified pool of high risk, below investment grade fixed income securities. A CLO is a trust typically collateralized by a pool of loans, which may include, among others, domestic and foreign senior secured loans, senior unsecured loans and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. CDOs may charge management fees and administrative expenses. For both CBOs and CLOs, the cash flows from the trust are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the equity tranche which bears the bulk of defaults from the bonds or loans in the trust and serves to protect the other, more senior tranches from default. Since it is partially protected from defaults, a senior tranche from a CBO trust or CLO trust typically has higher ratings and lower yields than the underlying securities and can be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults and aversion to CBO or CLO securities as a class. The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which the Fund invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus are not registered under the securities laws. As a result, investments in CDOs may be characterized by the Fund as illiquid securities; however, an active dealer market may exist for CDOs allowing a CDO to qualify under Rule 144A under the Securities Act. CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the Fund may invest in CDO securities that are subordinate to other classes; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results.
Commercial Paper. Commercial paper represents short-term unsecured promissory notes issued in bearer form by corporations such as banks or bank holding companies and finance companies. The rate of return on commercial paper may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
U.S. Government Securities. U.S. Government securities are obligations of and, in certain cases, guaranteed by, the U.S. Government, its agencies or instrumentalities. The U.S. Government does not guarantee the NAV of the Funds shares. Some U.S. Government securities, such as Treasury bills, notes and bonds, and securities guaranteed by the Government National Mortgage Association, are supported by the full faith and credit of the United States; others, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Department of the Treasury (the U.S. Treasury); others, such as those of the Federal National Mortgage Association , are supported by the discretionary authority of the U.S. Government to purchase the agencys obligations; and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. U.S. Government securities may include zero coupon securities, which do not distribute interest on a current basis and tend to be subject to greater risk than interest-paying securities of similar maturities.
Zero-Coupon Bonds, Step-Ups and Payment-In-Kind Securities. Zero-coupon bonds pay interest only at maturity rather than at intervals during the life of the security. Like zero-coupon bonds, step up bonds pay no interest initially but eventually begin to pay a coupon rate prior to maturity, which rate may increase at stated intervals during the life of the security. Payment-in-kind securities (PIKs) are debt obligations that pay interest in the form of other debt obligations, instead of in cash. Each of these instruments is normally issued and traded at a deep discount from face value. Zero-coupon bonds, step-ups and PIKs allow an issuer to avoid or delay the need to generate cash to meet current interest payments and, as a result, may involve greater credit risk than bonds that pay interest currently or in cash. The Fund would be required to distribute the income on these instruments as it accrues, even though the Fund will not receive the income on a current basis or in cash. Thus, the Fund may have to sell other investments, including when it may not be advisable to do so, to make income distributions to its shareholders.
Inflation-Indexed Bonds. Inflation-indexed bonds (other than municipal inflation-indexed bonds and certain corporate inflation-indexed bonds) are fixed income securities the principal value of which is periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value of inflation-indexed bonds (other than municipal inflation-indexed bonds and certain corporate inflation-indexed bonds) will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation- indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal. With regard to certain corporate inflation-indexed bonds, the inflation adjustment is reflected in the semi-annual coupon payment. As a result, the principal value of such corporate inflation-indexed bonds does not adjust according to the rate of inflation.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates are tied to the relationship between nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate than inflation, real interest rates may rise, leading to a decrease in value of inflation-indexed bonds. Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
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Variable- and Floating-Rate Securities. Variable- and floating-rate instruments are instruments that pay interest at rates that adjust whenever a specified interest rate (the reference rate) changes and/or that reset on predetermined dates (such as the last day of a month or calendar quarter). In addition to floating-rate loans, variable- and floating-rate instruments may include, without limitation, instruments such as catastrophe and other event-linked bonds, bank capital securities, unsecured bank loans, corporate bonds, money market instruments and certain types of mortgage-backed and other asset-backed securities. Due to their variable- or floating-rate features, these instruments will generally pay higher levels of income in a rising interest rate environment and lower levels of income as interest rates decline. For the same reason, the market value of a variable- or floating-rate instrument is generally expected to have less sensitivity to fluctuations in market interest rates than a fixed-rate instrument, although the value of a variable- or floating-rate instrument may nonetheless decline as interest rates rise and due to other factors, such as changes in credit quality or because of an imperfect correlation between the securities interest rate adjustment mechanism and the level of interest rates generally.
The Fund also may engage in credit spread trades. A credit spread trade is an investment position relating to a difference in the prices or interest rates of two bonds or other securities, in which the value of the investment position is determined by changes in the difference between the prices or interest rates, as the case may be, of the respective securities. The Fund may also invest in inverse floating-rate debt instruments (inverse floaters), which are floating rate instruments whose coupon rate moves in the opposite direction from the change in the reference rate. An inverse floater may exhibit greater price volatility than a fixed-rate obligation of similar credit quality.
Hybrid Instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a benchmark). The interest rate or (unlike most fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. An example of a hybrid could be a bond issued by an oil company that pays a small base level of interest with additional interest that accrues in correlation to the extent to which oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes the Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations in the NAV of the Funds common shares if the Fund invests in hybrid instruments.
Certain hybrid instruments may provide exposure to the commodities markets. These are derivative securities with one or more commodity-linked components that have payment features similar to commodity futures contracts, commodity options or similar instruments. Commodity-linked hybrid instruments may be either equity or debt securities, leveraged or unleveraged, and are considered hybrid instruments because they have both security and commodity-like characteristics. A portion of the value of these instruments may be derived from the value of a commodity, futures contract, index or other economic variable.
Certain issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, the Funds investments in these products may be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act.
Depository Receipts. The Fund may invest in American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and similar securities that represent interests in a companys securities that have been deposited with a bank or trust and that trade on an exchange or over-the-counter. For example, ADRs represent interests in a non-U.S. company but trade on a U.S. exchange or over-the-counter and are denominated in U.S. dollars. These securities represent the right to receive securities of the foreign issuer deposited with the bank or trust. ADRs, EDRs and GDRs can be sponsored by the issuing bank or trust company or the issuer of the underlying securities. Although the issuing bank or trust company may impose charges for the collection of dividends and the conversion of such securities into the underlying securities, there are generally no fees imposed on the purchase or sale of these securities, other than transaction fees ordinarily involved with trading stock. Such securities may be less liquid or may trade at a lower price than the underlying securities of the issuer. Additionally, receipt of corporate information about the underlying issuer and proxy disclosure may be untimely.
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Other Investment Companies. The Fund may invest in securities of other open- or closed-end investment companies, including exchange traded funds (ETFs) and investment companies organized under non-U.S. law, to the extent that such investments are consistent with the Funds investment objective, strategies and policies and permissible under the 1940 Act. The Fund may invest in other investment companies to gain broad market, sector or geographic exposure, including during periods when it has large amounts of uninvested cash or when the Adviser, believes share prices of other investment companies offer attractive values. The Fund may invest in investment companies that are advised by the Adviser, Stone Harbor, or their affiliates to the extent permitted by applicable law and/or pursuant to exemptive relief from the Securities and Exchange Commission (SEC). As a shareholder in an investment company, the Fund would bear its ratable share of that investment companys expenses and would remain subject to payment of the Funds management fees and other expenses with respect to assets so invested. Common shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies. The securities of other investment companies may be leveraged, in which case the NAV and/or market value of the investment companys shares will be more volatile than unleveraged investments.
The Fund may use leverage to the extent permitted by the 1940 Act. The Funds strategy relating to its use of leverage may not be successful, and the Funds use of leverage will cause its NAV to be more volatile than it would otherwise be. There can be no guarantee that the Fund will leverage its assets or, to the extent the Fund utilizes leverage, the percentage of its assets such leverage will represent.
As of [●, 2024], the Fund had an aggregate financial leverage ratio from reverse repurchase agreements as a percentage of its total Managed Assets of [●%].
Investing in the Fund involves risks, including the risk that you may receive little or no return on your investment or that you may lose part or all of your investment. Please refer to the section of the Funds most recent annual report on Form N-CSR entitled Principal Risk Factors, which is incorporated by reference herein, for a discussion of the risks of investing in the Fund.
The Board of Trustees
The Fund is governed by a board of trustees (the Board) that is responsible for the overall supervision of the Fund, including establishing the Funds policies, general supervision, and review of its investment activities, and performs the various duties imposed on trustees under the 1940 Act and under Massachusetts law. The Board consists of 12 trustees, 11 of whom are not interested persons of the Fund as that term is defined by the 1940 Act.
The Adviser and Subadviser
VAIA is the Adviser to the Fund and is located at One Financial Plaza, Hartford, CT 06103. VAIA, an indirect wholly owned subsidiary of Virtus Investment Partners, Inc. (Virtus), a publicly traded multi-manager asset management business, serves as the investment adviser to open- and closed-end regulated investment companies. As of [●, 2024,], VAIA had approximately [$●] in assets under management.
VFIA an affiliate of VAIA, is located at One Financial Plaza, Hartford, CT 06103. VFIA operates through its division, Stone Harbor, in subadvising the Fund as described herein. As of [●, 2024,], the three divisions that make up VFIA had approximately [$●] billion in aggregate assets under management.
The Stone Harbor division of VFIA is a global credit specialist with expertise in emerging and developed markets debt, with three decades of informed experience allocating risk in complex areas of the fixed income markets. As of [$●], the Stone Harbor division of VFIA had approximately [$●] in assets under management.
The Funds contractual advisory fee is 1.00% of the Funds Managed Assets provided that the advisory fee does not exceed 1.50% of the Funds net assets.
The advisory fee for the Fund will vary based on the extent to which the Fund borrows for investment purposes. As a result, the advisory fee, as a percentage of net assets, can differ due to the amount of Borrowings. The advisory fee for the Fund for the fiscal period ended [●, 2024] as a percentage of net assets was [●%].
The Subadviser manages the investments of the Fund, for which it is paid a subadvisory fee at the rate of 50% of the net advisory fee paid by the applicable Fund to the Adviser.
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The Adviser has contractually agreed to limit the Funds annual operating expenses other than the advisory fees, subject to the following exclusions, so that such expenses do not exceed, on an annualized basis, 0.58% of average daily net assets through April 10, 2025. Following the contractual period, the Adviser may discontinue the expense reimbursement arrangement at any time. The reimbursements are accrued daily and received monthly. The exclusions include investment advisory fees, interest, any other fees or expenses relating to financial leverage, preferred shares (such as dividends on preferred shares, auction agent fees and commissions and rating agency fees) or borrowing (such as interest, commitment, amendment and renewal expenses on credit or redemption facilities), taxes, extraordinary, unusual or infrequently occurring expenses (such as litigation), costs related to share offerings, brokerage commissions, expenses incurred in connection with any merger or reorganization, underlying fund expenses and dividend expenses, if any (each expressed as a percentage of average daily net assets attributable to common shares).
Under certain conditions, VAIA may recapture operating expenses reimbursed or fees waived under the fee waiver arrangement within three years after the date on which such amounts were incurred or waived. The Fund must pay its ordinary operating expenses before VAIA is entitled to any reimbursement and must remain in compliance with any applicable expense limitations or, if none, the expense limitation in effect at the time of the waiver or reimbursement. During the fiscal period ended November 30, 2023, [VAIA recaptured [$●] in expenses previously waived for the Fund.
A discussion regarding the basis for the Board approving the investment advisory and subadvisory agreements for the Fund is available in the Funds annual shareholder report for the period ended November 30, 2023.
Administrator
Virtus Fund Services, LLC, an indirect wholly-owned subsidiary of Virtus and an affiliate of VIA, serves as administrator to the Fund. As the Funds administrator, VFS generally assists in the administration of the Funds day to day corporate affairs, subject to the overall authority of the Funds Board.
The Fund pays the administrator an asset-based fee of one tenth of one percent (0.1%) per year calculated on average daily Managed Assets, which is calculated daily and paid monthly.
Expenses
The Fund pays all expenses incurred in the operation of the Fund and offering of its shares, including, among others, interest, taxes, brokerage fees and commissions, fees of trustees who are not affiliated persons of the Adviser, expenses of trustees and shareholders meetings including the cost of printing and mailing proxies, expenses of Fund officers attending trustee meetings as required, expenses of insurance premiums for fidelity and other coverage, expenses of repurchase and redemption of shares, expenses of issue and sale of shares (to the extent not borne by its underwriter(s) pursuant to an agreement with the Fund), expenses of printing and mailing share certificates representing shares of the Fund, association membership dues, charges of custodians, transfer agents, dividend disbursing agents and financial agents, bookkeeping, auditing and legal expenses. The Fund will also pay the fees and bear the expense of registering and maintaining the registration of the Fund and its shares with the SEC to the extent required by law, listing its shares on any exchange, and registering or qualifying its shares under state or other securities laws and the expense of preparing and mailing prospectuses and reports to shareholders to the extent required by law. Additionally, if authorized by the trustees, the Fund shall pay for extraordinary expenses and expenses of a nonrecurring nature which may include, but not be limited to the reasonable and proportionate cost of any reorganization or acquisition of assets and the cost of legal proceedings to which the Fund is a party.
Portfolio Management
The following individuals are jointly and primarily responsible for the day-to-day management of the Funds portfolio.
Darin Batchman (since 2024)
Mr. Batchman serves as Portfolio Manager of Stone Harbor. Prior to joining the predecessor to Stone Harbor in 2011, he served as Director of Latin America integrated trading at Deutsche Bank Securities from 2008 to 2010, Director and Senior Vice President of equity strategies at Lehman Brothers/Barclays Capital from 2008 to 2010, and Associate Director of emerging markets fixed income research at Bear Stearns & Co. from 2003 to 2005.
James E. Craige, CFA (since 2010)
Mr. Craige serves as Co-Chief Investment Officer and a Portfolio Manager of Stone Harbor. Prior to joining the predecessor to Stone Harbor in 2006, he served as Managing Director and Senior Portfolio Manager for emerging markets debt portfolios at Salomon Brothers Asset Management Inc. Mr. Craige joined Salomon Brothers Asset Management Inc. in 1992.
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Kumaran Damodaran, PhD (since 2015)
Mr. Damodaran serves as a Portfolio Manager of Stone Harbor. Prior to joining the predecessor to Stone Harbor in 2015, he served as Lead Emerging Markets Macro Portfolio Manager for GLG Partners from 2012 to 2015. From 2008 to 2012, he served as Executive Vice President and Emerging Markets Portfolio Manager at PIMCO. Prior to PIMCO, he served as Senior Vice President and Trader in Latin American Local Market Rate Derivatives at Lehman Brothers for over five years.
Richard Lange (since 2024)
Mr. Lange serves as a Portfolio Manager for Stone Harbor. Prior to joining the predecessor to Stone Harbor in 2010, he served as a trader for Autonomy Capital Group from 2008 to 2010 and Director for Latin America corporate credit trading at Deutsche Bank from 2002 to 2008.
David A. Oliver, CFA (since 2010)
Mr. Oliver serves as a Portfolio Manager of Stone Harbor. Prior to joining the predecessor to Stone Harbor in 2008, he served as Managing Director in emerging market sales and trading at Citigroup. Mr. Oliver joined Citigroup in 1986.
Stuart Sclater-Booth (since 2017)
Mr. Sclater-Booth serves as a Portfolio Manager of Stone Harbor. Prior to joining the predecessor to Stone Harbor in 2014, he served as Managing Director and head of Emerging Markets Debt strategy for Goldman Sachs from 2009 to 2010 and from 2011 to 2014. Prior to joining Goldman Sachs Mr. Sclater-Booth served as Executive Director - Global Head of Emerging Markets Macro Strategy, Executive Director - Emerging Markets Proprietary Trading, Vice President, Head of Trade Strategy for JP Morgan Chase Securities from 1998 to 2009 and from 2010 to 2011.
Peter J. Wilby, CFA (since 2010)
Mr. Wilby serves as Co-Chief Investment Officer and a Portfolio Manager of Stone Harbor. Prior to joining the predecessor to Stone Harbor in 2006, he served as Chief Investment Officer - North American Fixed Income and senior portfolio manager responsible for directing investment policy and strategy for all emerging markets and high yield fixed income portfolios at Citigroup Asset Management. Mr. Wilby joined Citigroup or its predecessor firms in 1989.
See the Statement of Additional Information for additional information about the portfolio managers, including their compensation structure, other accounts managed, and share ownership.
The Fund currently pays a monthly distribution of $0.06 per share. The Fund intends to continue making a level dividend distribution each month to common shareholders after deduction of interest on any outstanding Borrowings or dividend on any outstanding preferred shares. The level dividend rate may be modified by the Board from time to time and will be based upon the past and projected performance and expenses of the Fund. The Fund will also make a distribution during or with respect to each calendar year (which may be combined with a regular monthly distribution), which will generally include any net investment income and net realized capital gain for the year not otherwise distributed.
If the total distributions made in any calendar year exceed the Funds current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, such excess distributed amount would be a tax-free return of capital to the extent of the adjusted tax basis in the common shares. After such adjusted tax basis is reduced to zero, the distribution would constitute capital gain (assuming the shares are held as capital assets). In general terms, a return of capital would involve a situation in which a Fund distribution (or a portion thereof) represents a return of a portion of the common shareholders investment, rather than net income or capital gains generated from his or her investment during a particular period. Although return of capital distributions may not be taxable, such distributions would reduce the basis of a shareholders common shares and therefore may increase a shareholders tax liability for capital gains upon a sale of common shares.
The Funds distribution policy may, under certain circumstances, have certain adverse consequences to the Fund and its shareholders because it may result in a return of capital resulting in less of a shareholders assets being invested in the Fund and, over time, increase the Funds expense ratio. The distribution policy also may cause the Fund to sell a security at a time it would not otherwise do so in order to manage the distribution of income and gain.
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The level dividend distribution described above is intended to result in the payment of approximately the same amount or percentage to holders of Common Shares each month. Section 19(a) of the 1940 Act and Rule 19a-1 thereunder require the Fund to provide a written statement accompanying any such payment that adequately discloses its source or sources. Thus, if the source of the dividend or other distribution were the original capital contribution of the common shareholder, and the payment amounted to a return of capital, the Fund would be required to provide written disclosure to that effect. Nevertheless, persons who periodically receive the payment of a dividend or other distribution may be under the impression that they are receiving net profits when they are not. Holders of Common Shares should read any written disclosure provided pursuant to Section 19(a) and Rule 19a-1 carefully, and should not assume that the source of any distribution from the Fund is net income or net profit. In addition, in cases in which the Fund would return capital to common shareholders, such distribution may bear on the Funds ability to maintain its asset coverage requirements and to pay the dividends on any preferred shares that the Fund may issue
The Fund has adopted a dividend reinvestment plan (the Plan) pursuant to which all dividends declared on Common Shares will automatically be reinvested by the Plans administrator, Computershare Trust Company, N.A. (the Plan Administrator), in additional common shares unless the registered owner of such Common Shares elects to receive cash by contacting the Plan Administrator. Common shareholders who elect not to participate in the Plan will receive all dividends and other distributions in cash paid by check mailed directly to the shareholder of record (or, if the common shares are held in street or other nominee name, then to such nominee) by the Plan Administrator as dividend disbursing agent. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Plan Administrator prior to the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution. Such notice will be effective with respect to a particular dividend or other distribution (together, a Dividend). Some brokers may automatically elect to receive cash on behalf of common shareholders and may re-invest that cash in additional common shares, which may result in a higher cost to such shareholders as compared to shareholders who participate in the Plan.
The Plan Administrator will open an account for each common shareholder participating in the Plan in the same name in which such common shareholders Common Shares is registered. Whenever the Fund declares a Dividend payable in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in Common Shares. The Common Shares will be acquired by the Plan Administrator for the participants accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized common shares from the Fund (Newly Issued Common Shares) or (ii) by purchase of outstanding common shares on the open market (Open-Market Purchases) on the NYSE or elsewhere. If, on the payment date for any Dividend, the closing market price plus estimated brokerage commissions per common share is equal to or greater than the NAV per common share, the Plan Administrator will invest the Dividend amount in Newly Issued Common Shares on behalf of the participants. The number of Newly Issued Common Shares to be credited to each participants account will be determined by dividing the dollar amount of the Dividend by the NAV per common share on the payment date; provided that, if the NAV is less than or equal to 95% of the closing market value on the payment date, the dollar amount of the Dividend will be divided by 95% of the closing market price per common share on the payment date. If, on the payment date for any Dividend, the NAV per common share is greater than the closing market value plus estimated brokerage commissions, the Plan Administrator will invest the Dividend amount in common shares acquired on behalf of the participants in Open-Market Purchases.
In the event of a market discount on the payment date for any Dividend, the Plan Administrator will have until the last business day before the next date on which the common shares trade on an ex-dividend basis or 30 days after the payment date for such Dividend, whichever is sooner (the Last Purchase Date), to invest the Dividend amount in common shares acquired in Open-Market Purchases. It is contemplated that the Fund will pay monthly income Dividends. If, before the Plan Administrator has completed its Open-Market Purchases, the market price per common share exceeds the NAV per common share, the average per common share purchase price paid by the Plan Administrator may exceed the NAV of the common shares, resulting in the acquisition of fewer common shares than if the Dividend had been paid in Newly Issued Common Shares on the Dividend payment date. Because of the foregoing difficulty with respect to Open-Market Purchases, the Plan provides that if the Plan Administrator is unable to invest the full Dividend amount in Open-Market Purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Administrator may cease making Open-Market Purchases and may invest the uninvested portion of the Dividend amount in Newly Issued Common Shares at the NAV per common share at the close of business on the Last Purchase Date provided that, if the NAV is less than or equal to 95% of the then current market price per common share, the dollar amount of the Dividend will be divided by 95% of the market price on the payment date for purposes of determining the number of shares issuable under the Plan.
The Plan Administrator maintains all shareholders accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for tax records. Common shares in the account of each Plan participant will be held by the Plan Administrator on behalf of the Plan participant, and each shareholder proxy will include those shares purchased or received pursuant to the Plan. The Plan Administrator will forward all proxy solicitation materials to participants and vote proxies for shares held under the Plan in accordance with the instructions of the participants.
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In the case of common shareholders such as banks, brokers or nominees which hold shares for others who are the beneficial owners, the Plan Administrator will administer the Plan on the basis of the number of common shares certified from time to time by the record shareholders name and held for the account of beneficial owners who participate in the Plan.
There will be no brokerage charges with respect to common shares issued directly by the Fund. However, each participant will pay a pro rata share of brokerage commissions incurred in connection with Open-Market Purchases. The automatic reinvestment of Dividends will not relieve participants of any federal, state or local income tax that may be payable (or required to be withheld) on such Dividends. Participants that request a sale of common shares through the Plan Administrator are subject to brokerage commissions.
The Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants with regard to purchases in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants.
All correspondence or questions concerning the Plan should be directed to the Plan Administrator at 1-866-270-7788.
The following is a brief description of the Funds capital stock. This description does not purport to be complete and is subject to and qualified in its entirety by reference to the Funds amended and restated declaration of trust (the Declaration of Trust) and amended and restated bylaws (the Bylaws). The Declaration of Trust and Bylaws are each exhibits to the registration statement of which this Prospectus is a part.
Common Shares
All Common Shares offered pursuant to this Prospectus will be, upon issuance, duly authorized, fully paid and nonassessable, and will have no pre-emptive or conversion rights or rights to cumulative voting. All Common Shares offered pursuant to this Prospectus will be of the same class and will have identical rights, as described below. All shares of Common Shares have equal rights to the payment of dividends and the distribution of assets upon liquidation.
The Funds Common Shares is listed on the NYSE under the trading or ticker symbol EDF. The Fund intends to hold annual meetings of stockholders so long as the Common Shares is listed on a national securities exchange and such meetings are required as a condition to such listing. The Fund must continue to meet the NYSE requirements for the Common Shares to remain listed.
Unlike open-end funds, closed-end funds, like the Fund, do not continuously offer shares and do not provide daily redemptions. Rather, if a stockholder determines to buy additional shares of Common Shares or sell shares of Common Shares already held, the stockholder may do so by trading on the NYSE through a broker or otherwise. Shares of closed-end funds may frequently trade on an exchange at prices lower than net asset value.
The market value of the Common Shares may be influenced by such factors as dividend levels (which are in turn affected by expenses), call protection, dividend stability, portfolio credit quality, net asset value, relative demand for and supply of such Common Shares in the market, general market and economic conditions, and other factors beyond the control of the Fund. The Fund cannot provide assurances that the Common Shares will trade at a price equal to or higher than net asset value in the future. The Funds Common Shares is designed primarily for long-term investors, and investors in Common Shares should not view the Fund as a vehicle for trading purposes.
Each outstanding share of Common Shares entitles the holder to one vote on all matters submitted to a vote of common stockholders, including the election of trustees. Holders of fractional shares of Common Shares are entitled to a proportional fractional vote. There is no cumulative voting in the election of trustees, which means that the holders of a majority of the outstanding shares of Common Shares can elect all of the trustees then standing for election and the holders of the remaining shares of Common Shares will not be able to elect any trustees.
Preferred Shares and Other Securities
Although the Fund currently offers one class of shares, the Declaration of Trust provides that the Funds trustees may authorize separate classes of shares of beneficial interest. Currently, the Fund has not issued preferred shares. The Funds Declaration of Trust provides that the Board may, subject to the Funds investment policies and restrictions and the requirements of the 1940 Act, authorize and cause the Fund to issue securities of the Fund having such par value and such preferences, voting powers, terms of redemption, if any, and special or relative rights or privileges (including conversion rights, if any) as the Board may determine, without the approval of shareholders.
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Under the 1940 Act, the Fund is not permitted to issue preferred shares unless immediately after such issuance the market value of the total assets of the Funds portfolio is at least 200% of the liquidation value of the outstanding preferred shares (i.e., such liquidation value may not exceed 50% of the Funds average daily total assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration, the preferred shares of the Fund have an asset coverage of at least 200% after deducting the amount of such dividend or other distribution, as the case may be. If preferred shares are issued, the Fund intends, to the extent possible, to purchase or redeem preferred shares, from time to time, to maintain coverage of any preferred shares of at least 300%. If the Fund issues preferred shares, the holders of the preferred shares would be entitled to elect two of the trustees of the Fund. In the event the Fund failed to pay dividends on its preferred shares for two years, holders of preferred shares would be entitled to elect a majority of the trustees until the dividends are paid.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Fund, the terms of any preferred shares may entitle the holders of preferred shares to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus redemption premium, if any, together with accrued and unpaid dividends, whether or not earned or declared and on a cumulative basis) before any distribution of assets is made to shareholders. After payment of the full amount of the liquidating distribution to which they are entitled, the preferred shareholders would not be entitled to any further participation in any distribution of assets by the Fund.
The following is a description of the procedures used by the Fund in valuing its assets.
The Board has adopted valuation policy and approved procedures for determining the value of investments of the Fund. Pursuant to the valuation policy and Rule 2a-5 under the 1940 Act, the Board has designated the Adviser as its valuation designee for fair value determinations. The Fund calculates a share price for its shares. The share price (net asset value or NAV) is based on the net assets of the Fund and the number of outstanding shares. In general, the Fund calculates a share price by:
· | adding the values of all securities and other assets of the Fund; |
· | subtracting liabilities; and |
· | dividing the result by the total number of outstanding shares. |
Assets. Equity securities are valued at the official closing price (typically last sale) on the exchange on which the securities are primarily traded, or, if no closing price is available, at the last bid price. Shares of other investment companies are valued at such companies NAVs. Debt instruments, including restricted securities, are valued based on evaluated quotations received from independent pricing services or from dealers who make markets in such securities. Other assets, such as accrued interest, accrued dividends and cash are also included in determining the Funds NAV. As required, some securities and assets are valued at fair value as determined by the Adviser.
Net Asset Value (NAV). Accrued expenses and liabilities are deducted from the assets of the Fund. The resulting amount is then divided by the number of shares outstanding to produce the NAV per share. The NAV per share of the Fund is determined as of the close of regular trading (generally 4:00 PM Eastern Time) on days when the NYSE is open for trading. The Fund will not calculate its NAV on days when the NYSE is closed for trading. If the Fund holds securities that are traded on foreign exchanges that trade on weekends or other holidays when the Fund does not price their shares, the NAV of the Funds shares may change on days when shareholders will not be able to purchase or redeem the Funds shares.
The Fund is a closed-end investment company and as such common shareholders do not have the right to cause the Fund to redeem their common shares. Instead, the common shares trade in the open market at a price that is a function of several factors, including dividend levels, NAV, call protection, portfolio credit quality, relative demand for and supply of such shares in the market, general market and economic conditions, conditions affecting individual issuers and other factors. Shares of a closed-end investment company may frequently trade at prices lower than NAV. To the extent permitted under applicable law, the Board reserves the right to purchase its common shares on the open market at any time. For example, the Board regularly monitors the relationship between the market price and NAV of the common shares. If the common shares were to trade at a substantial discount to NAV for an extended period of time, the Board may consider the repurchase of its common shares on the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Fund to an open-end investment company. The Fund cannot assure you that the Board will decide to take or propose any of these actions, or that share repurchases or tender offers will actually reduce market discount.
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If the Fund were to convert to an open-end company, it would be required to redeem all preferred shares and other preferred shares then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), and the common shares would no longer be listed on the NYSE. In addition, the Fund may have to close out any credit default swaps that it had written. In contrast to a closed-end investment company, shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their NAV, less any redemption charge that is in effect at the time of redemption. In addition, if the Fund were to convert to an open-end company, it would not be able to invest more than 15% of its net assets in illiquid investments, which may necessitate a substantial repositioning of the Funds investment portfolio, which may in turn generate substantial transaction costs, which would be borne by common shareholders, and may adversely affect the Funds performance and common share dividends.
Before deciding whether to take any action to convert the Fund to an open-end investment company, the Board would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Funds portfolio, the effect of any action that might be taken on the Fund or its shareholders, and market considerations. Based on these considerations, even if the Funds common shares should trade at a discount, the Board may determine that, in the interest of the Fund and its shareholders, no action should be taken.
U.S. FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income tax consequences that may be relevant to a holder of Common Stock that acquires, holds and/or disposes of Common Stock of the Fund, and reflects provisions of the Internal Revenue Code of 1986, as amended (the Code), existing Treasury Regulations, rulings published by the Internal Revenue Service (IRS), and other applicable authority, as of the date of this prospectus. These authorities are subject to change by legislative or administrative action, possibly with retroactive effect. The following discussion is only a summary of some of the important tax considerations generally applicable to investments in the Fund, and the discussion set forth herein does not constitute tax advice. For more detailed information regarding tax considerations, see the Statement of Additional Information. There may be other tax considerations applicable to particular investors, including foreign shareholders (as defined below). In addition, income earned through an investment in the Fund may be subject to state, local and foreign taxes. Common Shareholders should consult their own tax advisers regarding their particular situation and the possible application of U.S. federal, state, local, foreign or other tax laws.
The Fund intends to elect to be treated as a regulated investment company (RIC) under Subchapter M of the Code and intends each year to qualify and be eligible to be treated as such. In order for the Fund to qualify as a RIC, it must meet an income and asset diversification test each year. If the Fund so qualifies and satisfies certain distribution requirements, the Fund (but not its shareholders) will not be subject to U.S. federal income tax to the extent it distributes its investment company taxable income (as that term is defined in the Code, but without regard to the deduction for dividends paid) and net capital gains (the excess of net long-term capital gains over net short-term capital loss) in a timely manner to its shareholders in the form of dividends or capital gain distributions. The Fund intends to distribute substantially all of such income and gain each year.
If the Fund does retain any investment company taxable income, it will be subject to tax at the regular corporate rate on the amount retained. If the Fund retains any net capital gain, it will also be subject to tax at the regular corporate rate on the amount retained, but may designate the retained amount as undistributed capital gain in a notice to its shareholders who would then (i) be required to include in income for U.S. federal income tax purposes, as long-term capital gain, their shares of such undistributed amount, and (ii) be entitled to credit their proportionate shares of the tax paid by the Fund on such undistributed amount against their U.S. federal income tax liabilities, if any, and to claim such refunds on a properly filed U.S. tax return to the extent the credit exceeds such liabilities. If the Fund makes this designation, for U.S. federal income tax purposes, the tax basis of common shares owned by a shareholder will be increased by an amount equal under current law to the difference between the amount of undistributed capital gains included in the shareholders gross income under clause (i) of the preceding sentence and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence. The Fund is not required to, and there can be no assurance that the Fund will, make this designation if it retains all or a portion of its net capital gain in a taxable year.
A nondeductible excise tax at the rate of 4% will be imposed on the excess, if any, of the Funds required distribution over its actual distributions in any calendar year. Generally, the required distribution is 98% of the Funds ordinary income for the calendar year plus 98.2% of its capital gain net income recognized during the one-year period ending on October 31 (or November 30, if the Fund elects to use its taxable year instead), plus undistributed amounts from prior years. For these purposes, ordinary gains and losses from the sale, exchange, or other taxable disposition of property taken into account after October 31 (or November 30, if the Fund elects to use its taxable year instead) are treated as arising on January 1 of the following calendar year. For purposes of the excise tax, the Fund will be treated as having distributed any amount for which it is subject to corporate income tax for the taxable year ending within the calendar year. The Fund intends to make distributions sufficient to avoid imposition of the excise tax, although there can be no assurance that it will be able to do so. The Fund may determine to pay the excise tax in a year to the extent it is deemed to be in the best interest of the Fund (e.g., if the excise tax is de minimis).
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In determining its net capital gain, including in connection with determining the amount available to support a capital gain dividend, its taxable income and its earnings and profits, the Fund generally may elect to treat part or all of any post-October capital loss (defined as any net capital loss attributable to the portion, if any, of the taxable year after October 31 or, if there is no such loss, the net long-term capital loss or net short-term capital loss attributable to such portion of the taxable year) or late-year ordinary loss (generally, the sum of its (i) net ordinary loss from the sale, exchange or other taxable disposition of property, attributable to the portion, if any, of the taxable year after October 31, and its (ii) other net ordinary loss attributable to the portion, if any, of the taxable year after December 31) as if incurred in the succeeding taxable year.
The Funds intention to qualify for treatment as a RIC may negatively affect the Funds return to Common Shareholders by limiting its ability to acquire or continue to hold positions that would otherwise be consistent with its investment strategy or by requiring it to engage in transactions it would otherwise not engage in, resulting in additional transaction costs. In certain circumstances, it may be difficult for the Fund to meet the income or diversification test for RIC qualification. Failure to qualify as a RIC would likely materially reduce the investment return to the common shareholders. If the Fund were to fail to qualify as a RIC accorded special tax treatment in any taxable year for example, because it was not sufficiently diversified under the applicable tests the Fund would be subject to tax on its taxable income at the corporate rate, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, would be taxable to common shareholders as dividend income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before re-qualifying as a RIC that is accorded special tax treatment.
The Fund intends to make monthly distributions of net investment income. Unless a shareholder elects otherwise, all distributions will be automatically reinvested in additional common shares of the Fund pursuant to the Plan. For U.S. federal income tax purposes, all dividends are generally taxable in the same manner, whether a shareholder takes them in cash or they are reinvested pursuant to the Plan in additional shares of the Fund. A shareholder whose distributions are reinvested in common shares under the Plan generally will be treated as having received a dividend equal to either (i) if Newly Issued Common Shares are issued under the Plan, the fair market value of the Newly Issued Common Shares issued to the shareholder or (ii) if reinvestment is made through Open-Market Purchases under the Plan, the amount of cash allocated to the shareholder for the purchase of common shares on its behalf in the open market. See Dividend Reinvestment Plan above.
For U.S. federal income tax purposes, distributions of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the Fund owned the investments that generated them, rather than how long a shareholder has owned their common shares. In general, the Fund will recognize long-term capital gain or loss on investments it has owned (or is deemed to have owned) for more than one year, and short-term capital gain or loss on investments it has owned (or is deemed to have owned) for one year or less. Distributions of net capital gain (that is, the excess of net long-term capital gain over net short-term capital loss) that are properly reported by the Fund as capital gain dividends (Capital Gain Dividends) will be taxable to shareholders as long-term capital gains. Distributions from capital gains are generally made after applying any available capital loss carryovers. Distributions of net short-term capital gain (as reduced by any net long-term capital loss for the taxable year) will be taxable to shareholders as ordinary income. The Fund may report certain dividends as derived from qualified dividend income, which, when received by an individual, will be taxed at the rates applicable to long-term capital gain, provided holding period and other requirements are met at both the shareholder and Fund levels. The Fund does not expect a significant portion of distributions to be derived from qualified dividend income.
If the Fund makes a distribution in excess of its current and accumulated earnings and profits in any taxable year, the excess distribution will be treated as a return of capital to the extent of a shareholders tax basis in their common shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces a shareholders basis in his or her shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by the shareholder of such shares. Where the Fund distributes current-year capital gains without reference to those losses deemed to arise on the first-day of the Funds current taxable year, the capital loss carryforwards that will remain available for future years are reduced by the excess of current-year capital gains over current-year capital losses (other than carryforward losses treated as realized on the first day of the Funds current taxable year).
The determination of the character for U.S. federal income tax purposes of any distribution from the Fund (i.e. ordinary income dividends, capital gains dividends, qualified dividends, or return of capital distributions) will be made as of the end of the Funds taxable year. Generally, the Fund will provide shareholders with a written notice reporting the amount of any capital gain distributions or other distributions, generally on Form 1099.
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Dividends and distributions on the common shares are generally subject to federal income tax as described herein to the extent they do not exceed the Funds realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholders investment. Such distributions are likely to occur in respect of common shares purchased at a time when the Funds net asset value reflects unrealized gains or income or gains that are realized but not yet distributed. Such realized income and gains may be required to be distributed even when the Funds net asset value also reflects unrealized losses.
Common Shareholders who sell or exchange their common shares will generally recognize gain or loss in an amount equal to the difference between the Common Shareholders adjusted tax basis in the common shares sold or exchanged and the amount received. If the common shares are held as a capital asset, any gain or loss realized upon a taxable disposition of the common shares will be treated as long-term capital gain or loss if the shares have been held for more than one year. Otherwise, the gain or loss on the taxable disposition of common shares will be treated as short-term capital gain or loss. However, any loss realized upon a taxable disposition of common shares held by a shareholder for six months or less will be treated as long-term, rather than short-term, to the extent of Capital Gain Dividends received (or deemed received) by the shareholder with respect to the shares. For purposes of determining whether common shares have been held for six months or less, the holding period is suspended for any periods during which the common shareholders risk of loss is diminished as a result of holding one or more other positions in substantially similar or related property, or through certain options or short sales. Any loss realized on a sale or exchange of common shares will be disallowed to the extent those common shares are replaced by other substantially identical shares within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the common shares (whether through the reinvestment of distributions, which could occur, for example, if the common shareholder is a participant in the Plan or otherwise). In that event, the basis of the replacement shares will be adjusted to reflect the disallowed loss.
The Fund may be liable to foreign governments for taxes relating primarily to investment income or capital gains on foreign securities in the Funds portfolio. If at the close of its taxable year, more than 50% of the value of the Funds total assets consists of securities of foreign corporations (including foreign governments), the Fund will be permitted to make an election under the Code that would allow common shareholders who are U.S. citizens or U.S. corporations to claim a foreign tax credit or deduction (but not both) on their income tax returns for their pro rata portion of qualified taxes paid by the Fund to foreign countries in respect of foreign securities that the Fund held for at least the minimum period specified in the Code. In such a case, common shareholders will include in gross income from foreign sources their pro rata shares of such taxes paid by the Fund. A common shareholders ability to claim an offsetting foreign tax credit or deduction in respect of foreign taxes paid by the Fund is subject to certain limitations imposed by the Code, which may result in the shareholders not receiving a full credit or deduction (if any) for the amount of such taxes. Shareholders who do not itemize deductions on their U.S. federal income tax returns may claim a credit (but not a deduction) for such foreign taxes.
Any transaction by the Fund in foreign currencies, foreign-currency denominated debt obligations or certain foreign currency options, futures contracts, or forward contracts (or similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency concerned. Such ordinary income treatment may accelerate Fund distributions to common shareholders and increase the distributions taxed to common shareholders as ordinary income. Any net losses so created cannot be carried forward by the Fund to offset income or gains earned in subsequent taxable years.
The Funds transactions in derivative instruments (e.g., options, futures, forward contracts, structured notes and swap agreements), as well as any of its other hedging, short sale or similar transactions, may be subject to uncertainty with respect to their tax treatment, and to one or more special tax rules (e.g., notional principal contract, straddle, constructive sale, wash sale, and short sale rules). The aforementioned rules may affect whether gains and losses recognized by the Fund are treated as ordinary or capital or as short-term or long-term, accelerate the recognition of income or gains to the Fund, defer losses to the Fund, and cause adjustments in the holding periods of the Funds securities. These rules could therefore affect the amount, timing and/or character of distributions to common shareholders. Because the tax treatment and the tax rules applicable to these types of transactions are in some cases uncertain under current law, an adverse determination or future guidance by the IRS with respect to these rules or treatment (which determination or guidance could be retroactive) may affect whether the Fund has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a RIC and avoid a Fund-level tax.
Certain of the Funds use of derivatives and foreign currency-denominated instruments, and any of the Funds transactions in foreign currencies and hedging activities, are likely to produce a difference between its book income and its taxable income. If there are differences between the Funds book income and its taxable income, the Fund may be required to distribute amounts in excess of its book income or a portion of Fund distributions may be treated as a return of capital to common shareholders. If the Funds book income exceeds its taxable income (including realized capital gains), the distribution (if any) of such excess generally will be treated as (i) a dividend to the extent of the Funds remaining earnings and profits, (ii) thereafter, as a return of capital to the extent of the recipients basis in its common shares, and (iii) thereafter as gain from the sale or exchange of a capital asset. If the Funds book income is less than its taxable income, the Fund could be required to make distributions exceeding book income to qualify as a RIC that is accorded special tax treatment.
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From time to time, a substantial portion of the Funds investments in loans and other debt obligations could be treated as having market discount and/or original issue discount (OID) for U.S. federal income tax purposes, which, in some cases, could be significant and could cause the Fund to recognize income in respect of these investments before or without receiving cash representing such income. If so, the Fund could be required to pay out as an income distribution each year an amount which is greater than the total amount of cash interest the Fund actually received. As a result, the Fund could be required at times to, among other things, liquidate other investments (including at potentially disadvantageous times or prices) in order to satisfy its distribution requirements and/or to avoid incurring Fund-level U.S. federal income or excise taxes. If the Fund liquidates portfolio securities to raise cash, the Fund may realize gain or loss on such liquidations; in the event the Fund realizes net long-term or short-term capital gains from such liquidation transactions, its shareholders may receive larger capital gain or ordinary dividends, respectively, than they would in the absence of such transactions.
The interest paid on municipal bonds is generally exempt from U.S. federal income tax. However, because the Fund does not expect to be eligible to pay exempt-interest dividends to its shareholders under the Code, any distribution received by common shareholders that is attributable to the interest received by the Fund on its municipal bond holdings is taxable to common shareholders. In addition, any gains realized by the Fund on the sale or exchange of municipal bonds generally are taxable to common shareholders when distributed to them by the Fund.
Investments in debt obligations that are at risk of or in default present special tax issues for the Fund. Tax rules are not entirely clear about issues such as whether or to what extent the Fund should recognize market discount on a debt obligation; when the Fund may cease to accrue interest, OID or market discount; when and to what extent the Fund may take deductions for bad debts or worthless securities; and how the Fund should allocate payments received on obligations in default between principal and income. These and other related issues will be addressed by the Fund when, as, and if it invests in such securities in order to seek to ensure that it distributes sufficient income to preserve its status as a RIC and avoid becoming subject to U.S. federal income or excise tax.
Certain distributions reported by the Fund as section 163(j) interest dividends may be treated as interest income by shareholders for purposes of the tax rules applicable to interest expense limitations under section 163(j) of the Code. Such treatment by the shareholder is generally subject to holding period requirements and other potential limitations, although the holding period requirements are generally not applicable to dividends declared by money market funds and certain other funds that declare dividends daily and pay such dividends on a monthly or more frequent basis. The amount that the Fund is eligible to report as a section 163(j) dividend for a tax year is generally limited to the excess of the Funds business interest income over the sum of the Funds (i) business interest expense and (ii) other deductions properly allocable to the Funds business interest income.
Backup withholding (currently at a rate of 24%) is generally required with respect to taxable distributions paid to any individual shareholder who fails to properly furnish a correct taxpayer identification number, who has under-reported dividend or interest income, or who fails to certify that he or she is not subject to such withholding. Amounts withheld as a result of backup withholding are remitted to the U.S. Treasury but do not constitute an additional tax imposed on the shareholder; such amounts may be claimed as a credit on the shareholders U.S. federal income tax return, provided the appropriate information is furnished to the IRS.
In general, dividends other than Capital Gain Dividends paid to a shareholder that is not a U.S. person within the meaning of the Code (a foreign shareholder) are subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate). Capital Gain Dividends paid to foreign shareholders are generally not subject to withholding. The Fund is not required to withhold any amounts with respect to distributions of (i) U.S.-source interest income that would not have been subject to U.S. federal income tax if earned directly by an individual foreign shareholder, and (ii) net short-term capital gains in excess of net long-term capital losses, in each case to the extent the Fund properly reports such distributions to shareholders, generally on Form 1099.
An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of shares) of U.S. individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceed certain threshold amounts.
Under sections 1471 through 1474 of the Code (such sections commonly referred to as FATCA), a 30% United States federal withholding tax may apply to any dividends that the Fund pays to (i) a foreign financial institution (as specifically defined in the Code), whether such foreign financial institution is the beneficial owner or an intermediary, unless such foreign financial institution agrees to verify, report and disclose its United States account holders (as specifically defined in the Code) and meets certain other specified requirements or (ii) a non-financial foreign entity, whether such nonfinancial foreign entity is the beneficial owner or an intermediary, unless such entity provides a certification that the beneficial owner of the payment does not have any substantial United States owners or provides the name, address and taxpayer identification number of each such substantial United States owner and certain other specified requirements are met. In certain cases, the relevant foreign financial institution or non-financial foreign entity may qualify for an exemption from, or be deemed to be in compliance with, these rules. In addition, foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules. Shareholders should consult their own tax advisor regarding FATCA and whether it may be relevant to their ownership and disposition of our shares.
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Under U.S. Treasury Regulations, if a shareholder recognizes losses with respect to shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Internal Revenue Service Form 8886. Direct owners of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayers treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
Special tax rules apply to investments though defined contribution plans and other tax-qualified plans. Common Shareholders should consult their tax advisors to determine the suitability of common shares as an investment through such plans and the precise effect of an investment on their particular tax situation.
The foregoing discussion relates solely to U.S. federal income tax laws. Dividends and distributions also may be subject to state and local taxes. Common Shareholders are urged to consult their tax advisors regarding specific questions as to federal, state, local, and, where applicable, foreign taxes. Foreign investors should consult their tax advisors concerning the tax consequences of ownership of common shares.
The foregoing is a general and abbreviated summary of the applicable provisions of the Code and related regulations currently in effect. For more detailed information, see the Statement of Additional Information. For the complete provisions, reference should be made to the pertinent Code sections and regulations. The Code and regulations are subject to change by legislative or administrative actions.
The Funds Declaration of Trust and the Bylaws include provisions that could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status.
The Funds trustees are divided into three classes. At each annual meeting of shareholders, the term of one class expires and each trustee elected to that class holds office for a term of three years. The classification of the Board in this manner could delay for an additional year the replacement of a majority of the Board. In addition, the Funds Declaration of Trust provides that a trustee may be removed only for cause and only (i) by action of at least 75% of the outstanding shares of the classes or series of shares entitled to vote for the election of such trustee, or (ii) by at least 75% of the remaining trustees.
The Funds Declaration of Trust grants special approval rights with respect to certain matters to members of the Board who qualify as Continuing Trustees, which means trustees who either (i) have been members of the Board for a period of at least thirty-six months, or since the commencement of the Funds operations, if less than thirty-six months, or (ii) were nominated to serve as members of the Board by a majority of the Continuing Trustees then members of the Board.
The Funds Declaration of Trust requires the affirmative vote or consent of at least 75% of the trustees and holders of at least 75% of the Funds common shares to authorize certain Fund transactions not in the ordinary course of business, including a merger or consolidation, issuance or transfer by the Fund of the Funds shares, except as may be pursuant to a public offering, the Funds dividend reinvestment plan or upon exercise of any stock subscription rights, a sale, transfer or other disposition of Fund assets, or any shareholder proposal regarding specific investment decisions, unless the transaction is authorized by both a majority of the trustees and 75% of the Continuing Trustees, in which case no shareholder authorization would be required by the Funds Declaration of Trust, but may be required in certain cases under the 1940 Act.
The Funds Declaration of Trust also requires the affirmative vote or consent of holders of at least 75% of the Funds common shares entitled to vote on the matter to authorize a conversion of the Fund from a closed-end to an open-end investment company, unless the conversion is authorized by both a majority of the trustees and 75% of the Continuing Trustees, in which case shareholders would have only the minimum voting rights required by the 1940 Act with respect to the conversion. Also, the Funds Declaration of Trust provides that the Fund may be terminated at any time by vote or consent of at least 75% of the Funds shares or, alternatively, by vote or consent of both a majority of the trustees and 75% of the Continuing Trustees.
The trustees may from time to time grant other voting rights to shareholders with respect to these and other matters in the Bylaws, certain of which are required by the 1940 Act.
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The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. These provisions also provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Funds investment objective and policies. The provisions of the Funds Declaration of Trust and Bylaws described above could have the effect of discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The Board has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its shareholders.
The foregoing is intended only as a summary and is qualified in its entirety by reference to the full text of the Funds Declaration of Trust and the Bylaws, both of which are on file with the SEC.
Under Massachusetts law, shareholders could, in certain circumstances, be held personally liable for the obligations of the Fund. However, the Funds Declaration of Trust contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the trustees. The Funds Declaration of Trust further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is remote.
The Funds Common Shares may be sold from time to time in any one or more of the following ways:
● | through at-the-market transactions, |
● | directly to one or more purchases (direct sales), |
● | through agents for the period of their appointment, |
● | to underwriters as principals for resale to the public, |
● | to dealers as principals for resale to the public, or |
● | pursuant to the Funds Dividend Reinvestment Plan. |
Any public offering price and any discounts or concessions allowed or reallowed or paid to dealers may be changed from time to time.
The Bank of New York, 240 Greenwich Street, New York, NY 10286-1048, serves as the Funds custodian pursuant to a custody agreement. The Bank of New York also serves as fund accounting agent, performing certain accounting services.
Computershare Trust Company, N.A., P.O. Box 43078, Providence, RI 02940-3078, serves as the Funds transfer agent.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[●] is the Funds independent registered public accounting firm, and is expected to render an opinion annually on the Funds financial statements.
Certain legal matters in connection with the offering of Common Shares will be passed upon for the Fund by Dechert, LLP, the Funds counsel.
As of the date of this prospectus, there are [●] who control the Fund. For purposes of the foregoing statement, control means (1) the beneficial ownership, either directly or through one or more controlled companies, of more than 25% of the voting securities of a company; (2) the acknowledgment or assertion by either the controlled or controlling party of the existence of control; or (3) an adjudication under Section 2(a)(9) of the 1940 Act, which has become final, that control exists.
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This Prospectus is part of a registration statement filed with the SEC. Pursuant to the final rule and form amendments adopted by the SEC on April 8, 2020 to implement certain provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Fund is permitted to incorporate by reference the information filed with the SEC, which means that the Fund can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this Prospectus, and later information that the Fund files with the SEC will automatically update and supersede this information.
The documents listed below, and any reports and other documents subsequently filed with the SEC pursuant to Section 30(b)(2) of the 1940 Act and Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the offering will be incorporated by reference into this Prospectus and deemed to be part of this Prospectus from the date of the filing of such reports and documents:
● | the Funds statement of additional information, dated [●, 2024,] relating to this Prospectus |
● | the Funds annual report to shareholders on Form N-CSR, filed with the SEC February 5, 2024, for the fiscal period ended November 30, 2023 |
● | the Funds semiannual report to shareholders on Form N-CSRS, dated [●], for the fiscal period ended May 31, 2024 |
You may obtain copies of any information incorporated by reference into this Prospectus, at no charge, by calling (866) 270-7788 toll-free, by writing to the Fund at Virtus Funds, 101 Munson Street, Greenfield, MA 01301-9683, or by visiting the Funds website (www.Virtus.com). The Funds periodic reports filed pursuant to Section 30(b)(2) of the 1940 Act and Sections 13 and 15(d) of the Exchange Act, as well as this Prospectus and the Statement of Additional Information, are available on the Funds website (www.Virtus.com).
The Fund is committed to ensuring your financial privacy. This notice is being sent to comply with privacy regulations of the SEC. The Fund has in effect the following policy and procedures with respect to nonpublic personal information about its current and former customers:
· | The Fund will ensure: (a) the security and confidentiality of customer records and information; (b) that customer records and information are protected from any anticipated threats and hazards; and (c) that customer records and information are protected from unauthorized access or use. |
· | The Fund conducts its business affairs through the trustees, officers and third parties that provide services pursuant to agreements with the Fund. The Fund has no employees. It is anticipated that the trustees and officers of the Fund who are not employees of service providers will not have access to customer records and information in the performance of their normal responsibilities for the Fund. |
· | The Fund may share customer information with its affiliates, subject to the customers right to prohibit such sharing. |
· | The Fund may share customer information with unaffiliated third parties only in accordance with the requirements of Regulation S-P. Pursuant to this policy, the Fund will not share customer information with unaffiliated third parties other than as permitted by law, unless authorized to do so by the customer. |
Consistent with these policies, the Fund has adopted the following procedures:
· | The Fund will determine that the policies and procedures of its affiliates and service providers are reasonably designed to safeguard customer information and only permit appropriate and authorized access to and use of customer information through the application of appropriate administrative, technical and physical protections. |
· | The Fund will direct each of its service providers to adhere to the privacy policy of the Fund and to its privacy policy with respect to all customer information of the Fund and to take all action reasonably necessary so that the Fund is in compliance with the provisions of Regulation S-P, including, as applicable, the development and delivery of privacy notices and the maintenance of appropriate and adequate records. |
· | Each service provider is required to promptly report to the officers of the Fund any material changes to its privacy policy before, or promptly after, the adoption of such changes. |
For more information about the Funds privacy policies call (866) 270-7788 (toll-free)
28
Shares
Virtus Stone Harbor Emerging Markets Income Fund
Common Shares
PROSPECTUS [ ], 2024
Until [ ], 2024 (25 days after the date of this prospectus), federal securities laws may require all dealers that effect transactions in our common stock, whether or not participating in this offering, to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
29
$[]
Virtus Stone Harbor Emerging Markets Income Fund
Common Shares
PROSPECTUS SUPPLEMENT
[ ], 2024
The information in this prospectus is not complete and may be changed. The Fund may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION |
[ ], 2024 |
Filed Pursuant to Rule [ ]
File No. [ ]
PROSPECTUS SUPPLEMENT
(To prospectus dated [ ], 2024)
Shares
Virtus Stone Harbor Emerging Markets Income Fund
(formerly known as Stone Harbor Emerging Markets Income Fund)
Common Shares
We are offering for sale [] of our common shares. Our common shares are listed on the New York Stock Exchange under the symbol EDF. On [], 2024, the last reported net asset value per share of our common shares was $[] and the last reported sales price per share of our common shares on the NYSE was $[].
The Virtus Stone Harbor Emerging Markets Income Fund (the Fund) is a non-diversified closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act). The Fund is organized as a Massachusetts business trust. The Funds investment objective is to maximize total return, which consists of income on its investments and capital appreciation. The Fund pursues this objective by normally investing at least 80% of its net assets (plus any borrowings for investment purposes) in Emerging Markets Securities (the 80% policy). Emerging Markets Securities include fixed income securities and other instruments (including derivatives) that are economically tied to emerging market countries, that are denominated in the predominant currency of the local market of an emerging market country or whose performance is linked to those countries markets, currencies, economies or ability to repay loans.
[Sales of our common shares, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be at the market as defined in Rule 415 under the Securities Act of 1933, as amended (the Securities Act), including sales made directly on the New York Stock Exchange or sales made to or through a market maker other than on an exchange.]
An investment in the Fund is not appropriate for all investors. We cannot assure you that the Funds investment objective will be achieved. You should read this prospectus supplement and the accompanying prospectus before deciding whether to invest in the common shares and retain it for future reference. The prospectus supplement and the accompanying prospectus contain important information about us. Material that has been incorporated by reference, including the Statement of Additional Information (the SAI), and other information about us can be obtained from us without charge by calling (866) 270-7788 or from the Securities and Exchange Commissions (SEC) website (http://www.sec.gov).
Investing in common shares involves certain risks that are described in the Risk Factors section beginning on page 16 of the accompanying prospectus.
Neither the Securities and Exchange Commission (the SEC) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
2
Per Share |
Total(1) |
|||||||
Public offering price |
$ | [] | $ | [] | ||||
Underwriting discounts and commissions |
$ | [] | $ | [] | ||||
Proceeds, before expenses, to us |
$ | [] | $ | [] |
(1) | The aggregate expenses of the offering (excluding underwriting discounts and commissions) are estimated to be $[], which represents approximately $[] per share. |
The underwriters may also purchase up to an additional [] common shares from us at the public offering price, less underwriting discounts and commissions, to cover over-allotments, if any, within [] days after the date of this prospectus supplement. If the over-allotment option is exercised in full, the total proceeds, before expenses, to the Fund would be $[] and the total underwriting discounts and commissions would be $[]. The underwriters are expected to deliver the common shares in book-entry form with The Depository Trust Company on or about [].
[], 2024
3
You should rely only on the information contained or incorporated by reference in this prospectus supplement and the accompanying prospectus. Neither the Fund nor the underwriters have authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither the Fund nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus supplement and the accompanying prospectus is accurate as of any date other than the date of this prospectus supplement and the accompanying prospectus, respectively. Our business, financial condition, results of operations and prospects may have changed since those dates.
Prospectus Supplement
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S-4 |
Prospectus
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4
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the SAI contain forward-looking statements. Forward-looking statements can be identified by the words may, will, intend, expect, estimate, continue, plan, anticipate, and similar terms and the negative of such terms. Such forward-looking statements may be contained in this prospectus supplement as well as in the accompanying prospectus. By their nature, all forward-looking statements involve risks and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect our actual results are the performance of the portfolio of securities we hold, the price at which our shares will trade in the public markets and other factors discussed in our periodic filings with the SEC.
Although we believe that the expectations expressed in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and are subject to inherent risks and uncertainties, such as those disclosed in the Risk Factors section of the accompanying prospectus. All forward-looking statements contained or incorporated by reference in this prospectus supplement or the accompanying prospectus are made as of the date of this prospectus supplement or the accompanying prospectus, as the case may be. Except for our ongoing obligations under the federal securities laws, we do not intend, and we undertake no obligation, to update any forward-looking statement. The forward-looking statements contained in this prospectus supplement, the accompanying prospectus and the SAI are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the Securities Act).
Currently known risk factors that could cause actual results to differ materially from our expectations include, but are not limited to, the factors described in the Risk Factors section of the accompanying prospectus. We urge you to review carefully those sections for a more detailed discussion of the risks of an investment in our common shares.
S-2
TABLE OF COMMON SHAREHOLDER FEES AND EXPENSES
Fees and Expenses Table
The following table is intended to assist investors in understanding the annualized fees and expenses that an investor in the Funds Common Shares would bear, directly or indirectly. The table is based on the Funds capital structure as of [●, 2024.]
SHAREHOLDER TRANSACTION EXPENSES |
|
|||||
Sales Load (as a percentage of offering price) 1 |
[●] | % | ||||
Offering Expenses Borne by the Fund (as a percentage of offering price) 2 |
[●] | % | ||||
Dividend Reinvestment and Cash Purchase Plan Fees 3 |
[$●] | |||||
ANNUAL EXPENSES (as a percentage of net assets attributable to Common Shares) | ||||||
Management Fees4 |
[●] | % | ||||
Administration Fees4 |
[●] | % | ||||
Interest Payments on Borrowed Funds5 |
[●] | % | ||||
Other Expenses6 |
[●] | % | ||||
Total Annual Expenses: | [●] | % |
1 Represents the estimated commission the Fund will pay to [●] with respect to the Common Shares being sold in this offering. Pursuant to the Distribution Agreement, [●] will be entitled to compensation of [●%] of the gross sales price per share of Common Shares sold under the Agreement. Commission payments will reduce the net proceeds from this offering and will be indirectly borne by all holders of the Funds Common Shares.
2 Offering expenses payable by the Fund will reduce the net proceeds from this offering and will be indirectly borne by all holders of the Funds Common Shares.
3 There will be no brokerage charges with respect to Common Shares issued directly by the Fund under its dividend reinvestment plan. You will pay brokerage charges in connection with open market purchases or if you direct the Plan Administrator, as defined below, to sell your Common Shares held in a dividend reinvestment account.
4 The contractual management fee and administration fee are asset-based fees calculated using the average daily Managed Assets, as defined below, of the Fund. The calculation reflects the Funds use of leverage during the period. The management fee cannot exceed 1.50% of the Funds net assets.
5 Assumed Borrowings, as defined below, in an aggregate amount of ●% of average Managed Assets for the 12 months ended November 30, 2023. The expenses and rates associated with leverage may vary as and when Borrowings are made.
6 Other Expenses are based on estimated amounts for the current fiscal year.
The Adviser has contractually agreed to limit the Funds annual total operating expenses, subject to the exclusions listed below, so that such expenses do not exceed, on an annualized basis, 0.58% of average daily net assets through April 10, 2025. Following the contractual period, the Adviser may discontinue these expense reimbursement arrangements at any time. The exclusions include investment advisory fees, interest, any other fees or expenses relating to financial leverage, preferred shares (such as dividends on preferred shares, auction agent fees and commissions and rating agency fees) or borrowing (such as interest, commitment, amendment and renewal expense on credit or redemption facilities), taxes, extraordinary, unusual or infrequently occurring expenses (such as litigation), costs related to share offerings, brokerage commissions, expenses incurred in connection with any merger or reorganization, underlying fund expenses and dividend expenses, if any (each expressed as a percentage of average daily net assets attributable to common shares).
Expense Example
The following example illustrates the expenses that a shareholder would pay on a $1,000 investment that is held for the time periods provided in the table. The examples assume that all dividends and other distributions are reinvested and that the Funds Total Annual Expenses of [●%] remain the same for the time periods shown. The example set forth below assumes a 5% annual rate of return. Actual annual rates of return may be greater or lesser than 5%. The example should not be considered a representation of future expenses. Actual expenses may be greater or lesser than those shown.
The following example does not include the sales load:
1 Year | 3 Years | 5 Years | 10 Years | |||||
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return: |
[$●] | [$●] | [$●] | [$●] | ||||
The following example assumes a sales load of [●%] as a percentage of the Common Shares offering price: | ||||||||
1 Year | 3 Years | 5 Years | 10 Years | |||||
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return: |
[$●] | [$●] | [$●] | [$●] |
S-3
We estimate the total net proceeds of the offering to be $[] based on the public offering price of $[] per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The Fund currently intends to fully invest substantially all of the net proceeds of this offering in accordance with its investment objective and policies within three months after receipt thereof. However, certain investments may be delayed up to an additional three months if suitable investments are unavailable at the time or for other reasons, such as market volatility and lack of liquidity in the markets of suitable investments.
[To be provided.]
[To be provided.]
The following table sets forth for the quarters indicated, the high and low sale prices on the New York Stock Exchange per common share and the net asset value and the premium or discount from net asset value per share at which the common shares were trading, expressed as a percentage of net asset value, at each of the high and low sale prices provided.
[To be provided.]
The last reported price for our common shares on [] was $[] per share.
[To be provided.]
Certain legal matters in connection with the offering of Common Shares will be passed upon for the Fund by Dechert, LLP, the Funds counsel.
S-4
STATEMENT OF ADDITIONAL INFORMATION
VIRTUS STONE HARBOR EMERGING MARKETS INCOME FUND
[ , 2024]
101 Munson Street
Greenfield, MA 01301-9683
This Statement of Additional Information (SAI) provides additional information regarding the Virtus Stone Harbor Emerging Markets Income Funds (the Fund) prospectus, filed with the Securities and Exchange Commission (the SEC) and dated [●, 2024] (the Prospectus), which is incorporated herein by reference. This SAI is not a prospectus and should only be read in conjunction with the Prospectus as may be supplemented from time to time. You may obtain a copy of the Funds Prospectus and other information without charge by calling (866) 270-7788 or by writing to Virtus Funds, 101 Munson Street, Greenfield, MA 01301-9683. You may also obtain a copy of the Prospectus on the SECs website (http://www.sec.gov). The audited financial statements appear in the Funds annual report for the period ending November 30, 2023. Unaudited financial statements appear in the Funds semiannual report for the period ending May 31, 2024. Shareholders may obtain a copy of the Funds annual and semiannual reports, without charge, by calling (866) 270-7788 or by visiting virtus.com.
Capitalized terms used but not defined in this SAI have the meanings ascribed to them in the Funds Prospectus.
TABLE OF CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION
1 | ||||
4 | ||||
4 | ||||
66 | ||||
67 | ||||
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A-1 |
1933 Act |
The Securities Act of 1933, as amended | |
1940 Act |
The Investment Company Act of 1940, as amended | |
Administrator |
The Funds administrative agent, Virtus Fund Services, LLC | |
ADRs |
American Depositary Receipts | |
ADSs |
American Depositary Shares | |
Adviser |
The investment adviser to the Fund, Virtus Alternative Investment Advisers, Inc. | |
BNY |
The Bank of New York, the Funds custodian | |
Board |
The Board of Trustees of the Fund (also referred to herein as the Trustees) | |
CDRs |
Continental Depositary Receipts (another name for EDRs) | |
CEA |
Commodity Exchange Act, which is the U.S. law governing trading in commodity futures | |
CFTC |
Commodity Futures Trading Commission, which is the U.S. regulator governing trading in commodity futures | |
Code |
The Internal Revenue Code of 1986, as amended, which is the law governing U.S. federal taxes | |
Custodian |
The custodian of the Funds assets, The Bank of New York | |
[●] |
The auditor of the Funds most recent financial statements | |
EDRs |
European Depositary Receipts (another name for CDRs) | |
ETFs |
Exchange-Traded Funds | |
FHFA |
Federal Housing Finance Agency, an independent Federal agency that regulates FNMA, FHLMC and the twelve Federal Home Loan Banks | |
FHLMC |
Federal Home Loan Mortgage Corporation, also known as Freddie Mac, which is a government-sponsored corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders | |
Fitch |
Fitch Ratings, Inc. | |
FNMA |
Federal National Mortgage Association, also known as Fannie Mae, which is a government-sponsored corporation owned entirely by private stockholders and subject to general regulation by the Secretary of Housing and Urban Development | |
Fund |
Virtus Stone Harbor Emerging Markets Income Fund | |
GDRs |
Global Depositary Receipts | |
GNMA |
Government National Mortgage Association, also known as Ginnie Mae, which is a wholly-owned United States Government corporation within the Department of Housing and Urban Development | |
IMF |
International Monetary Fund, an international organization seeking to promote international economic cooperation, international trade, employment and exchange rate stability, among other things | |
Independent Trustees |
Those members of the Board who are not interested persons as defined by the 1940 Act |
1
IRS |
The United States Internal Revenue Service, which is the arm of the U.S. government that administers and enforces the Code | |
LIBOR |
London Interbank Offering Rate, an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market | |
Moodys |
Moodys Investors Service, Inc. | |
NAV |
Net Asset Value | |
NYSE |
New York Stock Exchange | |
OCC |
Options Clearing Corporation, a large equity derivatives clearing corporation | |
PERLS |
Principal Exchange Rate Linked Securities | |
Prospectus |
The Prospectus to which this SAI relates | |
[●] |
[●], the independent registered public accounting firm for the Fund | |
RIC |
Regulated Investment Company, a designation under the Code indicating a U.S.-registered investment company meeting the specifications under the Code allowing the investment company to be exempt from paying U.S. federal income taxes | |
S&P |
S&P Global Ratings | |
SAI |
Statement of Additional Information, such as this document | |
SEC |
U.S. Securities and Exchange Commission | |
SMBS |
Stripped Mortgage-Backed Securities | |
SOFR |
Secured Overnight Financing Rate, the preferred LIBOR successor for U.S. dollar markets | |
Stone Harbor or Subadviser |
Stone Harbor Investment Partners, a division of VFIA, subadviser to the Fund | |
VAIA |
Virtus Alternative Investment Advisers, Inc., Adviser to the Fund | |
VFIA |
Virtus Fixed Income Advisers, LLC, an affiliate of VAIA | |
VFS |
Virtus Fund Services, LLC, Administrator to the Fund | |
Virtus |
Virtus Investment Partners, Inc., parent company of the Adviser, the Subadviser, and the Administrator | |
Virtus Funds |
The family of funds overseen by the Board, consisting of the Fund, The Merger Fund®, The Merger Fund® VL, the series of Virtus Alternative Solutions Trust, the series of Virtus Asset Trust, the series of Virtus Equity Trust, the series of Virtus Event Opportunities Trust, the series of Virtus Investment Trust, the series of Virtus Opportunities Trust, the series of Virtus Retirement Trust, the series of Virtus Strategy Trust, the series of Virtus Variable Insurance Trust, Virtus Artificial Intelligence & Technology Opportunities Fund, [Virtus Convertible & Income 2024 Target Term Fund,] Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II, Virtus Diversified Income & Convertible Fund, Virtus Dividend, Interest & Premium Strategy Fund, Virtus Equity & Convertible Income Fund, Virtus Global Multi-Sector Income Fund, Virtus Stone Harbor Emerging Markets Income Fund, and Virtus Total Return Fund Inc. | |
Virtus Mutual Funds |
The family of funds consisting of The Merger Fund, the series of Virtus Alternative Solutions Trust, the series of Virtus Asset Trust, the series of Virtus Equity Trust, the series of Virtus Event Opportunities Trust, the series of Virtus Investment Trust, the series of Virtus Opportunities Trust, and the series of Virtus Strategy Trust |
2
World Bank |
International Bank for Reconstruction and Development, an international financial institution that provides loans to developing countries for capital programs |
3
Prior to April 11, 2022, Virtus Stone Harbor Emerging Markets Income Fund was known as Stone Harbor Emerging Markets Income Fund.
ADDITIONAL INVESTMENT ACTIVITIES AND RESTRICTIONS
The Funds primary investment objective is to maximize total return, which consists of income on its investments and capital appreciation. The Fund is non-diversified under the 1940 Act. The Funds primary investment strategies are described in its Prospectus. The following is a description of the various investment policies in which the Fund may engage, whether as a primary or secondary strategy, and a summary of certain attendant risks. The Funds subadviser may, but is not required to, buy any of the following instruments or use any of the following techniques, and would do so only if it believes that doing so will help to achieve the Funds investment objective. The following is not meant to be an exclusive list of all the securities and instruments in which the Fund may invest or investment strategies in which it may engage, and the Fund may invest in instruments and securities and engage in strategies other than those listed below.
Fundamental Restrictions
The following investment restrictions of the Fund are designated as fundamental policies and as such cannot be changed without the approval of the holders of a majority of the Funds outstanding common shares, which, as used in this SAI, means the lesser of (a) 67% of the shares of the Fund present or represented by proxy at a meeting if the holders of more than 50% of the outstanding shares are present or represented at the meeting or (b) more than 50% of outstanding shares of the Fund. As a matter of fundamental policy, the Fund may not:
(1) Purchase any security (other than U.S. government securities) if, as a result, more than 25% of the Funds total assets (taken at current value) would be invested in any one industry. For purposes of this restriction, telephone, gas and electric public utilities are each regarded as separate industries, finance companies whose financing activities are related primarily to the activities of their parent companies are classified in the industry of their parents, and each non-U.S. countrys government (together with subdivisions thereof) will be considered to be a separate industry. For purposes of this restriction with regard to bank obligations, bank obligations are considered to be one industry, and asset-backed securities are not considered to be bank obligations;
(2) Make short sales of securities or maintain a short position, except that the Fund may make any short sales or maintain any short positions where the short sales or short positions would not constitute senior securities under the 1940 Act;
(3) Borrow money, except to the extent permitted under the 1940 Act;
(4) Make loans, except that the Fund may purchase or hold debt instruments in accordance with its investment objectives and policies; provided however, this restriction does not apply to repurchase agreements or loans of portfolio securities;
(5) Act as an underwriter of securities of other issuers except that, in the disposition of portfolio securities, it may be deemed to be an underwriter under the federal securities laws;
(6) Purchase or sell real estate, although the Fund may purchase securities of issuers which deal in real estate, securities which are secured by interests in real estate, and securities which represent interests in real estate, and the Fund may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein;
(7) Purchase or sell commodities, except that the Fund may purchase and sell futures contracts and options, may enter into foreign exchange contracts and may enter into swap agreements and other financial transactions not requiring the delivery of physical commodities; or
4
(8) Issue senior securities, except for permitted borrowings, the issuance of preferred shares or as otherwise permitted under the 1940 Act.
Restrictions (2) and (8) shall be interpreted based upon no-action letters and other pronouncements of the staff of the SEC.
Whenever an investment policy or investment restriction set forth in the Prospectus or this SAI states a maximum or minimum percentage of assets that may be invested in any security or other assets or describes a policy regarding quality standards, such percentage limitation or standard shall be determined immediately after and as a result of the Funds acquisition of such security or asset. Accordingly, any later increase or decrease resulting from a change in values or assets, from other circumstances, or from any subsequent rating change made by a rating service (or as determined by the Funds subadviser if the security is not rated by a rating agency) will not compel the Fund to dispose of such security or other asset. Notwithstanding the foregoing, the Fund must always be in compliance with the borrowing policies set forth above.
Under the 1940 Act, a senior security does not include any promissory note or evidence of indebtedness where such loan is for temporary purposes only and in an amount not exceeding 5% of the value of the total assets of the issuer at the time the loan is made. A loan is presumed to be for temporary purposes if it is repaid within sixty days and is not extended or renewed.
The Fund would be deemed to concentrate its investments in a particular industry if it invested more than 25% of its total assets in that industry. The Funds industry concentration policy does not preclude it from focusing investments in issuers in a group of related industrial sectors (such as different types of utilities). The Fund interprets its industry concentration policy to apply to direct investments in the securities of issuers in a particular industry, as defined by the Fund. For purposes of this restriction, each non-U.S. countrys government is considered to be a separate industry. Currency positions are not considered to be an investment in a foreign government for industry concentration purposes. Securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities are not subject to the Funds industry concentration restrictions. Similarly, municipal bonds issued by states, municipalities and other political subdivisions, agencies, authorities and instrumentalities of states and multi-state agencies and authorities are not subject to the Funds industry concentration restrictions.
If the Fund determines to issue preferred shares, it intends to apply for ratings for such preferred shares from Moodys, S&P, and/or Fitch. To obtain and maintain such required ratings, the Fund may be required to comply with investment quality, and other guidelines established by Moodys, S&P, and/or Fitch. Such guidelines will likely be more restrictive than the restrictions set forth above. The Fund does not anticipate that any such guidelines would have a material adverse effect on common shareholders or its ability to achieve its investment objective. No minimum rating is required for the issuance of preferred shares by the Fund. Moodys, S&P, and Fitch receive fees in connection with their ratings issuances.
Temporary Borrowings
The Fund may borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities.
Portfolio Turnover
A change in the securities held by the Fund is known as portfolio turnover. The Subadviser manages the Fund without regard generally to restrictions on portfolio turnover. Trading in fixed income securities does not generally involve the payment of brokerage commissions but does involve indirect transaction costs such as dealer mark-ups and mark-downs. The use of futures contracts may involve the payment of commissions to futures commission merchants. High portfolio turnover (e.g., greater than 100%) involves correspondingly greater expenses to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. The higher the rate of portfolio turnover of the Fund, the higher these transaction costs borne by the Fund generally will be. Such sales may result in realization of taxable capital gains, including short-term capital gains (which are generally taxed as ordinary income upon distribution in the form of dividends to shareholders at ordinary income tax rates).
5
The portfolio turnover rate of the Fund is calculated by dividing (a) the lesser of purchases or sales of portfolio securities for the particular fiscal year by (b) the monthly average of the value of the portfolio securities owned by the Fund during the particular fiscal year. In calculating the rate of portfolio turnover, there is excluded from both (a) and (b) all securities, including options, whose maturities or expiration dates at the time of acquisition were one year or less. Proceeds from short sales and assets used to cover short positions undertaken are included in the amounts of securities sold and purchased, respectively, during the year.
Debt Investing
The Fund may invest in debt, or fixed income, instruments. Debt, or fixed income, instruments (which include corporate bonds, commercial paper, debentures, notes, government securities, municipal obligations, state- or state agency-issued obligations, obligations of foreign issuers, asset- or mortgage-backed securities, and other obligations) are used by issuers to borrow money and thus are debt obligations of the issuer. Holders of debt instruments are creditors of the issuer, normally ranking ahead of holders of both common and preferred stock as to dividends or upon liquidation. The issuer usually pays a fixed, variable, or floating rate of interest and must repay the amount borrowed at the instruments maturity. Some debt instruments, such as zero-coupon bonds (discussed below), do not pay interest but may be sold at a deep discount from their face value.
Yields on debt instruments depend on a variety of factors, including the general conditions of the money, bond, and note markets, the size of a particular offering, the maturity date of the obligation, and the rating of the issue. Debt instruments with longer maturities tend to produce higher yields and are generally subject to greater price fluctuations in response to changes in market conditions than obligations with shorter maturities. An increase in interest rates generally will reduce the market value of portfolio debt instruments, while a decline in interest rates generally will increase the value of the same instruments. The achievement of the Funds investment objective depends in part on the continuing ability of the issuers of the debt instruments in which the Fund invests to meet their obligations for the payment of principal and interest when due. Obligations of issuers of debt instruments are subject to the provisions of bankruptcy, insolvency, sovereign immunity, and other laws that affect the rights and remedies of creditors. There is also the possibility that, as a result of litigation or other conditions, the ability of an issuer to pay, when due, the principal of and interest on its debt instruments may be materially affected.
Collateralized Debt Obligations
The Fund may invest in collateralized debt obligations (CDOs) which include collateralized bond obligations (CBOs), collateralized loan obligations (CLOs), and other similarly structured securities. CBOs and CLOs are types of asset-backed securities. A CBO is a trust that is backed by a diversified pool of high risk, below investment grade fixed income securities. A CLO is a trust typically collateralized by a pool of loans, which may include, among others, domestic and foreign senior secured loans, senior unsecured loans and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. CDOs may charge management fees and administrative expenses.
For both CBOs and CLOs, the cash flows from the trust are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the equity tranche which bears the bulk of defaults from the bonds or loans in the trust and serves to protect the other, more senior tranches from default. Since it is partially protected from defaults, a senior tranche from a CBO trust or CLO trust typically has higher ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults, as well as aversion to CBO or CLO securities as a class.
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The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which the Fund invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus, are not registered under the securities laws. As a result, investments in CDOs may be characterized by the Fund as illiquid securities, however an active dealer market may exist for CDOs allowing a CDO to qualify for Rule 144A transactions. In addition to the normal risks associated with fixed income securities discussed elsewhere in this SAI and the Funds Prospectus (e.g., interest rate risk and default risk), CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the Fund may invest in classes of CDO securities that are subordinate to other classes; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results.
Convertible Securities
A convertible security is a bond, debenture, note, or other security that entitles the holder to acquire common stock or other equity securities of the same or a different issuer within a particular period of time at a specific price or formula. It generally entitles the holder to receive interest paid or accrued until the security matures or is redeemed, converted, or exchanged. Convertible securities may have several unique investment characteristics such as (1) higher yields than common stocks, but lower yields than comparable nonconvertible securities, (2) a lesser degree of fluctuation in value than the underlying stock since they have fixed income characteristics and (3) the potential for capital appreciation if the market price of the underlying common stock increases.
Before conversion, convertible securities have characteristics similar to nonconvertible debt securities. Convertible securities often rank senior to common stock in a corporations capital structure and, therefore, are often viewed as entailing less risk than the corporations common stock, although the extent to which this is true depends in large measure on the degree to which the convertible security sells above its value as a fixed income security. However, because convertible securities are often viewed by the issuer as future common stock, they are often subordinated to other senior securities and therefore are rated one category lower than the issuers nonconvertible debt obligations or preferred stock.
A convertible security may be subject to redemption or conversion at the option of the issuer at a predetermined price. If a convertible security held by the Fund is called for redemption, the Fund could be required to permit the issuer to redeem the security and convert it to the underlying common stock. The Fund generally would invest in convertible securities for their favorable price characteristics and total return potential, and would normally not exercise an option to convert. The Fund might be more willing to convert such securities to common stock.
The Funds subadviser will select only those convertible securities for which it believes (a) the underlying common stock is an appropriate investment for the Fund and (b) a greater potential for total return exists by purchasing the convertible security because of its higher yield and/or favorable market valuation. However, the Fund may invest in convertible debt securities rated less than investment grade.
Debt securities rated less than investment grade are commonly referred to as junk bonds. (For information about debt securities rated less than investment grade, see High-Yield Fixed Income Securities (Junk Bonds) under Debt Investing in this section of the SAI; for additional information about ratings on debt obligations, see Appendix A to this SAI.)
Corporate Debt Securities
The Fund may invest in debt securities issued by corporations, limited partnerships and other similar entities. The Funds investments in debt securities of domestic or foreign corporate issuers include bonds, debentures, notes and other similar corporate debt instruments, including convertible securities that meet the Funds minimum ratings criteria or if unrated are, in the Funds subadvisers opinion, comparable in quality to corporate debt securities that meet those criteria. The rate of return or return of principal on some debt obligations may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies or to the value of commodities, such as gold.
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Dollar-denominated Foreign Debt Securities (Yankee Bonds)
The Fund may invest in Yankee Bonds, which are dollar-denominated instruments issued in the U.S. market by foreign branches of U.S. banks and U.S. branches of foreign banks. Since these instruments are dollar-denominated, they are not affected by variations in currency exchange rates. They are influenced primarily by interest rate levels in the United States and by the financial condition of the issuer, or of the issuers foreign parent. However, investing in these instruments may present a greater degree of risk than investing in domestic securities, due to factors that may impact the issuer or the issuers foreign parent such as access to publicly available information, less securities regulation, war, or expropriation. Special considerations may include higher brokerage costs and thinner trading markets. Investments in foreign countries could be affected by other factors including extended settlement periods. (See Foreign Investing in this section of the SAI for additional information about investing in foreign countries.)
Duration
Duration is a time measure of a bonds interest-rate sensitivity, based on the weighted average of the time periods over which a bonds cash flows accrue to the bondholder. Time periods are weighted by multiplying by the present value of its cash flow divided by the bonds price. (A bonds cash flows consist of coupon payments and repayment of capital.) A bonds duration will almost always be shorter than its maturity, with the exception of zero-coupon bonds, for which maturity and duration are equal.
High-Yield Fixed Income Securities (Junk Bonds)
Investments in securities rated BB or below by S&P or Fitch, or Ba or below by Moodys generally provide greater income (leading to the name high-yield securities) and opportunity for capital appreciation than investments in higher quality securities, but they also typically entail greater price volatility, liquidity, and principal and income risk. These securities are regarded as predominantly speculative as to the issuers continuing ability to meet principal and interest payment obligations. Analysis of the creditworthiness of issuers of lower-quality debt securities may be more complex than for issuers of higher-quality debt securities.
Interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of low-rated securities tend to reflect individual corporate developments to a greater extent than do higher-rated securities, which react primarily to fluctuations in the general level of interest rates. Low-rated securities also tend to be more sensitive to economic conditions than higher-rated securities. As a result, they generally involve more credit risks than securities in the higher-rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of low-rated securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuers ability to service its debt obligations may also be adversely affected by specific corporate developments, the issuers inability to meet specific projected business forecasts or the unavailability of additional financing. The risk of loss due to default by an issuer of low-rated securities is generally considered to be significantly greater than issuers of higher- rated securities because such securities are usually unsecured and are often subordinated to other creditors. Further, if the issuer of a low-rated security defaulted, the Fund might incur additional expenses in seeking recovery. Periods of economic uncertainty and changes would also generally result in increased volatility in the market prices of low-rated securities and thus in the Funds NAV.
Low-rated securities often contain redemption, call, or prepayment provisions which permit the issuer of the securities containing such provisions to, at its discretion, redeem the securities. During periods of falling interest rates, issuers of low-rated securities are likely to redeem or prepay the securities and refinance them with debt securities with a lower interest rate. To the extent an issuer is able to refinance the securities or otherwise redeem them, the Fund may have to replace the securities with a lower yielding security which would result in lower returns for the Fund.
The Fund may have difficulty disposing of certain low-rated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all low-rated securities, there is no established retail secondary market for many of these securities. The Fund anticipates that such securities could be sold only to a limited number of dealers or institutional investors. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security, and accordingly, the NAV of a particular Fund and its ability to dispose of particular securities when necessary to meet its liquidity needs, or in response to a specific economic event, or an event such as a deterioration in the creditworthiness of the issuer. The lack of a liquid secondary market for certain securities may also make it more difficult for the Fund to obtain accurate market quotations for purposes of valuing its respective portfolio. Market quotations are generally available on many low-rated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. During periods of thin trading, the spread between bid and asked prices is likely to increase significantly. In addition, adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of low-rated securities, especially in a thinly-traded market. Due to the limited liquidity of low-rated securities, to the extent the Fund needs to liquidate these types of securities the Fund may be forced to do so at a substantial discount. Any such liquidation could result in a reduced rate of return for the Fund.
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Interest Rate Environment Risk
Changing interest rates, may have unpredictable effects on markets, may result in heightened market volatility and may detract from the Funds performance to the extent the Fund is exposed to such interest rates. A low interest rate environment may have an adverse impact on the Funds ability to provide a positive yield to its shareholders and pay expenses out of Fund assets because of the low yields from the Funds portfolio investments. Alternatively, a general rise in interest rates has the potential to cause investors to move out of fixed-income securities on a large scale. To the extent the Fund needs to sell assets at such a time, this could cause the Fund to sell assets at inopportune times or at a loss or depressed value and could hurt the Funds performance.
Further, Federal Reserve policy changes may expose fixed-income and related markets to heightened volatility and may reduce liquidity for certain Fund investments, which could cause the value of the Funds investments and the Funds share price to decline or create difficulties for the Fund in disposing of investments. The Fund that invests in derivatives tied to fixed-income markets may be more substantially exposed to these risks than the Fund that does not invest in derivatives.
The Fund could also be forced to liquidate its investments at disadvantageous times or prices, thereby adversely affecting the Fund.
Inverse Floating Rate Obligations
Certain variable rate securities pay interest at a rate that varies inversely to prevailing short-term interest rates (sometimes referred to as inverse floaters). For example, upon reset the interest rate payable on a security may go down when the underlying index has risen. During periods when short-term interest rates are relatively low as compared to long-term interest rates, the Fund may attempt to enhance its yield by purchasing inverse floaters. Certain inverse floaters may have an interest rate reset mechanism that multiplies the effects of changes in the underlying index. While this form of leverage may increase the securitys yield, it may also increase the volatility of the securitys market value.
Similar to other variable and floating rate obligations, effective use of inverse floaters requires skills different from those needed to select most portfolio securities. If movements in interest rates are incorrectly anticipated, the Fund holding these instruments could lose money and its NAV could decline.
Letters of Credit
Debt obligations, including municipal obligations, certificates of participation, commercial paper and other short-term obligations, may be backed by an irrevocable letter of credit of a bank that assumes the obligation for payment of principal and interest in the event of default by the issuer. Only banks that, in the opinion of the Funds subadviser, are of investment quality comparable to other permitted investments of the Fund may be used for Letter of Credit-backed investments.
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Loan and Debt Participations and Assignments
A loan participation agreement involves the purchase of a share of a loan made by a bank to a company in return for a corresponding share of the borrowers principal and interest payments. Loan participations of the type in which the Fund may invest include interests in both secured and unsecured corporate loans. When the Fund purchases loan assignments from lenders, it will acquire direct rights against the borrower, but these rights and the Funds obligations may differ from, and be more limited than, those held by the assignment lender. The principal credit risk associated with acquiring loan participation and assignment interests is the credit risk associated with the underlying corporate borrower. There is also a risk that there may not be a readily available market for participation loan interests and, in some cases, this could result in the Fund disposing of such securities at a substantial discount from face value or holding such securities until maturity.
There is typically a limited amount of public information available about loans because loans normally are not registered with the SEC or any state securities commission or listed on any securities exchange. Certain of the loans in which the Fund may invest may not be considered securities, and therefore the Fund may not be entitled to rely on the anti-fraud protections of the federal securities laws with respect to those loans in the event of fraud or misrepresentation by a borrower. The Fund may come into possession of material, non- public information about a borrower as a result of the Funds ownership of a loan or other floating-rate instrument of the borrower. Because of prohibitions on trading in securities of issuers while in possession of material, non-public information, the Fund might be unable to enter into a transaction in a publicly-traded security of the borrower when it would otherwise be advantageous to do so.
Loans trade in an unregulated inter-dealer or inter-bank secondary market. Purchases and sales of loans are generally subject to contractual restrictions that must be satisfied before a loan can be bought or sold. These restrictions may (i) impede the Funds ability to buy or sell loans; (ii) negatively affect the transaction price; affect the counterparty credit risk borne by the Fund; (iv) impede the Funds ability to timely vote or otherwise act with respect to loans; and (v) expose the Fund to adverse tax or regulatory consequences.
In the event that a corporate borrower failed to pay its scheduled interest or principal payments on participations held by the Fund, the market value of the affected participation would decline, resulting in a loss of value of such investment to the Fund. Accordingly, such participations are speculative and may result in the income level and net assets of the Fund being reduced. Moreover, loan participation agreements generally limit the right of a participant to resell its interest in the loan to a third party and, as a result, loan participations may be deemed by the Fund to be illiquid investments. The Fund will invest only in participations with respect to borrowers whose creditworthiness is, or is determined by the Funds subadviser to be, substantially equivalent to that of issuers whose senior unsubordinated debt securities are rated B or higher by Moodys or S&P. For the purposes of diversification and/or concentration calculations, both the borrower and issuer will be considered an issuer.
The Fund may purchase from banks participation interests in all or part of specific holdings of debt obligations. Each participation interest is backed by an irrevocable letter of credit or guarantee of the selling bank that the Funds subadviser has determined meets the prescribed quality standards of the Fund. Thus, even if the credit of the issuer of the debt obligation does not meet the quality standards of the Fund, the credit of the selling bank will.
Loan participations and assignments may be illiquid.
Large loans to corporations or governments may be shared or syndicated among several lenders, usually banks. The Fund may participate in such syndicates, or can buy part of a loan, becoming a direct lender. Participations and assignments involve special types of risk, including liquidity risk and the risks of being a lender. If the Fund purchases a participation, it may only be able to enforce its rights through the lender, and may assume the credit risk of the lender in addition to the borrower. With respect to assignments, the Funds rights against the borrower may be more limited than those held by the original lender.
The Fund may have invested significantly in floating rate loans that have interest rate provisions which were previously linked to LIBOR or otherwise continue to reference synthetic LIBOR. LIBOR was used extensively in the U.S. and globally as a benchmark. As a result of benchmark reforms, publication of most LIBOR settings has ceased. Some LIBOR settings continue to be published but only on a temporary, synthetic and non-representative basis. Regulated entities have generally ceased entering into new LIBOR contracts in connection with regulatory guidance or prohibitions.
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Public and private sector actors have worked to establish new or alternative reference rates to be used in place of LIBOR. Replacement rates that have been identified include the Secured Overnight Financing Rate (SOFR), which replaced U.S. dollar LIBOR and measures the cost of overnight borrowings through repurchase agreement transactions collateralized with U.S. Treasury securities, and the Sterling Overnight Index Average Rate (SONIA), which replaced GBP LIBOR and measures the overnight interest rate paid by banks for unsecured transactions in the sterling market, although other replacement rates could be adopted by market participants. There is no single replacement rate which will act as LIBORs successor. It is uncertain what effect divergent benchmark rates will have on the price and liquidity of certain equity and debt securities in which the Fund may invest.
The elimination of LIBOR, changes to other reference rates or any other changes or reforms to the determination or supervision of reference rates could have an adverse impact on the market for, or value of, any securities or payments linked to those reference rates, which may adversely affect the Funds performance and/or NAV.
The shift from LIBOR to alternative reference rates like SOFR also brings pricing challenges for borrowers and loan issuers, who prefer exposure to credit benchmarks that will adjust to shifts in credit market conditions. SOFR is based on the U.S. repurchase agreement market, which has no credit risk and may fall during times of stress. LIBOR, by contrast, measures bank borrowing costs and generally rose during periods of stress. Lenders are adapting by pricing loans with a spread to SOFR. However, there are risks that this spread could underprice risks if there are unexpected periods of credit stress.
Alteration of the terms of a debt instrument or a modification of the terms of other types of contracts to replace LIBOR or another interbank offered rate (IBOR) with a new reference rate could result in a taxable exchange and the realization of income and gain/loss for U.S. federal income tax purposes. The IRS has issued regulations regarding the tax consequences of the transition from IBOR to a new reference rate in debt instruments and non-debt contracts. Under the regulations, alteration or modification of the terms of a debt instrument to replace an operative rate that uses a discontinued IBOR with a qualified rate (as defined in the regulations) including true up payments equalizing the fair market value of contracts before and after such IBOR transition, to add a qualified rate as a fallback rate to a contract whose operative rate uses a discontinued IBOR or to replace a fallback rate that uses a discontinued IBOR with a qualified rate would not be taxable. The IRS may provide additional guidance, with potential retroactive effect.
Participations on Creditors Commitments
While the Fund does not invest in securities to exercise control over the securities issuers, the Fund may, from time to time, participate on committees formed by creditors to negotiate with the management of financially troubled issuers of securities held by the Fund. Such participation may subject the Fund to expenses such as legal fees and may deem the Fund an insider of the issuer for purposes of the Federal securities laws, and expose the Fund to material non- public information of the issuer, and therefore may restrict the Funds ability to purchase or sell a particular security when it might otherwise desire to do so. Participation by the Fund on such committees also may expose the Fund to potential liabilities under the federal bankruptcy laws or other laws governing the rights of creditors and debtors. The Fund will participate on such committees only when the Funds subadviser believes that such participation is necessary or desirable to enforce the Funds rights as a creditor or to protect the value of securities held by the Fund.
Payable in Kind (PIK) Bonds
PIK bonds are obligations which provide that the issuer thereof may, at its option, pay interest on such bonds in cash or in kind, which means in the form of additional debt securities. Such securities benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of such cash. The Fund will accrue income on such investments for tax and accounting purposes, which is distributable to shareholders and which, because no cash is received at the time of accrual, may require the liquidation of other portfolio securities to satisfy the Funds distribution obligations. The market prices of PIK bonds generally are more volatile than the market prices of securities that pay interest periodically, and they are likely to respond to changes in interest rates to a greater degree than similar bonds on which regular cash payments of interest are being made.
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Ratings
The rating or quality of a debt security refers to a rating agencys assessment of the issuers creditworthiness, i.e., its ability to pay principal and interest when due. Higher ratings indicate better credit quality, as rated by independent rating organizations such as Moodys, S&P or Fitch, which publish their ratings on a regular basis. Appendix A provides a description of the various ratings provided for bonds (including convertible bonds), municipal bonds, and commercial paper.
After the Fund purchases a debt security, the rating of that security may be reduced below the minimum rating acceptable for purchase by the Fund. A subsequent downgrade does not require the sale of the security, but the Funds subadviser will consider such an event in determining whether to continue to hold the obligation. To the extent that ratings established by Moodys or S&P may change as a result of changes in such organizations or their rating systems, the Fund will invest in securities which are deemed by the Funds subadviser to be of comparable quality to securities whose current ratings render them eligible for purchase by the Fund.
Credit ratings issued by credit rating agencies evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market-value risk and therefore may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the security. Consequently, credit ratings are used only as a preliminary indicator of investment quality.
Sovereign Debt
The Fund may invest in sovereign debt, which is issued or guaranteed by foreign governments (including countries, provinces and municipalities) or their agencies and instrumentalities. Sovereign debt may trade at a substantial discount from face value. The Fund may hold and trade sovereign debt of foreign countries in appropriate circumstances to participate in debt conversion programs. Emerging market country sovereign debt involves a higher degree of risk than that of developed markets, is generally lower-quality debt, and is considered speculative in nature due, in part, to the extreme and volatile nature of debt burdens in such countries and because emerging market governments can be relatively unstable. The issuer or governmental authorities that control sovereign-debt repayment (sovereign debtors) may be unable or unwilling to repay principal or interest when due in accordance with the terms of the debt. A sovereign debtors willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash-flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtors policy towards the IMF, and the political constraints to which the sovereign debtor may be subject. Sovereign debtors may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearage on their debt. The commitment of these third parties to make such disbursements may be conditioned on the sovereign debtors implementation of economic reforms or economic performance and the timely service of the debtors obligations. The sovereign debtors failure to meet these conditions may cause these third parties to cancel their commitments to provide funds to the sovereign debtor, which may further impair the debtors ability or willingness to timely service its debts. In certain instances, the Fund may invest in sovereign debt that is in default as to payments of principal or interest. In the event that the Fund holds non-performing sovereign debt, the Fund may incur additional expenses in connection with any restructuring of the issuers obligations or in otherwise enforcing their rights thereunder.
Brady Bonds
The Fund may invest a portion of its assets in certain sovereign debt obligations known as Brady Bonds. Brady Bonds are issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external indebtedness. The Brady Plan contemplates, among other things, the debtor nations adoption of certain economic reforms and the exchange of commercial bank debt for newly issued bonds. In restructuring its external debt under the Brady Plan framework, a debtor nation negotiates with its existing bank lenders as well as the World Bank or the IMF. The World Bank or IMF supports the restructuring by providing funds pursuant to loan agreements or other arrangements that enable the debtor nation to collateralize the new Brady Bonds or to replenish reserves used to reduce outstanding bank debt. Under these loan agreements or other arrangements with the World Bank or IMF, debtor nations have been required to agree to implement certain domestic monetary and fiscal reforms. The Brady Plan sets forth only general guiding principles for economic reform and debt reduction, emphasizing that solutions must be negotiated on a case-by-case basis between debtor nations and their creditors.
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Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (these uncollateralized amounts constitute the residual risk). In light of the residual risk of Brady Bonds and, among other factors, the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds, investments in Brady Bonds can be viewed as speculative.
Stand-by Commitments
The Fund may purchase securities together with the right to resell them to the seller or a third party at an agreed-upon price or yield within specified periods prior to their maturity dates. Such a right to resell is commonly known as a stand-by commitment, and the aggregate price which the Fund pays for securities with a stand-by commitment may increase the cost, and thereby reduce the yield, of the security. The primary purpose of this practice is to permit the Fund to be as fully invested as practicable in municipal securities while preserving the desired flexibility and liquidity. Standby commitments acquired by the Fund are valued at zero in determining the Funds NAV. Stand-by commitments involve certain expenses and risks, including the inability of the issuer of the commitment to pay for the securities at the time the commitment is exercised, non-marketability of the commitment, and differences between the maturity of the underlying security and the maturity of the commitment.
Strip Bonds
Strip bonds are debt securities that are stripped of their interest (usually by a financial intermediary) after the securities are issued. The market value of these securities generally fluctuates more in response to changes in interest rates than interest-paying securities of comparable maturity.
Tender Option Bonds
Tender option bonds are relatively long-term bonds that are coupled with the option to tender the securities to a bank, broker-dealer or other financial institution at periodic intervals and receive the face value of the bond. This investment structure is commonly used as a means of enhancing a securitys liquidity.
Variable and Floating Rate Obligations
The Fund may purchase securities having a floating or variable rate of interest. These securities pay interest at rates that are adjusted periodically according to a specific formula, usually with reference to some interest rate index or market interest rate (the underlying index). The floating rate tends to decrease the securitys price sensitivity to changes in interest rates. These securities may carry demand features permitting the holder to demand payment of principal at any time or at specified intervals prior to maturity. Accordingly, as interest rates decrease or increase, the potential for capital appreciation or depreciation is less than for fixed-rate obligations.
The floating and variable rate obligations that the Fund may purchase include variable rate demand securities. Variable rate demand securities are variable rate securities that have demand features entitling the purchaser to resell the securities to the issuer at an amount approximately equal to amortized cost or the principal amount thereof plus accrued interest, which may be more or less than the price that the Fund paid for them. The interest rate on variable rate demand securities also varies either according to some objective standard, such as an index of short-term, tax-exempt rates, or according to rates set by or on behalf of the issuer.
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When the Fund purchases a floating or variable rate demand instrument, the Funds subadviser will monitor, on an ongoing basis, the ability of the issuer to pay principal and interest on demand. The Funds right to obtain payment at par on a demand instrument could be affected by events occurring between the date the Fund elects to demand payment and the date payment is due that may affect the ability of the issuer of the instrument to make payment when due, except when such demand instrument permits same day settlement. To facilitate settlement, these same day demand instruments may be held in book entry form at a bank other than the Funds custodian subject to a sub-custodian agreement between the bank and the Funds custodian.
The floating and variable rate obligations that the Fund may purchase also include certificates of participation in such obligations purchased from banks. A certificate of participation gives the Fund an undivided interest in the underlying obligations in the proportion that the Funds interest bears to the total principal amount of the obligation. Certain certificates of participation may carry a demand feature that would permit the holder to tender them back to the issuer prior to maturity.
The income received on certificates of participation in tax-exempt municipal obligations constitutes interest from tax-exempt obligations.
The Fund will limit its purchases of floating and variable rate obligations to those of the same quality as it otherwise is allowed to purchase. Similar to fixed rate debt instruments, variable and floating rate instruments are subject to changes in value based on changes in prevailing market interest rates or changes in the issuers creditworthiness.
Zero and Deferred Coupon Debt Securities
The Fund may invest in debt obligations that do not make any interest payments for a specified period of time prior to maturity (deferred coupon bonds) or until maturity (zero coupon bonds). The nonpayment of interest on a current basis may result from the bonds having no stated interest rate, in which case the bond pays only principal at maturity and is normally initially issued at a discount from face value. Alternatively, the bond may provide for a stated rate of interest, but provide that such interest is not payable until maturity, in which case the bond may initially be issued at par. The value to the investor of these types of bonds is represented by the economic accretion either of the difference between the purchase price and the nominal principal amount (if no interest is stated to accrue) or of accrued, unpaid interest during the bonds life or payment deferral period.
Because deferred and zero coupon bonds do not make interest payments for a certain period of time, they are generally purchased by the Fund at a deep discount and their value fluctuates more in response to interest rate changes than does the value of debt obligations that make current interest payments. The degree of fluctuation with interest rate changes is greater when the deferred period is longer. Therefore, when the Fund invests in zero or deferred coupon bonds, there is a risk that the value of the Funds shares may decline more as a result of an increase in interest rates than would be the case if the Fund did not invest in such bonds.
Even though zero and deferred coupon bonds may not pay current interest in cash, the Fund is required to accrue interest income on such investments and to distribute such amounts to shareholders. Thus, the Fund would not be able to purchase income-producing securities to the extent cash is used to pay such distributions, and, therefore, the Funds current income could be less than it otherwise would have been. Instead of using cash, the Fund might liquidate investments in order to satisfy these distribution requirements.
Derivative Instruments and Other Leveraged Transactions
The Fund may invest in various types of derivatives or other leveraged transactions, which may at times result in significant exposure. A derivative is a financial instrument whose performance is derived from the performance of another asset. The Fund may invest in derivative instruments including, but not limited to: futures contracts, put options, call options, options on future contracts, options on foreign currencies, swaps, forward contracts, structured investments, and other equity- linked derivatives.
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The Fund may use derivative instruments for hedging (to offset risks associated with an investment, currency exposure, or market conditions) or in pursuit of its investment objective(s) and policies (to seek to enhance returns). When the Fund invests in a derivative and other leveraged transactions, the risks of loss of that derivative may be greater than the derivatives cost. The Fund may not use any derivative to gain exposure to an asset or class of assets that it would be prohibited by its investment restrictions from purchasing directly. In addition to other considerations, the Funds ability to use derivative instruments may be limited by tax considerations.
Investments in derivatives and other leveraged transactions may subject the Fund to special risks in addition to normal market fluctuations and other risks inherent in investment in securities. Investments in derivatives in general are subject to market risks that may cause their prices to fluctuate over time. The risks of investing in derivatives and other leveraged transactions include leverage, liquidity, interest rate, market, counterparty (including credit), operational, legal and management risks, and valuation complexity. Investments in derivatives may not directly correlate with the price movements of the underlying instrument. As a result, the use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case.
SEC Rule 18f-4 (Rule 18f-4) regulates the ability of the Fund to enter derivative transactions and other leveraged transactions. Under Rule 18f-4, the Fund is required to trade derivatives and other transactions that potentially create senior securities (except reverse repurchase agreements and similar financing transactions) subject to a value-at-risk (VaR) leverage limit, certain other testing and derivatives risk management program requirements and requirements related to board reporting. These requirements apply unless the Fund qualifies as a limited derivatives user, as defined in Rule 18f-4. Reverse repurchase agreements and similar financing transactions continue to be subject to the asset coverage requirements, and a fund trading reverse repurchase agreements needs to aggregate the amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions with the aggregate amount of any other senior securities representing indebtedness when calculating the funds asset coverage ratio (unless the fund treats such agreements and transactions as derivatives for all purposes under the rule). In addition, under Rule 18f-4, the Fund is permitted to invest in a security on a when-issued or forward-settling basis, or with a nonstandard settlement cycle, and the transaction will be deemed not to involve a senior security, provided that (i) the Fund intends to physically settle the transaction and (ii) the transaction will settle within 35 days of its trade date. The Fund may otherwise engage in such transactions that do not meet these conditions so long as the Fund treats any such transaction as a derivatives transaction for purposes of compliance with Rule 18f-4. Furthermore, under Rule 18f-4, the Fund will be permitted to enter into an unfunded commitment agreement, and such unfunded commitment agreement will not be subject to the limits on borrowings as described in the Leverage section of the Prospectus, if the Fund reasonably believes, at the time it enters into such agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all such agreements as they come due.
Commodity Interests
Certain of the derivative investment types permitted for the Fund may be considered commodity interests for purposes of the CEA and regulations approved by the CFTC. Investing in commodity interests, outside of certain conditions required to qualify for exemption or exclusion, will cause the Fund to be deemed a commodity pool, thereby subjecting the Fund to regulation under the CEA and CFTC rules. In that event, the Adviser will be registered as a Commodity Pool Operator, the Funds subadviser will be registered as a Commodity Trading Adviser, and the Fund will be operated in accordance with CFTC rules. Because of the applicable registration requirements and rules, investing the Funds assets in commodity interests could cause the Fund to incur additional expenses. Alternatively, to the extent that the Fund limits its exposure to commodity interests in order to qualify for exemption from being considered a commodity pool, the Funds use of investment techniques described in its Prospectus and this SAI may be limited or restricted. However, as of the date of this SAI, the Fund intends to limit the use of such investment types as required to qualify for exclusion or exemption from being considered a commodity pool or otherwise as a vehicle for trading in commodity interests under such regulations. As a result, the Adviser has filed a notice of exclusion under CFTC Regulation 4.5 or exemption under another CFTC regulation.
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Credit-linked Notes
Credit-linked notes are derivative instruments used to transfer credit risk. The performance of the notes is linked to the performance of the underlying reference obligation or reference portfolio (reference entities). The notes are usually issued by a special purpose vehicle that sells credit protection through a credit default swap agreement in return for a premium and an obligation to pay the transaction sponsor should a reference entity experience a credit event, such as bankruptcy. The special purpose vehicle invests the proceeds from the notes to cover its contingent obligation. Revenue from the investments and the money received as premium are used to pay interest to note holders. The main risk of credit linked notes is the risk of default to the reference obligation of the credit default swap. Should a default occur, the special purpose vehicle would have to pay the transaction sponsor, subordinating payments to the note holders. Credit linked notes also may not be liquid and may be subject to currency and interest rate risks as well.
Equity-linked Derivatives
The Fund may invest in equity-linked derivative products, the performance of which is designed to correspond generally to the performance of a specified stock index or basket of stocks, or to a single stock. Investments in equity-linked derivatives involve the same risks associated with a direct investment in the types of securities such products are designed to track. There can be no assurance that the trading price of the equity-linked derivatives will equal the underlying value of the securities purchased to replicate a particular investment or that such basket will replicate the investment.
Investments in equity-linked derivatives may constitute investments in other investment companies. (See Other Investment Companies in this section of the SAI for information regarding the implications of the Fund investing in other investment companies.)
Foreign Currency Forward Contracts, Futures and Options
The Fund may engage in certain derivative foreign currency exchange and option transactions involving investment risks and transaction costs to which the Fund would not be subject absent the use of these strategies. If the Funds subadvisers predictions of movements in the direction of securities prices or currency exchange rates are inaccurate, the Fund may experience adverse consequences, leaving it in a worse position than if it had not used such strategies. Risks inherent in the use of option and foreign currency forward and futures contracts include: (1) dependence on the Funds subadvisers ability to correctly predict movements in the direction of securities prices and currency exchange rates; (2) imperfect correlation between the price of options and futures contracts and movements in the prices of the securities or currencies being hedged; (3) the fact that the skills needed to use these strategies are different from those needed to select portfolio securities; (4) the possible absence of a liquid secondary market for any particular instrument at any time; and (5) the possible need to defer closing out certain hedged positions to avoid adverse tax consequences. The Funds ability to enter into futures contracts is also limited by the requirements of the Code for qualification as a regulated investment company.
The Fund may engage in currency exchange transactions to protect against uncertainty in the level of future currency exchange rates. In addition, the Fund may write covered put and call options on foreign currencies for the purpose of increasing its return.
The Fund may enter into contracts to purchase or sell foreign currencies at a future date (forward contracts) and purchase and sell foreign currency futures contracts. For certain hedging purposes, the Fund may also purchase exchange-listed and over-the-counter put and call options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives the Fund the right to assume a short position in the futures contract until the expiration of the option. A put option on a currency gives the Fund the right to sell the currency at an exercise price until the expiration of the option. A call option on a futures contract gives the Fund the right to assume a long position in the futures contract until the expiration of the option. A call option on a currency gives the Fund the right to purchase the currency at the exercise price until the expiration of the option.
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When engaging in position hedging, the Fund enters into foreign currency exchange transactions to protect against a decline in the values of the foreign currencies in which its portfolio securities are denominated (or an increase in the values of currency for securities which the Fund expects to purchase, when the Fund holds cash or short-term investments). In connection with position hedging, the Fund may purchase put or call options on foreign currency and on foreign currency futures contracts and buy or sell forward contracts and foreign currency futures contracts. (The Fund may also purchase or sell foreign currency on a spot basis, as discussed in Foreign Currency Transactions under Foreign Investing in this section of the SAI.)
The precise matching of the amounts of foreign currency exchange transactions and the value of the portfolio securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the dates the currency exchange transactions are entered into and the dates they mature. It is also impossible to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, it may be necessary for the Fund to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security or securities being hedged is less than the amount of foreign currency the Fund is obligated to deliver and a decision is made to sell the security or securities and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security or securities if the market value of such security or securities exceeds the amount of foreign currency the Fund is obligated to deliver.
Hedging techniques do not eliminate fluctuations in the underlying prices of the securities which the Fund owns or intends to purchase or sell. They simply establish a rate of exchange which one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which might result from the increase in value of such currency.
The Fund may seek to increase its return or to offset some of the costs of hedging against fluctuations in currency exchange rates by writing covered put options and covered call options on foreign currencies. In that case, the Fund receives a premium from writing a put or call option, which increases the Funds current return if the option expires unexercised or is closed out at a net profit. The Fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written.
The Funds currency hedging transactions may call for the delivery of one foreign currency in exchange for another foreign currency and may at times not involve currencies in which its portfolio securities are then denominated. The Funds subadviser will engage in such cross hedging activities when it believes that such transactions provide significant hedging opportunities for the Fund. Cross hedging transactions by the Fund involve the risk of imperfect correlation between changes in the values of the currencies to which such transactions relate and changes in the value of the currency or other asset or liability which is the subject of the hedge.
Foreign currency forward contracts, futures and options may be traded on foreign exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States; may not involve a clearing mechanism and related guarantees; and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. The value of such positions also could be adversely affected by (i) other complex foreign political, legal and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in the Funds ability to act upon economic events occurring in foreign markets during non- business hours in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States, and (v) lesser trading volume.
The types of derivative foreign currency exchange transactions most commonly employed by the Fund are discussed below, although the Fund is also permitted to engage in other similar transactions to the extent consistent with the Funds investment limitations and restrictions.
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Foreign Currency Forward Contracts
A foreign currency forward contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days (term) from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded directly between currency traders (usually large commercial banks) and their customers.
Foreign Currency Futures Transactions
The Fund may use foreign currency futures contracts and options on such futures contracts. Through the purchase or sale of such contracts, the Fund may be able to achieve many of the same objectives attainable through the use of foreign currency forward contracts, but more effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures contracts and options on foreign currency futures contracts are standardized as to amount and delivery period and are traded on boards of trade and commodities exchanges. It is anticipated that such contracts may provide greater liquidity and lower cost than forward foreign currency exchange contracts.
Purchasers and sellers of foreign currency futures contracts are subject to the same risks that apply to the buying and selling of futures generally. In addition, there are risks associated with foreign currency futures contracts similar to those associated with options on foreign currencies. (See Foreign Currency Options and Futures Contracts and Options on Futures Contracts, each in this sub-section of the SAI.) The Fund must accept or make delivery of the underlying foreign currency, through banking arrangements, in accordance with any U.S. or foreign restrictions or regulations regarding the maintenance of foreign banking arrangements by U.S. residents and may be required to pay any fees, taxes or charges associated with such delivery which are assessed in the issuing country.
Futures contracts are designed by boards of trade which are designated contracts markets by the CFTC. Futures contracts trade on contracts markets in a manner that is similar to the way a stock trades on a stock exchange and the boards of trade, through their clearing corporations, guarantee performance of the contracts.
Foreign Currency Options
A foreign currency option provides the option buyer with the right to buy or sell a stated amount of foreign currency at the exercise price at a specified date or during the option period. A call option gives its owner the right, but not the obligation, to buy the currency, while a put option gives its owner the right, but not the obligation, to sell the currency. The option seller (writer) is obligated to fulfill the terms of the option sold if it is exercised. However, either seller or buyer may close its position during the option period for such options any time prior to expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put rises in value if the underlying currency depreciates. While purchasing a foreign currency option can protect the Fund against an adverse movement in the value of a foreign currency, it does not limit the gain which might result from a favorable movement in the value of such currency. For example, if the Fund were holding securities denominated in an appreciating foreign currency and had purchased a foreign currency put to hedge against a decline in the value of the currency, it would not have to exercise its put. Similarly, if the Fund had entered into a contract to purchase a security denominated in a foreign currency and had purchased a foreign currency call to hedge against a rise in the value of the currency but instead the currency had depreciated in value between the date of purchase and the settlement date, the Fund would not have to exercise its call but could acquire in the spot market the amount of foreign currency needed for settlement.
The value of a foreign currency option depends upon the value of the underlying currency relative to the other referenced currency. As a result, the price of the option position may vary with changes in the value of either or both currencies and have no relationship to the investment merits of a foreign security, including foreign securities held in a hedged investment portfolio. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the use of foreign currency options, the Fund may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots.
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As in the case of other kinds of options, the use of foreign currency options constitutes only a partial hedge, and the Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on a foreign currency may not necessarily constitute an effective hedge against fluctuations in exchange rates and, in the event of rate movements adverse to the Funds position, the Fund may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies written or purchased by the Fund may be traded on U.S. or foreign exchanges or over the counter. There is no systematic reporting of last sale information for foreign currencies traded over the counter or any regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Quotation information available is generally representative of very large transactions in the interbank market and thus may not reflect relatively smaller transactions (i.e., less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that the options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that are not reflected in the options market.
For additional information about options transactions, see Options in this section of the SAI.
Foreign Currency Warrants
Foreign currency warrants such as currency exchange warrants are warrants that entitle the holder to receive from the issuer an amount of cash (generally, for warrants issued in the United States, in U.S. dollars) that is calculated pursuant to a predetermined formula and based on the exchange rate between two specified currencies as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time.
Foreign currency warrants may be used to reduce the currency exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event the U.S. dollar depreciates against the value of a major foreign currency such as the Japanese Yen or Euro. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a particular direction (e.g., unless the U.S. dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed).
Foreign currency warrants are severable from the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. Upon exercise of warrants, there may be a delay between the time the holder gives instructions to exercise and the time the exchange rate relating to exercise is determined, thereby affecting both the market and cash settlement values of the warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining time value of the warrants (i.e., the difference between the current market value and the exercise value of the warrants), and, if the warrants were out-of-the-money, in a total loss of the purchase price of the warrants.
Warrants are generally unsecured obligations of their issuers and are not standardized foreign currency options issued by the OCC. Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants generally will not be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency warrants could be considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving larger amounts of foreign currencies. Foreign currency warrants are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.
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Performance Indexed Paper
Performance indexed paper is commercial paper the yield of which is linked to certain currency exchange rate movements. The yield to the investor on performance indexed paper is established at maturity as a function of spot exchange rates between the designated currencies as of or about the time (generally, the index maturity two days prior to maturity). The yield to the investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above, market yields on commercial paper, with both the minimum and maximum rates of return on the investment corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
Principal Exchange Rate Linked Securities (PERLS)
PERLS are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the particular currencies at or about that time. The return on standard principal exchange rate linked securities is enhanced if the currency to which the security is linked appreciates against the base currency, and is adversely affected by increases in the exchange value of the base currency. Reverse PERLS are like the standard securities, except that their return is enhanced by increases in the value of the base currency and adversely impacted by increases in the value of other currency. Interest payments on the securities are generally made at rates that reflect the degree of currency risk assumed or given up by the purchaser of the notes (i.e., at relatively higher interest rates if the purchaser has assumed some of the currency exchange risk, or relatively lower interest rates if the issuer has assumed some of the currency exchange risk, based on the expectations of the current market). PERLS may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities), which may have an adverse impact on the value of the principal payment to be made at maturity.
Future Contracts and Options on Futures Contracts
The Fund may use interest rate, foreign currency, dividend, volatility or index futures contracts. An interest rate, foreign currency, dividend, volatility or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument, foreign currency, dividend basket or the cash value of an index at a specified price and time. A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of these securities is made. A public market exists in futures contracts covering several indexes as well as a number of financial instruments and foreign currencies, and it is expected that other futures contracts will be developed and traded in the future.
The Fund may purchase and write call and put options on futures. Futures options possess many of the same characteristics as options on securities and indexes discussed above. A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true.
Except as otherwise described in this SAI, the Fund will limit their use of futures contracts and futures options to hedging transactions and in an attempt to increase total return, in accordance with Federal regulations. The costs of, and possible losses incurred from, futures contracts and options thereon may reduce the Funds current income and involve a loss of principal. Any incremental return earned by the Fund resulting from these transactions would be expected to offset anticipated losses or a portion thereof.
The Fund will only enter into futures contracts and futures options which are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Fund, the Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of cash or U.S. Government securities (initial margin). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract which is returned to the Fund upon termination of the contract, assuming all contractual obligations have been satisfied. The Fund expect to earn interest income on their initial margin deposits. A futures contract held by the Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called variation margin, equal to the daily change in value of the futures contract. This process is known as marking to market. Variation margin does not represent a borrowing or loan by the Fund but is instead a settlement between the Fund and the broker of the amount one would owe the other if the futures contract expired. In computing daily NAV, the Fund will mark to market its open futures positions.
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The Fund are also required to deposit and maintain margin with respect to put and call options on futures contracts written by them. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the Fund.
Futures contracts are designed by boards of trade which are designated contracts markets by the CFTC. Futures contracts trade on contracts markets in a manner that is similar to the way a stock trades on a stock exchange and the boards of trade, through their clearing corporations, guarantee performance of the contracts.
The requirements of the Code for qualification as a regulated investment company also may limit the extent to which the Fund may enter into futures, futures options or forward contracts.
Although some futures contracts call for making or taking delivery of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (same exchange, underlying security or index, and delivery month). If an offsetting purchase price is less than the original sale price, the Fund realizes a capital gain, or if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sales price is more than the original purchase price, the Fund realizes a capital gain, or if it is less, the Fund realizes a capital loss. The transaction costs must also be included in these calculations.
Positions in futures contracts and related options may be closed out only on an exchange which provides a secondary market for such contracts or options. The Fund will enter into an option or futures position only if there appears to be a liquid secondary market. However, there can be no assurance that a liquid secondary market will exist for any particular option or futures contract at any specific time. Thus, it may not be possible to close out a futures or related option position. In the case of a futures position, in the event of adverse price movements the Fund would continue to be required to make daily margin payments. In this situation, if the Fund has insufficient cash to meet daily margin requirements it may have to sell portfolio securities to meet its margin obligations at a time when it may be disadvantageous to do so. In addition, the Fund may be required to take or make delivery of the securities underlying the futures contracts it holds. The inability to close out futures positions also could have an adverse impact on the Funds ability to hedge its portfolio effectively.
There are several risks in connection with the use of futures contracts as a hedging device. While hedging can provide protection against an adverse movement in market prices, it can also limit a hedgers opportunity to benefit fully from a favorable market movement. In addition, investing in futures contracts and options on futures contracts will cause the Fund to incur additional brokerage commissions and may cause an increase in the Funds portfolio turnover rate.
The successful use of futures contracts and related options may also depend on the ability of the Funds subadviser to forecast correctly the direction and extent of market movements, interest rates and other market factors within a given time frame. To the extent market prices remain stable during the period a futures contract or option is held by the Fund or such prices move in a direction opposite to that anticipated, the Fund may realize a loss on the transaction which is not offset by an increase in the value of its portfolio securities. Options and futures may also fail as a hedging technique in cases where the movements of the securities underlying the options and futures do not follow the price movements of the hedged portfolio securities. As a result, the Funds total return for the period may be less than if it had not engaged in the hedging transaction. The loss from investing in futures transactions is potentially unlimited.
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Utilization of futures contracts by the Fund involves the risk of imperfect correlation in movements in the price of futures contracts and movements in the price of the securities which are being hedged. If the price of the futures contract moves more or less than the price of the securities being hedged, the Fund will experience a gain or loss which will not be completely offset by movements in the price of the securities. It is possible that, where the Fund has sold futures contracts to hedge its portfolio against a decline in the market, the market may advance and the value of securities held in the Funds portfolio may decline. If this occurred, the Fund would lose money on the futures contract and would also experience a decline in value in its portfolio securities. Where futures are purchased to hedge against a possible increase in the prices of securities before the Fund is able to invest its cash (or cash equivalents) in securities (or options) in an orderly fashion, it is possible that the market may decline; if the Fund then determines not to invest in securities (or options) at that time because of concern as to possible further market decline or for other reasons, the Fund will realize a loss on the futures that would not be offset by a reduction in the price of the securities purchased.
The market prices of futures contracts may be affected if participants in the futures market elect to close out their contracts through off- setting transactions rather than to meet margin deposit requirements. In such case, distortions in the normal relationship between the cash and futures markets could result. Price distortions could also result if investors in futures contracts opt to make or take delivery of the underlying securities rather than to engage in closing transactions because such action would reduce the liquidity of the futures market. In addition, from the point of view of speculators, because the deposit requirements in the futures markets are less onerous than margin requirements in the cash market, increased participation by speculators in the futures market could cause temporary price distortions. Due to the possibility of price distortions in the futures market and because of the imperfect correlation between movements in the prices of securities and movements in the prices of futures contracts, a correct forecast of market trends may still not result in a successful hedging transaction.
Compared to the purchase or sale of futures contracts, the purchase of put or call options on futures contracts involves less potential risk for the Fund because the maximum amount at risk is the premium paid for the options plus transaction costs. However, there may be circumstances when the purchase of an option on a futures contract would result in a loss to the Fund while the purchase or sale of the futures contract would not have resulted in a loss, such as when there is no movement in the price of the underlying securities.
For additional information about options transactions, see Options in this section of the SAI.
Mortgage-Related and Other Asset-Backed Securities
The Fund may purchase mortgage-related and other asset-backed securities, which collectively are securities backed by mortgages, installment contracts, credit card receivables or other financial assets. Asset-backed securities represent interests in pools of assets in which payments of both interest and principal on the securities are made periodically, thus in effect passing through such payments made by the individual borrowers on the assets that underlie the securities, net of any fees paid to the issuer or guarantor of the securities. The average life of asset-backed securities varies with the maturities of the underlying instruments, and the average life of a mortgage-backed instrument, in particular, is likely to be less than the original maturity of the mortgage pools underlying the securities as a result of mortgage prepayments, where applicable. For this and other reasons, an asset-backed securitys stated maturity may be different, and the securitys total return may be difficult to predict precisely.
If an asset-backed security is purchased at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Conversely, if an asset-backed security is purchased at a discount, faster than expected prepayments will increase yield to maturity, while slower than expected prepayments will decrease yield to maturity.
Prepayments of principal of mortgage-related securities by mortgagors or mortgage foreclosures affect the average life of the mortgage-related securities in the Funds portfolio. Mortgage prepayments are affected by the level of interest rates and other factors, including general economic conditions and the underlying location and age of the mortgage. In periods of rising interest rates, the prepayment rate tends to decrease, lengthening the average life of a pool of mortgage-related securities. The longer the remaining maturity of a security the greater the effect of interest rate changes will be. Changes in the ability of an issuer to make payments of interest and principal and in the markets perception of its creditworthiness also affect the market value of that issuers debt securities.
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In periods of falling interest rates, the prepayment rate tends to increase, shortening the average life of a pool. Because prepayments of principal generally occur when interest rates are declining, it is likely that the Fund, to the extent that it retains the same percentage of debt securities, may have to reinvest the proceeds of prepayments at lower interest rates than those of its previous investments. If this occurs, that Funds yield will correspondingly decline. Thus, mortgage-related securities may have less potential for capital appreciation in periods of falling interest rates than other fixed income securities of comparable duration, although they may have a comparable risk of decline in market value in periods of rising interest rates. To the extent that the Fund purchases mortgage-related securities at a premium, unscheduled prepayments, which are made at par, result in a loss equal to any unamortized premium.
Duration is one of the fundamental tools used by the Funds subadviser in managing interest rate risks including prepayment risks. Traditionally, a debt securitys term to maturity characterizes a securitys sensitivity to changes in interest rates. Term to maturity, however, measures only the time until a debt security provides its final payment, taking no account of prematurity payments. Most debt securities provide interest (coupon) payments in addition to a final (par) payment at maturity, and some securities have call provisions allowing the issuer to repay the instrument in full before maturity date, each of which affect the securitys response to interest rate changes. Duration therefore is generally considered a more precise measure of interest rate risk than term to maturity. Determining duration may involve the Subadvisers estimates of future economic parameters, which may vary from actual future values. Generally fixed income securities with longer effective durations are more responsive to interest rate fluctuations than those with shorter effective durations. For example, if interest rates rise by 1%, the value of securities having an effective duration of three years will generally decrease by approximately 3%.
Descriptions of some of the different types of mortgage-related and other asset-backed securities most commonly acquired by the Fund are provided below. In addition to those shown, other types of mortgage-related and asset-backed investments are, or may become, available for investment by the Fund.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrid instruments with characteristics of both mortgage-backed and mortgage pass-through securities. Interest and prepaid principal on a CMO are paid, in most cases, monthly. CMOs may be collateralized by whole mortgage loans but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by entities such as GNMA, FHLMC, or FNMA, and their income streams.
CMOs are typically structured in multiple classes, each bearing a different stated maturity. Actual maturity and average life will depend upon the prepayment experience of the collateral. CMOs provide for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how quickly the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes typically receive principal only after the first class has been retired. An investor may be partially guarded against a sooner than desired return of principal because of the sequential payments.
FHLMC CMOs are debt obligations of FHLMC issued in multiple classes having different maturity dates and are secured by the pledge of a pool of conventional mortgage loans purchased by FHLMC. The amount of principal payable on each monthly payment date is determined in accordance with FHLMCs mandatory sinking fund schedule. Sinking fund payments in the CMOs are allocated to the retirement of the individual classes of bonds in the order of their stated maturities. Payments of principal on the mortgage loans in the collateral pool in excess of the amount of FHLMCs minimum sinking fund obligation for any payment date are paid to the holders of the CMOs as additional sinking-fund payments. Because of the pass- through nature of all principal payments received on the collateral pool in excess of FHLMCs minimum sinking fund requirement, the rate at which principal of the CMOs is actually repaid is likely to be such that each class of bonds will be retired in advance of its scheduled maturity date. If collection of principal (including prepayments) on the mortgage loans during any semiannual payment period is not sufficient to meet FHLMCs minimum sinking fund obligation on the next sinking fund payment date, FHLMC agrees to make up the deficiency from its general funds.
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CMO Residuals
CMO residuals are derivative mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans. As described above, the cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and, in particular, the prepayment experience on the mortgage assets. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are based. In certain circumstances the Fund may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. The CMO residual market currently may not have the liquidity of other more established securities trading in other markets. CMO residuals may be subject to certain restrictions on transferability, may be deemed illiquid.
Mortgage Pass-through Securities
Mortgage pass-through securities are interests in pools of mortgage loans, assembled and issued by various governmental, government- related, and private organizations. Unlike other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates, these securities provide a monthly payment consisting of both interest and principal payments. In effect, these payments are a pass- through of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs. Modified pass-through securities (such as securities issued by GNMA) entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities is GNMA. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of Federal Housing Administration insured or Veterans Administration guaranteed mortgages. Government-related guarantors whose obligations are not backed by the full faith and credit of the United States Government include FNMA and FHLMC. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. FHLMC issues Participation Certificates that represent interests in conventional mortgages from FHLMCs national portfolio. FNMA and FHLMC guarantee the timely payment of interest and ultimate collection of principal on securities they issue, but the securities they issue are neither issued nor guaranteed by the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/ or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments for such securities. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage- related security meets the Funds investment quality standards. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. The Fund may buy mortgage-related securities without insurance or guarantees if, through an examination of the loan experience and practices of the originator/servicers and poolers, the Funds subadviser determines that the securities meet the Funds quality standards. Securities issued by certain private organizations may not be readily marketable.
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Mortgage-backed securities that are issued or guaranteed by the U.S. Government, its agencies or instrumentalities, are not subject to the Funds industry concentration restrictions set forth in the Investment Restrictions section of this SAI by virtue of the exclusion from the test available to all U.S. Government securities. The assets underlying such securities may be represented by a portfolio of first lien residential mortgages (including both whole mortgage loans and mortgage participation interests) or portfolios of mortgage pass- through securities issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn be insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs.
The Fund will consider the assets underlying privately-issued, mortgage-related securities, and other asset-backed securities, when determining the industry of such securities for purposes of the Funds industry concentration restrictions set forth in the Investment Restrictions section of this SAI, and as a result such securities may not be deemed by the Fund to represent the same industry or group of industries. In the case of private issue mortgage-related securities whose underlying assets are neither U.S. Government securities nor U.S. Government-insured mortgages, to the extent that real properties securing such assets may be located in the same geographical region, the security may be subject to a greater risk of default than other comparable securities in the event of adverse economic, political or business developments that may affect such region and, ultimately, the ability of residential homeowners to make payments of principal and interest on the underlying mortgages.
It is possible that the availability and the marketability (that is, liquidity) of the securities discussed in this section could be adversely affected by the actions of the U.S. Government to tighten the availability of its credit. On September 7, 2008, the FHFA, an agency of the U.S. Government, placed FNMA and FHLMC into conservatorship, a statutory process with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate FNMA and FHLMC until they are stabilized. The conservatorship is still in effect as of the date of this SAI and has no specified termination date. There can be no assurance as to when or how the conservatorship will be terminated or whether FNMA or FHLMC will continue to exist following the conservatorship or what their respective business structures will be during or following the conservatorship. FHFA, as conservator, has the power to repudiate any contract entered into by FNMA or FHLMC prior to its appointment if it determines that performance of the contract is burdensome and repudiation of the contract promotes the orderly administration of FNMAs or FHLMCs affairs. Furthermore, FHFA has the right to transfer or sell any asset or liability of FNMA or FHLMC without any approval, assignment or consent. If FHFA were to transfer any such guarantee obligation to another party, holders of FNMA or FHLMC mortgage-backed securities would have to rely on that party for satisfaction of the guarantee obligation and would be exposed to the credit risk of that party.
Other Asset-Backed Securities
Through trusts and other special purpose entities, various types of securities based on financial assets other than mortgage loans are increasingly available, in both pass-through structures similar to mortgage pass-through securities described above and in other structures more like CMOs. As with mortgage-related securities, these asset-backed securities are often backed by a pool of financial assets representing the obligations of a number of different parties. They often include credit-enhancement features similar to mortgage-related securities.
Financial assets on which these securities are based include automobile receivables; credit card receivables; loans to finance boats, recreational vehicles, and mobile homes; computer, copier, railcar, and medical equipment leases; and trade, healthcare, and franchise receivables. In general, the obligations supporting these asset-backed securities are of shorter maturities than mortgage loans and are less likely to experience substantial prepayments. However, obligations such as credit card receivables are generally unsecured and the obligors are often entitled to protection under a number of consumer credit laws granting, among other things, rights to set off certain amounts owed on the credit cards, thus reducing the balance due. Other obligations that are secured, such as automobile receivables, may present issuers with difficulties in perfecting and executing on the security interests, particularly where the issuer allows the servicers of the receivables to retain possession of the underlying obligations, thus increasing the risk that recoveries on defaulted obligations may not be adequate to support payments on the securities.
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Stripped Mortgage-backed Securities (SMBS)
SMBS are derivative multi-class mortgage securities. They may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the interest-only or IO class), while the other class will receive all of the principal (the principal-only or PO class). The yield to maturity on an IO class security is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on the Funds yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Fund may fail to recoup fully its initial investment in these securities even if the security is in one of the highest rating categories. The market value of the PO class generally is unusually volatile in response to changes in interest rates.
Although SMBS are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, these securities were only recently developed. As a result, established trading markets have not yet developed and, accordingly, these securities may be deemed illiquid.
The Fund may invest in other mortgage-related securities with features similar to those described above, to the extent consistent with the Funds investment objectives and policies.
Options
The Fund may purchase or sell put and call options on securities, indices and other financial instruments. Options may relate to particular securities, foreign and domestic securities indices, financial instruments, volatility, credit default, foreign currencies or the yield differential between two securities. Such options may or may not be listed on a domestic or foreign securities exchange and may or may not be issued by the OCC.
A call option for a particular security gives the purchaser of the option the right to buy, and a writer the obligation to sell, the underlying security at the stated exercise price before the expiration of the option, regardless of the market price of the security. A premium is paid to the writer by the purchaser in consideration for undertaking the obligation under the option contract. A put option for a particular security gives the purchaser the right to sell and a writer the obligation to buy the security at the stated exercise price before the expiration date of the option, regardless of the market price of the security.
If the only derivatives in which the Fund invests are covered options, options written by the Fund will be covered and will remain covered as long as the Fund is obligated as a writer. A call option is covered if the Fund owns the underlying security or its equivalent covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration if such cash is segregated) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Fund holds on a share-for-share or equal principal amount basis a call on the same security as the call written where the exercise price of the call held is equal to or less than the exercise price of the call written or greater than the exercise price of the call written if appropriate liquid assets representing the difference are segregated by the Fund. A put option is covered if the Fund maintains appropriate liquid securities with a value equal to the exercise price, or owns on a share-for-share or equal principal amount basis a put on the same security as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written.
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The Funds obligation to sell an instrument subject to a covered call option written by it, or to purchase an instrument subject to a secured put option written by it, may be terminated before the expiration of the option by the Funds execution of a closing purchase transaction. This means that the Fund buys an option of the same series (i.e., same underlying instrument, exercise price and expiration date) as the option previously written. Such a purchase does not result in the ownership of an option. A closing purchase transaction will ordinarily be effected to realize a profit on an outstanding option, to prevent an underlying instrument from being called, to permit the sale of the underlying instrument or to permit the writing of a new option containing different terms on such underlying instrument. The cost of such a closing purchase plus related transaction costs may be greater than the premium received upon the original option, in which event the Fund will experience a loss. There is no assurance that a liquid secondary market will exist for any particular option. If the Fund that has written an option and is unable to effect a closing purchase transaction it will not be able to sell the underlying instrument (in the case of a covered call option) or liquidate the segregated assets (in the case of a secured put option) until the option expires or the optioned instrument is delivered upon exercise. The Fund will be subject to the risk of market decline or appreciation in the instrument during such period.
Options purchased are recorded as an asset and written options are recorded as liabilities to the extent of premiums paid or received. The amount of this asset or liability will be subsequently marked-to-market to reflect the current value of the option purchased or written. The current value of the traded option is the last sale price or, in the absence of a sale, the current bid price. If an option purchased by the Fund expires unexercised, the Fund will realize a loss equal to the premium paid. If the Fund enters into a closing sale transaction on an option purchased by it, the Fund will realize a gain if the premium received by the Fund on the closing transaction is more than the premium paid to purchase the option, or a loss if it is less. If an option written by the Fund expires on the stipulated expiration date or if the Fund enters into a closing purchase transaction, it will realize a gain (or loss if the cost of a closing purchase transaction exceeds the net premium received when the option is sold), and the liability related to such option will be eliminated. If an option written by the Fund is exercised, the proceeds of the sale will be increased by the net premium originally received and the Fund will realize a gain or loss.
Options trading is a highly specialized activity that entails more complex and potentially greater than ordinary investment risk. Options may be more volatile than the underlying instruments and, therefore, on a percentage basis, an investment in options may be subject to greater fluctuation than an investment in the underlying instruments themselves.
There are several other risks associated with options. For example, there are significant differences among the securities, currency, volatility, credit default and options markets that could result in an imperfect correlation among these markets, causing a given transaction not to achieve its objectives. In addition, a liquid secondary market for particular options, whether traded over-the- counter or on an exchange, may be absent for reasons that include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities or currencies; unusual or unforeseen circumstances may interrupt normal operations on an exchange; the facilities of an exchange or the OCC may not at all times be adequate to handle current trading value; or one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
Options on Indexes and Yield Curve Options
The Fund may enter into options on indexes or options on the spread, or yield differential, between two fixed income securities, in transactions referred to as yield curve options. Options on indexes and yield curve options provide the holder with the right to make or receive a cash settlement upon exercise of the option. With respect to options on indexes, the amount of the settlement will equal the difference between the closing price of the index at the time of exercise and the exercise price of the option expressed in dollars, times a specified multiple. With respect to yield curve options, the amount of the settlement will equal the difference between the yields of designated securities.
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With respect to yield curve options, a call or put option is covered if the Fund holds another call or put, respectively, on the spread between the same two securities and maintains in a segregated account liquid assets sufficient to cover the Funds net liability under the two options. Therefore, the Funds liability for such a covered option is generally limited to the difference between the amount of the Funds liability under the option it wrote less the value of the option it holds. The Fund may also cover yield curve options in such other manner as may be in accordance with the requirements of the counterparty with which the option is traded and applicable laws and regulations.
The trading of these types of options is subject to all of the risks associated with the trading of other types of options. In addition, however, yield curve options present risk of loss even if the yield of one of the underlying securities remains constant, if the spread moves in a direction or to an extent which was not anticipated.
Reset Options
In certain instances, the Fund may purchase or write options on U.S. Treasury securities, which provide for periodic adjustment of the strike price and may also provide for the periodic adjustment of the premium during the term of each such option. Like other types of options, these transactions, which may be referred to as reset options or adjustable strike options grant the purchaser the right to purchase (in the case of a call) or sell (in the case of a put), a specified type of U.S. Treasury security at any time up to a stated expiration date (or, in certain instances, on such date). In contrast to other types of options, however, the price at which the underlying security may be purchased or sold under a reset option is determined at various intervals during the term of the option, and such price fluctuates from interval to interval based on changes in the market value of the underlying security. As a result, the strike price of a reset option, at the time of exercise, may be less advantageous than if the strike price had been fixed at the initiation of the option. In addition, the premium paid for the purchase of the option may be determined at the termination, rather than the initiation, of the option. If the premium for a reset option written by the Fund is paid at termination, the Fund assumes the risk that (i) the premium may be less than the premium which would otherwise have been received at the initiation of the option because of such factors as the volatility in yield of the underlying Treasury security over the term of the option and adjustments made to the strike price of the option, and (ii) the option purchaser may default on its obligation to pay the premium at the termination of the option. Conversely, where the Fund purchases a reset option, it could be required to pay a higher premium than would have been the case at the initiation of the option.
SOFR Instruments
The Fund may invest in SOFR instruments. instruments. SOFR instruments are dollar-denominated certificates of deposit and time deposits issued outside the U.S. capital markets by foreign branches of U.S. banks and by foreign banks. SOFR futures contracts enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund might use SOFR instruments to hedge against changes in interest rates or to enhance returns.
SOFR obligations are subject to the same risks that pertain to domestic issuers, most notably income risk (and, to a lesser extent, credit risk, market risk, and liquidity risk). Additionally, SOFR obligations are subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of dollars, from flowing across its borders. Other risks include adverse political and economic developments, the extent and quality of government regulation of financial markets and institutions, the imposition of foreign withholding taxes, and expropriation or nationalization of foreign issuers. However, SOFR obligations will undergo the same type of credit analysis as domestic issuers in which the Fund invests.
Swaptions
The Fund may enter into swaption contracts, which give the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date. Over-the-counter uncleared swaptions, although providing greater flexibility, may involve greater credit risk than exchange-traded options as they are not backed by the clearing organization of the exchanges where they are traded, and as such, there is a risk that the seller will not settle as agreed. The Funds financial liability associated with swaptions is linked to the marked-to-market value of the notional underlying investments. Purchased swaption contracts are exposed to a maximum loss equal to the price paid for the option/swaption (the premium) and no further liability. Written swaptions, however, give the right of potential exercise to a third party, and the maximum loss to the Fund in the case of an uncovered swaption is unlimited.
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Swap Agreements
The Fund may enter into swap agreements on, among other things, interest rates, indices, securities and currency exchange rates. The Funds subadviser may use swaps in an attempt to obtain for the Fund a particular desired return at a lower cost to the Fund than if the Fund had invested directly in an instrument that yielded that desired return. Uncleared swap agreements are two-party contracts entered into primarily by institutional investors for periods typically ranging from a few weeks to more than one year. In a standard uncleared swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or swapped between the parties are calculated with respect to a notional amount, i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a basket of securities representing a particular index. The notional amount of the swap agreement is only a fictive basis on which to calculate the obligations the parties to a swap agreement have agreed to exchange. The Funds obligations (or rights) under a swap agreement will generally be equal only to the amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the net amount).
Because uncleared swap agreements are two-party contracts and may have terms of greater than seven days, they may be considered to be illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Funds subadviser will cause the Fund to enter into uncleared swap agreements only with counterparties that would be eligible for consideration as repurchase agreement counterparties under the Funds repurchase agreement guidelines. (See Repurchase Agreements in this section of the SAI.) Certain restrictions imposed on the Fund by the Code may limit the Funds ability to use swap agreements. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential additional government regulation, could adversely affect the Funds ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
CFTC rules dictate that certain swap agreements be considered commodity interests for purposes of the CEA. (See Commodity Interests in this section of the SAI for additional information regarding the implications of investments being considered commodity interests under the CEA.) The SEC and the CFTC have developed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act to create a comprehensive regulatory framework for swap transactions. Under the regulations, certain swap transactions are required to be executed on a regulated trading platform and cleared through a derivatives clearing organization. Additionally, the regulations impose other requirements on the parties entering into swap transactions, including requirements relating to posting margin, and reporting and documenting swap transactions. The Fund engaging in swap transactions may incur additional expenses as a result of these regulatory requirements.
Credit Default Swap Agreements
The Fund may enter into credit default swap agreements. A credit default swap is a bilateral financial contract in which one party (the protection buyer) pays a periodic fee in return for a contingent payment by the protection seller following a credit event of a reference issuer. The protection buyer must either sell particular obligations issued by the reference issuer for its par value (or some other designated reference or strike price) when a credit event occurs or receive a cash settlement based on the difference between the market price and such reference price. A credit event is commonly defined as bankruptcy, insolvency, receivership, material adverse restructuring of debt, or failure to meet payment obligations when due. The Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no event of default occurs, the Fund loses its investment and recovers nothing; however, if an event of default occurs, the Fund receives full notional value for a reference obligation that may have little or no value. As a seller, the Fund receives a periodic fee throughout the term of the contract, provided there is no default event; if an event of default occurs, the Fund must pay the buyer the full notional value of the reference obligation. The value of the reference obligation received by the Fund as a seller, coupled with the periodic payments previously received, may be less than the full notional value the Fund pays to the buyer, resulting in a loss of value to the Fund.
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Credit default swaps involve greater risks than if the Fund had invested in the reference obligation directly. In addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. The Fund will enter into swap agreements only with counterparties deemed creditworthy by the Funds subadviser.
Dividend Swap Agreements
A dividend swap agreement is a financial instrument where two parties contract to exchange a set of future cash flows at set dates in the future. One party agrees to pay the other the future dividend flow on a stock or basket of stocks in an index, in return for which the other party gives the first call options. Dividend swaps generally are traded over the counter rather than on an exchange.
Inflation Swap Agreements
Inflation swap agreements are contracts in which one party agrees to pay the cumulative percentage increase in a price index (e.g., the Consumer Price Index with respect to CPI swaps) over the term of the swap (with some lag on the inflation index), while the other pays a compounded fixed rate. Inflation swap agreements may be used by the Fund to hedge the inflation risk associated with non-inflation indexed investments, thereby creating synthetic inflation-indexed investments. One factor that may lead to changes in the values of inflation swap agreements is a change in real interest rates, which are tied to the relationship between nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate than inflation, real interest rates may rise, which may lead to a decrease in value of an inflation swap agreement.
Total Return Swap Agreements
Total return swap is the generic name for any non-traditional swap where one party agrees to pay the other the total return of a defined underlying asset, usually in return for receiving a stream of cash flows based upon an agreed rate. A total return swap may be applied to any underlying asset but is most commonly used with equity indices, single stocks, bonds and defined portfolios of loans and mortgages. A total return swap is a mechanism for the user to accept the economic benefits of asset ownership without utilizing the balance sheet. The other leg of the swap, which is often LIBOR, is spread to reflect the non-balance sheet nature of the product. Total return swaps can be designed with any underlying asset agreed between the two parties. No notional amounts are exchanged with total return swaps.
Variance and Correlation Swap Agreements
Variance swap agreements are contracts in which two parties agree to exchange cash payments based on the difference between the stated level of variance and the actual variance realized on an underlying asset or index. Actual variance as used here is defined as the sum of the square of the returns on the reference asset or index (which in effect is a measure of its volatility) over the length of the contract term. In other words, the parties to a variance swap can be said to exchange actual volatility for a contractually stated rate of volatility. Correlation swap agreements are contracts in which two parties agree to exchange cash payments based on the differences between the stated and the actual correlation realized on the underlying equity securities within a given equity index. Correlation as used here is defined as the weighted average of the correlations between the daily returns of each pair of securities within a given equity index. If two assets are said to be closely correlated, it means that their daily returns vary in similar proportions or along similar trajectories. The Fund may enter into variance or correlation swaps in an attempt to hedge equity market risk or adjust exposure to the equity markets.
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Equity Securities
The Fund may invest in equity securities. Equity securities include common stocks, preferred stocks and preference stocks; securities such as bonds, warrants or rights that are convertible into stocks; and depositary receipts for those securities.
Common stockholders are the owners of the company issuing the stock and, accordingly, usually have the right to vote on various corporate governance matters such as mergers. They are not creditors of the company, but rather, in the event of liquidation of the company, would be entitled to their pro rata shares of the companys assets after creditors (including fixed income security holders) and, if applicable, preferred stockholders are paid. Preferred stock is a class of stock having a preference over common stock as to dividends or upon liquidation. A preferred stockholder is a shareholder in the company and not a creditor of the company as is a holder of the companys fixed income securities. Dividends paid to common and preferred stockholders are distributions of the earnings or other surplus of the company and not interest payments, which are expenses of the company. Equity securities owned by the Fund may be traded in the over-the-counter market or on a securities exchange and may not be traded every day or in the volume typical of securities traded on a major U.S. national securities exchange. As a result, disposition by the Fund of a portfolio security may require the Fund to sell the security at less than the reported value of the security, to sell during periods when disposition is not desirable, or to make many small sales over a lengthy period of time. The market value of all securities, including equity securities, is based upon the markets perception of value and not necessarily the book value of an issuer or other objective measure of a companys worth.
Stock values may fluctuate in response to the activities of an individual company or in response to general market and/or economic conditions. Historically, common stocks have provided greater long- term returns and have entailed greater short-term risks than other types of securities. Smaller or newer issuers may be more likely to realize more substantial growth or suffer more significant losses. Investments in these companies can be both more volatile and more speculative. Fluctuations in the value of equity securities in which the Fund invests will cause the NAV of the Fund to fluctuate.
Equipment Trust Certificates
Equipment trust certificates are debt certificates issued by a company in order to buy mechanical equipment, with the equipment serving as the debts collateral.
Foreign Investing
The Fund may invest in a broad range of securities of foreign issuers, including equity, debt and convertible securities and foreign government securities. The Fund may purchase the securities of issuers from various countries, including countries commonly referred to as emerging markets or frontier markets. The Fund may also invest in domestic securities denominated in foreign currencies.
Investing in the securities of foreign companies involves special risks and considerations not typically associated with investing in U.S. companies. These include differences in accounting, auditing and financial reporting standards, generally higher commission rates on foreign portfolio transactions, the possibility of expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations, political instability which could affect U.S. investments in foreign countries, and potential restrictions on the flow of international capital. Foreign issuers may become subject to sanctions imposed by the United States or another country, which could result in the immediate freeze of the foreign issuers assets or securities. The imposition of such sanctions could impair the market value of the securities of such foreign issuers and limit the Funds ability to buy, sell, receive or deliver the securities. Additionally, dividends payable on foreign securities may be subject to foreign taxes withheld prior to distribution. Foreign securities often trade with less frequency and volume than domestic securities and therefore may exhibit greater price volatility. Changes in foreign exchange rates will affect the value of those securities which are denominated or quoted in currencies other than the U.S. dollar. Many of the foreign securities held by the Fund will not be registered with, nor will the issuers thereof be subject to the reporting requirements of, the SEC. Accordingly, there may be less publicly available information about the securities and about the foreign company or government issuing them than is available about a domestic company or government entity. Moreover, individual foreign economies may differ favorably or unfavorably from the United States economy in such respects as growth of Gross National Product, rate of inflation, capital reinvestment, resource self- sufficiency and balance of payment positions. Finally, the Fund may encounter difficulty in obtaining and enforcing judgments against issuers of foreign securities.
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Securities of U.S. issuers denominated in foreign currencies may be less liquid and their prices more volatile than securities issued by domestic issuers and denominated in U.S. dollars. In addition, investing in securities denominated in foreign currencies often entails costs not associated with investment in U.S. dollar-denominated securities of U.S. issuers, such as the cost of converting foreign currency to U.S. dollars, higher brokerage commissions, custodial expenses and other fees. Non-U.S. dollar denominated securities may be subject to certain withholding and other taxes of the relevant jurisdiction, which may reduce the yield on the securities to the Fund and which may not be recoverable by the Fund or their investors.
The Fund may use an eligible foreign custodian in connection with its purchases of foreign securities and may maintain cash and cash equivalents in the care of a foreign custodian. The amount of cash or cash equivalents maintained in the care of eligible foreign custodians will be limited to an amount reasonably necessary to effect the Funds foreign securities transactions. The use of a foreign custodian invokes considerations which are not ordinarily associated with domestic custodians. These considerations include the possibility of expropriations, restricted access to books and records of the foreign custodian, inability to recover assets that are lost while under the control of the foreign custodian, and the impact of political, social or diplomatic developments.
Settlement procedures relating to the Funds investments in foreign securities and to the Funds foreign currency exchange transactions may be more complex than settlements with respect to investments in debt or equity securities of U.S. issuers, and may involve certain risks not present in the Funds domestic investments. For example, settlement of transactions involving foreign securities or foreign currency may occur within a foreign country, and the Fund may be required to accept or make delivery of the underlying securities or currency in conformity with any applicable U.S. or foreign restrictions or regulations, and may be required to pay any fees, taxes or charges associated with such delivery. Such investments may also involve the risk that an entity involved in the settlement may not meet its obligations. Settlement procedures in many foreign countries are less established than those in the United States, and some foreign country settlement periods can be significantly longer than those in the United States.
To the extent the Fund that has significant exposure to certain countries, it can be expected to be impacted by the political and economic conditions within such countries. There is continuing uncertainty around the future of the euro and the European Union (EU) following the United Kingdoms vote to exit the EU in June 2016. In March 2017, the United Kingdom invoked a treaty provision that sets out the basics of a withdrawal from the EU and provides that negotiations must be completed within two years, unless all EU member states agree on an extension. The United Kingdom left the EU on January 31, 2020, followed by a transition period during which businesses and others prepared for the new post-Brexit rules that took effect on January 1, 2021. While a limited deal was reached prior to December 31, 2020, many aspects are still to be determined, including those related to financial services. Significant uncertainty remains in the market regarding the ramifications of the withdrawal of the United Kingdom from the European Union, and the range and potential implications of possible political, regulatory, economic and market outcomes are difficult to predict. Continuing Brexit issues and negotiations may cause greater market volatility and illiquidity, currency fluctuations, deterioration in economic activity, a decrease in business confidence, and increased likelihood of a recession in the United Kingdom. While it is not possible to determine the precise impact these events may have on the Fund, during this period and beyond, the impact on the United Kingdom, EU countries, other countries or parties that transact with the United Kingdom and EU, and the broader global economy could be significant and could adversely affect the value and liquidity of the Funds investments. In addition, if one or more countries were to exit the EU or abandon the use of the euro as a currency, the value of investments tied to those countries or the euro could decline significantly and unpredictably.
Depositary Receipts
The Fund may hold ADRs, ADSs, GDRs and EDRs. ADRs and ADSs typically are issued by an American bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as CDRs, are issued in Europe typically by foreign banks and trust companies and evidence ownership of either foreign or domestic securities. GDRs are similar to EDRs and are designed for use in several international financial markets. Generally, ADRs and ADSs in registered form are designed for use in United States securities markets and EDRs in bearer form are designed for use in European securities markets. For purposes of the Funds investment policies, its investments in ADRs, ADSs, GDRs and EDRs will be deemed to be investments in the underlying foreign securities.
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Depositary Receipts may be issued pursuant to sponsored or unsponsored programs. In sponsored programs, an issuer has made arrangements to have its securities traded in the form of Depositary Receipts. In unsponsored programs, the issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, in some cases it may be easier to obtain financial information from an issuer that has participated in the creation of a sponsored program. Accordingly, there may be less information available regarding issuers of securities underlying unsponsored programs and there may not be a correlation between such information and the market value of the Depositary Receipts. For purposes of the Funds investment policies, investments in Depositary Receipts will be deemed to be investments in the underlying securities. Thus, a Depositary Receipt representing ownership of common stock will be treated as common stock.
Depositary Receipts are generally subject to the same sort of risks as direct investments in a foreign country, such as currency risk, political and economic risk, and market risk, because their values generally depend on the performance of a foreign security denominated in its home currency. (The risks of foreign investing are addressed above in this section of the SAI under the heading Foreign Investing.) In addition to risks associated with the underlying portfolio of securities, receipt holders also must consider credit standings of the custodians and broker/dealer sponsors. The receipts are not registered with the SEC and qualify as Rule 144A securities which may make them more difficult and costly to sell. (For information about Rule 144A securities, see Restricted Securities and Securities with Limited Trading Markets (Rule 144A) in this section of the SAI.)
Emerging Market Securities
The Fund may invest in countries or regions with relatively low gross national product per capita compared to the worlds major economies, and in countries or regions with the potential for rapid economic growth (emerging markets). Emerging markets will include any country: (i) having an emerging stock market as defined by the International Finance Corporation; (ii) with low-to-middle-income economies according to the World Bank; (iii) listed in World Bank publications as developing; or (iv) determined by the Subadviser to be an emerging market as defined above.
Certain emerging market countries are either comparatively underdeveloped or are in the process of becoming developed and may consequently be economically dependent on a relatively few or closely interdependent industries. A high proportion of the securities of many emerging market issuers may also be held by a limited number of large investors trading significant blocks of securities. While the Funds subadviser will strive to be sensitive to publicized reversals of economic conditions, political unrest and adverse changes in trading status, unanticipated political and social developments may affect the values of the Funds investments in such countries and the availability of additional investments in such countries.
The risks of investing in foreign securities may be intensified in the case of investments in emerging markets. Securities of many issuers in emerging markets may be less liquid and more volatile than securities of comparable domestic issuers. Emerging markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlement could result in temporary periods when a portion of the assets of the Fund is uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of portfolio securities or, if the Fund has entered into a contract to sell the security, in possible liability to the purchaser. Securities prices in emerging markets can be significantly more volatile than in the more developed nations of the world, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may have relatively unstable governments, present the risk of nationalization of businesses, restrictions on foreign ownership, or prohibitions of repatriation of assets, and may have less protection of property rights than more developed countries.
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Certain emerging markets may require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, a country could impose temporary restrictions on foreign capital remittances, whether because deterioration occurs in an emerging markets balance of payments or for other reasons. The Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation of capital, as well as by the application to the Fund of any restrictions on investments.
Investments in certain foreign emerging market debt obligations may be restricted or controlled to varying degrees. These restrictions or controls may at times preclude investment in certain foreign emerging market debt obligations and increase the expenses of the Fund.
Regulatory regimes outside of the US may not require or enforce corporate governance standards comparable to that of the US, which may result in less protections for investors in such issuers and make such issuers more susceptible to actions not in the best interest of the issuer or its investors.
In December 2020, the Holding Foreign Companies Accountable Act (the HFCAA) was signed into law. The HFCAA directs the SEC to prohibit securities of a registrant from being listed on any US stock exchanges if, for three consecutive years, the PCAOB determines it was unable to inspect the auditor of the registrants financial statements. The HFCAA also requires a foreign registrant to provide certain disclosures if the registrant files an annual report that includes an audit report from an auditor that was not subject to Public Company Accounting Oversight Board inspection. In December 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCAA. The potential impact of the HFCAA is unclear at this time, but it may limit the securities in which the Fund may invest.
China Investment via China Bond Connect
The Fund currently does or is permitted to invest in mainland China. Such investments are or are intended to be made through the China Interbank Bond Market (CIBM) by way of Bond Connect. Bond Connect is a bond trading link between China and Hong Kong which allows foreign institutional investors to invest in onshore Chinese bonds and other debt instruments traded on the CIBM. The Fund may invest directly in the instruments traded on the CIBM via the Bond Connect.
China Interbank Bond Market Risk
Investment in the CIBM by the Fund is subject to regulatory risks. The relevant rules and regulations on investments in the CIBM are subject to changes which may have potential retrospective effect. In the event that the relevant Chinese authorities suspend accounts opening or trading in CIBM, the Funds ability to invest in CIBM will be limited and, after exhausting other trading alternatives, the Fund may suffer a loss of the investment in the CIBM. In addition, any suspension to trading in CIBM may result in the Fund being unable to dispose of securities and may introduce difficulties in repatriating sales proceeds. In turn, this may increase liquidity risk. Moreover, although there is no quota restriction under the CIBM investment regulations, relevant information about the Funds investments (such as the anticipated investment size and investment term) needs to be filed with Peoples Bank of China (PBoC) and an updating filing will be required is there is any significant change to the filed information. It cannot be predicted whether PBoC will make any comments on or require any changes with respect to such information for the purpose of the filing. If so required, the Fund will need to follow PBoC instructions and make the relevant changes accordingly, which, may not be in the best interests of the Fund and the Shareholders from a commercial perspective.
Market volatility and potential lack of liquidity due to low trading volume of certain instruments in the CIBM may result in prices of such instruments traded on such market fluctuating significantly. In addition, certain instruments may rely on market makers to provide liquidity. The Fund investing in such instruments is therefore subject to liquidity and volatility risks. The bid and offer spreads of the prices of such securities may be large, and the Fund may therefore incur significant trading and realization costs in respect of the investment made in the CIBM and may even suffer losses when disposing of such investments.
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Foreign Currency Transactions
When investing in securities denominated in foreign currencies, the Fund will be subject to the additional risk of currency fluctuations. An adverse change in the value of a particular foreign currency as against the U.S. dollar, to the extent that such change is not offset by a gain in other foreign currencies, will result in a decrease in the Funds assets. Any such change may also have the effect of decreasing or limiting the income available for distribution. Foreign currencies may be affected by revaluation, adverse political and economic developments, and governmental restrictions. Further, no assurance can be given that currency exchange controls will not be imposed on any particular currency at a later date.
As a result of its investments in foreign securities, the Fund may receive interest or dividend payments, or the proceeds of the sale or redemption of such securities, in the foreign currencies in which such securities are denominated. In that event, the Fund may convert such currencies into dollars at the then current exchange rate. Under certain circumstances, however, such as where the Funds subadviser believes that the applicable rate is unfavorable at the time the currencies are received or the Funds subadviser anticipates, for any other reason, that the exchange rate will improve, the Fund may hold such currencies for an indefinite period of time.
In addition, the Fund may be required to receive delivery of the foreign currency underlying forward foreign currency contracts it has entered into. This could occur, for example, if an option written by the Fund is exercised or the Fund is unable to close out a forward contract. The Fund may hold foreign currency in anticipation of purchasing foreign securities.
The Fund may also elect to take delivery of the currencies underlying options or forward contracts if, in the judgment of the Funds subadviser, it is in the best interest of the Fund to do so. In such instances as well, the Fund may convert the foreign currencies to dollars at the then current exchange rate, or may hold such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage of favorable movements in the applicable exchange rate, it also exposes the Fund to risk of loss if such rates move in a direction adverse to the Funds position. Such losses could reduce any profits or increase any losses sustained by the Fund from the sale or redemption of securities, and could reduce the dollar value of interest or dividend payments received. In addition, the holding of currencies could adversely affect the Funds profit or loss on currency options or forward contracts, as well as its hedging strategies.
When the Fund effects foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange market, the Fund incurs expenses in converting assets from one currency to another. The Fund may also effect other types of foreign currency exchange transactions, which have their own risks and costs. For information about such transactions, please see Foreign Currency Forward Contracts, Futures and Options in this section of the SAI.
Foreign Investment Companies
Some of the countries in which the Fund may invest may not permit, or may place economic restrictions on, direct investment by outside investors. Investments in such countries may be permitted only through foreign government-approved or -authorized investment vehicles, which may include other investment companies. These funds may also invest in other investment companies that invest in foreign securities. Investing through such vehicles may involve frequent or layered fees or expenses and may also be subject to limitation under the 1940 Act. As a shareholder of another investment company, the Fund would bear, along with other shareholders, its pro rata portion of the other investment companys expenses, including advisory fees. Those expenses would be in addition to the advisory and other expenses that the Fund bears directly in connection with its own operations. For additional information, see Other Investment Companies in this section of the SAI.
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Privatizations
The governments of some foreign countries have been engaged in programs of selling part or all of their stakes in government owned or controlled enterprises (privatizations). Privatizations may offer opportunities for significant capital appreciation. In certain foreign countries, the ability of foreign entities such as the Fund to participate in privatizations may be limited by local law, or the terms on which the Fund may be permitted to participate may be less advantageous than those for local investors. There can be no assurance that foreign governments will continue to sell companies currently owned or controlled by them or that privatization programs will be successful.
Inflation-Protected Securities
The Fund may invest in inflation-protected securities, which are freely transferable securities that are structured to provide protection against inflation. The principal or interest components of inflation-protected securities are adjusted periodically according to the general movements of inflation in the country of issue. U.S. Treasury Inflation Protected Securities (U.S. TIPS) are freely transferable inflation-indexed debt securities issued by the U.S. Department of Treasury that are structured to provide protection against inflation. The U.S. Treasury Department currently uses the Consumer Price Index for Urban Consumers, non-seasonally adjusted, as its inflation measure. Inflation-indexed bonds issued by a non-U.S. government are generally adjusted to reflect a comparable inflation index calculated by that government.
Market Volatility Risk
The Fund could lose money over short periods due to short-term market movements and over longer periods during more prolonged market downturns. The value of a security or other instrument may decline due to changes in general market conditions, economic trends or events that are not specifically related to the issuer of the security or other instrument, or factors that affect a particular issuer or issuers, country, group of countries, region, market, industry, group of industries, sector or asset class. During a general market downturn, multiple asset classes may be negatively affected. Changes in market conditions and interest rates generally do not have the same impact on all types of securities and instruments.
Social, political, economic and other conditions and events (such as natural disasters, epidemics and pandemics, terrorism, conflicts and social unrest) that occur from time to time will create uncertainty and may have significant impacts on issuers, industries, governments and other systems, including the financial markets, to which the Fund and the issuers in which it invests are exposed. As global systems, economies and financial markets are increasingly interconnected, events that once had only local impact are now more likely to have regional or even global effects. Events that occur in one country, region or financial market will, more frequently, impact issuers in other countries, regions or markets, including in established markets such as the United States. These impacts can be exacerbated by failures of governments and societies to adequately respond to an emerging event or threat.
Uncertainty can result in or coincide with: increased volatility in the global financial markets, including those related to equity and debt securities, loans, credit, derivatives and currency; a decrease in the reliability of market prices and difficulty in valuing assets; greater fluctuations in currency exchange rates; increased risk of default (by both government and private issuers); further social, economic, and political instability; nationalization of private enterprises; greater governmental involvement in the economy or in social factors that impact the economy; greater, less or different governmental regulation and supervision of the securities markets and market participants and increased, decreased or different processes for and approaches to monitoring markets and enforcing rules and regulations by governments or self-regulatory organizations; limited, or limitations on the, activities of investors in such markets; controls or restrictions on foreign investment, capital controls and limitations on repatriation of invested capital; inability to purchase and sell assets or otherwise settle transactions (i.e., a market freeze); unavailability of currency hedging techniques; substantial, and in some periods extremely high, rates of inflation, which can last many years and have substantial negative effects on markets as well as the economy as a whole; recessions; and difficulties in obtaining and/or enforcing legal judgments.
For example, an outbreak of infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and eventually detected globally. This coronavirus resulted in travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines, cancellations, supply chain disruptions, and lower consumer demand, as well as general concern and uncertainty. The impact of COVID-19 adversely affected the economies of many nations and the entire global economy, individual issuers and capital markets. Future infectious illness outbreaks could affect the economies of many nations or the entire global economy in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises may exacerbate other pre-existing political, social and economic risks in certain countries or globally.
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Although it is impossible to predict the precise nature and consequences of these events, or of any political or policy decisions and regulatory changes occasioned by emerging events or uncertainty on applicable laws or regulations that impact the Funds investments, it is clear that these types of events will impact the Fund and the issuers in which each invests. The government response to these events, including emergency health measures, welfare benefit programs, fiscal stimulus, industry support programs, and measures that impact interest rates, among other responses, is also a factor that may impact the financial markets and the value of the Funds holdings. The issuers in which the Fund invests could be significantly impacted by emerging events and uncertainty of this type. The Fund will also be negatively affected if the operations and effectiveness of any of its key service providers are compromised or if necessary or beneficial systems and processes are disrupted.
Money Market Instruments
The Fund may invest in money market instruments, which are high- quality short-term investments. The types of money market instruments most commonly acquired by the Fund are discussed below, although the Fund is also permitted to invest in other types of money market instruments to the extent consistent with the Funds investment limitations and restrictions.
Bankers Acceptances
A bankers acceptance is a time draft drawn on a commercial bank by a borrower usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods). The borrower, as well as the bank, is liable for payment, and the bank unconditionally guarantees to pay the draft at its face amount on the maturity date. Most acceptances have maturities of six months or less and are traded in secondary markets prior to maturity.
Certificates of Deposit
Certificates of deposit are generally short-term, interest-bearing negotiable certificates issued by banks or savings and loan associations against funds deposited in the issuing institution. They generally may be withdrawn on demand but may be subject to early withdrawal penalties which could reduce the Funds yield.
Commercial Paper
Commercial paper refers to short-term, unsecured promissory notes issued by corporations to finance short-term credit needs. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months.
Obligations of Foreign Banks and Foreign Branches of U.S. Banks
The money market instruments in which the Fund may invest include negotiable certificates of deposit, bankers acceptances and time deposits of foreign branches of U.S. banks, foreign banks and their non-U.S. branches (Eurodollars), U.S. branches and agencies of foreign banks (Yankee dollars), and wholly-owned banking-related subsidiaries of foreign banks. For the purposes of the Funds investment policies with respect to money market instruments, obligations of foreign branches of U.S. banks and of foreign banks are obligations of the issuing bank and may be general obligations of the parent bank. Such obligations, however, may be limited by the terms of a specific obligation and by government regulation. As with investment in non-U.S. securities in general, investments in the obligations of foreign branches of U.S. banks and of foreign banks may subject the Fund to investment risks that are different in some respects from those of investments in obligations of domestic issuers.
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Time Deposits
Time deposits are deposits in a bank or other financial institution for a specified period of time at a fixed interest rate for which a negotiable certificate is not received.
U.S. Government Obligations
Securities issued or guaranteed as to principal and interest by the United States Government include a variety of Treasury securities, which differ only in their interest rates, maturities, and times of issuance. Treasury bills have maturities of one year or less. Treasury notes have maturities of one to ten years, and Treasury bonds generally have maturities of greater than ten years.
Agencies of the United States Government which issue or guarantee obligations include, among others, Export-Import Bank of the United States, Farmers Home Administration, Federal Housing Administration, GNMA, Maritime Administration, Small Business Administration and The Tennessee Valley Authority. Obligations of instrumentalities of the United States Government include securities issued or guaranteed by, among others, FNMA, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks, Banks for Cooperatives, and the U.S. Postal Service. Some of these securities are supported by the full faith and credit of the U.S. Government, others are supported by the right of the issuer to borrow from the Treasury, while still others are supported only by the credit of the instrumentality. There is no guarantee that the U.S. Government will provide financial support to its agencies or instrumentalities, now or in the future, if it is not obligated to do so by law. Accordingly, although these securities have historically involved little risk of loss of principal if held to maturity, they may involve more risk than securities backed by the full faith and credit of the U.S. Government because the Fund must look principally to the agency or instrumentality issuing or guaranteeing the securities for repayment and may not be able to assert a claim against the United States if the agency or instrumentality does not meet its commitment.
Other Investment Companies
The Fund is authorized to invest in the securities of other investment companies subject to the limitations contained in the 1940 Act.
Investment companies in which the Fund may invest may include ETFs. An ETF is an investment company classified as an open-end investment company or unit investment trust that is traded similarly to a publicly traded company. Most ETFs seek to achieve the same return as a particular market index. That type of ETF is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index. An index-based ETF will invest in all of the securities included in the index, a representative sample of the securities included in the index, or other investments expected to produce returns substantially similar to that of the index. Other types of ETFs include leveraged or inverse ETFs, which are ETFs that seek to achieve a daily return that is a multiple or an inverse multiple of the daily return of a securities index. An important characteristic of these ETFs is that they seek to achieve their stated objectives on a daily basis, and their performance over longer periods of time can differ significantly from the multiple or inverse multiple of the index performance over those longer periods of time. ETFs also include actively managed ETFs that pursue active management strategies and publish their portfolio holdings on a frequent basis.
In certain countries, investments by the Fund may only be made through investments in other investment companies that, in turn, are authorized to invest in the securities that are issued in such countries. (See Foreign Investment Companies under Foreign Investing in this section of the SAI.)
Under the 1940 Act, the Fund generally may not own more than 3% of the outstanding voting stock of an investment company, invest more than 5% of its total assets in any one investment company, or invest more than 10% of its total assets in the securities of investment companies. In some instances, the Fund may invest in an investment company in excess of these limits; for instance, with respect to investments made pursuant to exemptive rules adopted and/or orders granted by the SEC. The SEC has adopted exemptive rules to permit a fund investing in other funds to exceed these limits when complying with certain conditions, which differ depending upon whether the underlying funds in which the fund invests are affiliated or unaffiliated with the fund. The Fund may rely on these exemptive rules and/or orders to invest in affiliated or unaffiliated mutual funds and/or unaffiliated ETFs.
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The risks associated with investing in other investment companies generally reflect the risks of owning shares of the underlying securities in which those investment companies invest, although lack of liquidity in an investment company could result in its value being more volatile than the underlying portfolio of securities. For purposes of complying with investment policies requiring the Fund to invest a percentage of its assets in a certain type of investments (e.g., stocks of small capitalization companies), the Fund generally will look through an investment company in which it invests, to categorize the investment company in accordance with the types of investments the investment company holds.
Certain investment companies in which the Fund may invest may be considered commodity pools under the CEA and applicable CFTC regulations. If the Fund invests in such an investment company, the Fund will be required to treat some or all of its holding of the investment companys shares as a commodity interest for the purposes of determining whether the Fund is qualified to claim exclusion or exemption from regulation by the CFTC. (See Commodity Interests in this section of the SAI for additional information regarding the implications to the Fund of investing in commodity interests.)
Investors in the Fund should recognize that when the Fund invests in another investment company, the Fund will bear its pro rata portion of the other investment companys expenses, including advisory fees, in addition to the expenses the Fund bears directly in connection with its own operations.
Real Estate Investment Trusts (REITs)
The Fund may invest in REITs. REITs pool investors funds for investment primarily in income producing commercial real estate or real estate related loans. A REIT is not taxed on income distributed to shareholders if it complies with several requirements relating to its organization, ownership, assets, and income and a requirement that it distribute to its shareholders at least 90% of its taxable income (other than net capital gains) for each taxable year.
REITs can generally be classified as follows:
● | Equity REITs, which invest the majority of their assets directly in real property and derive their income primarily from rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. |
● | Mortgage REITs, which invest the majority of their assets in real estate mortgages and derive their income primarily from interest payments. |
● | Hybrid REITs, which combine the characteristics of both equity REITs and mortgage REITs. |
REITs are structured similarly to closed-end investment companies in that they are essentially holding companies. An investor should realize that by investing in REITs indirectly through the Fund, they will bear not only their proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the underlying REITs. (See Mutual Fund Investing in this section of the SAI.)
Selecting REITs requires an evaluation of the merits of each type of asset a particular REIT owns, as well as regional and local economics. Due to the proliferation of REITs in recent years and the relative lack of sophistication of certain REIT managers, the quality of REIT assets has varied significantly. The risks associated with REITs are similar to those associated with the direct ownership of real estate. These include declines in the value of real estate, risks related to general and local economic conditions, dependence on management skill, cash flow dependence, possible lack of availability of long-term mortgage funds, over-building, extended vacancies of properties, decreased occupancy rates and increased competition, increases in property taxes and operating expenses, changes in neighborhood values and the appeal of the properties to tenants and changes in interest rates.
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Equity REITs may be affected by changes in the value of the underlying properties they own, while mortgage REITs may be affected by the quality of any credit extended. Further, equity and mortgage REITs are dependent upon management skills and generally are not diversified. Equity and mortgage REITs are also subject to potential defaults by borrowers, self-liquidation, and the possibility of failing to qualify for tax-free status of income under the Code and failing to maintain exemption from the 1940 Act. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. In addition, investment in REITs could cause the Fund to possibly fail to qualify as a regulated investment company.
Repurchase Agreements
The Fund may enter into repurchase agreements by which the Fund purchases portfolio securities subject to the sellers agreement to repurchase them at a mutually agreed-upon time and price. The repurchase price may be higher than the purchase price, the difference being income to the Fund, or the purchase and repurchase price may be the same, with interest payable to the Fund at a stated rate together with the repurchase price on repurchase. In either case, the income to the Fund is unrelated to the interest rate on the security.
A repurchase agreement must be collateralized by obligations that could otherwise be purchased by the Fund (except with respect to maturity). The value of such collateral will be monitored throughout the term of the repurchase agreement in an attempt to ensure that the market value of the collateral always equals or exceeds the repurchase price (including accrued interest). If the value of the collateral dips below such repurchase price, additional collateral will be requested and, when received, added to the account to maintain full collateralization.
Repurchase agreements will be entered into with commercial banks, brokers and dealers considered by the Funds subadviser to be creditworthy. However, the use of repurchase agreements involves certain risks such as default by, or insolvency of, the other party to the transaction. The Fund also might incur disposition costs in connection with liquidating the underlying securities or enforcing its rights.
Typically, repurchase agreements are in effect for one week or less, but they may be in effect for longer periods of time.
A Fund must comply with SEC Rule 18f-4 when engaging in short sales. See Derivatives Instruments and Other Leveraged Transactions above.
Restricted Securities and Securities with Limited Trading Markets (Rule 144A)
The Fund may purchase securities for which there is a limited trading market or which are subject to restrictions on resale to the public. If the Fund were to acquire substantial positions in securities with limited trading markets, the activities of the Fund could have an adverse effect upon the liquidity and marketability of such securities and the Fund might not be able to dispose of its holdings in those securities at then current market prices. Circumstances could also exist portfolio securities might have to be sold by the Fund at times which otherwise might be considered to be disadvantageous so that the Fund might receive lower proceeds from such sales than it had expected to realize. Investments in securities which are restricted may involve added expenses to the Fund should the Fund be required to bear registration costs with respect to such securities and could involve delays in disposing of such securities which might have an adverse effect upon the price and timing of sales of such securities. Restricted securities and securities for which there is a limited trading market may be significantly more difficult to value due to the unavailability of reliable market quotations for such securities, and investment in such securities may have an adverse impact on NAV. The Fund may purchase Rule 144A securities for which there may be a secondary market of qualified institutional buyers as contemplated by Rule 144A under 1933 Act.
Reverse Repurchase Agreements
Reverse repurchase agreements are transactions in which the Fund sells a security and simultaneously commits to repurchase that security from the buyer, such as a bank or broker-dealer, at an agreed-upon price on an agreed-upon future date. The resale price in a reverse repurchase agreement reflects a market rate of interest that is not related to the coupon rate or maturity of the sold security. For certain demand agreements, there is no agreed-upon repurchase date and interest payments are calculated daily, often based upon the prevailing overnight repurchase rate.
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Generally, a reverse repurchase agreement enables the Fund to recover for the term of the reverse repurchase agreement all or most of the cash invested in the portfolio securities sold and to keep the interest income associated with those portfolio securities. Such transactions are only advantageous if the interest cost to the Fund of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. In addition, interest costs on the money received in a reverse repurchase agreement may exceed the return received on the investments made by the Fund with those monies. Using reverse repurchase agreements to earn additional income involves the risk that the interest earned on the invested proceeds is less than the expense of the reverse repurchase agreement transaction.
The Fund will enter into reverse repurchase agreements only with parties that the Funds subadviser deems creditworthy, but such investments are still subject to the risks of leverage discussed above.
Securities Lending
Subject to certain investment restrictions, the Fund may lend securities from its portfolio to brokers, dealers and financial institutions deemed creditworthy and receive, as collateral, cash or cash equivalents which at all times while the loan is outstanding will be maintained in amounts equal to at least 100% of the current market value of the loaned securities. Any cash collateral will be invested in short-term securities that will increase the current income of the Fund lending its securities.
The Fund will have the right to regain record ownership of loaned securities to exercise beneficial rights such as voting rights and subscription rights. While a securities loan is outstanding, the Fund is to receive an amount equal to any dividends, interest or other distributions with respect to the loaned securities. The Fund may pay reasonable fees to persons unaffiliated with the Fund for services in arranging such loans.
Even though securities lending usually does not impose market risks on the lending Fund, as with any extension of credit, there are risks of delay in recovery of the loaned securities and in some cases loss of rights in the collateral should the borrower of the securities fail financially. In addition, the value of the collateral taken as security for the securities loaned may decline in value or may be difficult to convert to cash in the event that the Fund must rely on the collateral to recover the value of the securities. Moreover, if the borrower of the securities is insolvent, under current bankruptcy law, the Fund could be ordered by a court not to liquidate the collateral for an indeterminate period of time. If the borrower is the subject of insolvency proceedings and the collateral held might not be liquidated, the result could be a material adverse impact on the liquidity of the lending Fund.
The Fund will not lend securities having a value in excess of 33 1/3% of its assets, including collateral received for loaned securities (valued at the time of any loan).
Short Sales
The Fund may sell securities short as part of its overall portfolio management strategies involving the use of derivative instruments and to offset potential declines in long positions in similar securities. A short sale is a transaction in which the Fund sells a security it does not own or have the right to acquire, or that it owns but does not wish to deliver, in anticipation that the market price of that security will decline. A short sale is against the box to the extent the Fund contemporaneously owns, or has the right to obtain at no added cost, securities identical to those sold short. All other short sales are commonly referred to as naked short sales.
When the Fund makes a short sale, the broker-dealer through which the short sale is made must borrow the security sold short and deliver it to the party purchasing the security. The Fund is required to make a margin deposit in connection with such short sales; the Fund may have to pay a fee to borrow particular securities and will often be obligated to pay over any dividends and accrued interest on borrowed securities. If the price of the security sold short increases between the time of the short sale and the time the Fund covers its short position, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. The successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged.
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If the Fund sells securities short against the box, it may protect unrealized gains, but will lose the opportunity to profit on such securities if the price rises. If the Fund engages in naked short sales, the Funds risk of loss could be as much as the maximum attainable price of the security (which could be limitless) less the price paid by the Fund for the security at the time it was borrowed.
A Fund must comply with SEC Rule 18f-4 when engaging in when-issued and delayed delivery transactions. See Derivatives Instruments and Other Leveraged Transactions above.
Special Situations
The Fund may invest in special situations that the Funds subadviser believes present opportunities for capital growth. Such situations most typically include corporate restructurings, mergers, and tender offers.
A special situation arises when, in the opinion of the Funds subadviser, the securities of a particular company will, within a reasonably estimable period of time, be accorded market recognition at an appreciated value solely by reason of a development particularly or uniquely applicable to that company and regardless of general business conditions or movements of the market as a whole. Developments creating special situations might include, among others, the following: liquidations, reorganizations, recapitalizations, mergers, or tender offers; material litigation or resolution thereof; technological breakthroughs; and new management or management policies. Although large and well-known companies may be involved, special situations often involve much greater risk than is inherent in ordinary investment securities.
Step-Up Securities
Step-up securities are securities which pay no interest initially but eventually begin to pay a coupon rate prior to maturity, which may increase at stated intervals during the life of the security. Step-up securities allow an issuer to avoid or delay the need to generate cash to meet current interest payments and, as a result, may involve greater credit risk than bonds that pay interest currently or in cash.
Structured Notes
Included among the issuers of emerging market country debt securities in which the Fund may invest are entities organized and operated solely for the purpose of restructuring the investment characteristics of various securities. These entities are typically organized by investment banking firms which receive fees in connection with establishing each entity and arranging for the placement of its securities. This type of restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, of specified instruments, such as Brady Bonds (see Brady Bonds in this section of the SAI), and the issuance by that entity of one or more classes of securities (Structured Notes) backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued Structured Notes to create securities with different investment characteristics such as varying maturities, payment priorities or interest rate provisions; the extent of the payments made with respect to Structured Notes is dependent on the extent of the cash flow on the underlying instruments. Because Structured Notes of the type in which the Fund anticipates investing typically involve no credit enhancement, their credit risk will depend upon that of the underlying instruments and the terms of the Structured Note.
The Fund is permitted to invest in a class of Structured Notes that is either subordinated or unsubordinated to the right of payment of another class. Subordinated Structured Notes typically have higher yields and present greater risks than unsubordinated Structured Notes. Although in some circumstances the Funds purchase of subordinated Structured Notes may have a similar economic effect to that of borrowing against the underlying securities, the purchase will not be deemed to be borrowing for purposes of the limitations placed on the extent of the Funds assets that may be used for borrowing.
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As with any debt obligation, Structured Notes involve the risk that the issuer will become insolvent or otherwise default on its payment obligations. This risk is in addition to the risk that the issuers obligations (and thus the value of the Funds investment) will be reduced because of adverse changes in the external factor or factors to which the obligations are linked. The value of structured notes will in many cases be more volatile (that is, will change more rapidly or severely) than the value of traditional debt instruments. Volatility will be especially high if the issuers obligations are determined by reference to some multiple of the change in the external factor or factors. Many Structured Notes have limited or no liquidity, so that the Fund would be unable to dispose of the investment prior to maturity. As with all investments, successful use of structured notes depends in significant part of the accuracy of the Advisers or Subadvisers analysis of the issuers creditworthiness and financial prospects, and of the Advisers or Subadvisers forecast as to changes in relevant economic and financial market conditions and factors. In instances where the issuer of a Structured Investment is a non-U.S. entity, the usual risks associated with investments in non-U.S. securities apply. Structured Notes may be considered derivative securities.
1940 Act Limitations. Certain issuers of Structured Notes may be deemed to be investment companies as defined in the 1940 Act. As a result, the Funds investment in these Structured Notes may be limited by the restrictions contained in the 1940 Act described under Other Investment Companies. Structured Notes are typically sold in private placement transactions, and there currently is no active trading market for Structured Notes.
Supranational Organizations
The Fund may invest in debt securities issued by supranational organizations such as promissory notes, bonds and debentures. Supranational organizations are entities designated or supported by a government or governmental entity to promote economic development, and include, among others, the Asian Development Bank, the European Communities, the European Investment Bank, the Inter-American Development Bank, the International Monetary Fund, the United Nations, World Bank and the European Bank for Reconstruction and Development. These organizations have no taxing authority and are dependent upon their members for payments of interest and principal. Moreover, the lending activities of such supranational entities are limited to a percentage of their total capital (including callable capital contributed by members at an entitys call), reserves and net income.
Warrants or Rights to Purchase Securities
The Fund may invest in or acquire warrants or rights to purchase equity or fixed income securities at a specified price during a specific period of time. The Fund will make such investments only if the underlying securities are deemed appropriate by the Funds subadviser for inclusion in the Funds portfolio. Included are warrants and rights whose underlying securities are not traded on principal domestic or foreign exchanges. Warrants and stock rights are almost identical to call options in their nature, use and effect except that they are issued by the issuer of the underlying security, rather than an option writer, and they generally have longer expiration dates than call options. (See Options in this section of the SAI for information about call options.)
Bonds with warrants attached to purchase equity securities have many characteristics of convertible bonds and their prices may, to some degree, reflect the performance of the underlying stock. However, unlike convertible securities and preferred stocks, warrants do not pay a fixed dividend. Bonds also may be issued with warrants attached to purchase additional fixed income securities at the same coupon rate. A decline in interest rates would permit the Fund holding such warrants to buy additional bonds at the favorable rate or to sell the warrants at a profit. If interest rates rise, the warrants would generally expire with no value.
The Fund may purchase put warrants and call warrants whose values vary depending on the change in the value of one or more specified securities indices (index warrants). Index warrants are generally issued by banks or other financial institutions and give the holder the right, at any time during the term of the warrant, to receive upon exercise of the warrant a cash payment from the issuer based on the value of the underlying index at the time of exercise. In general, if the value of the underlying index rises above the exercise price of the index warrant, the holder of a call warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the value of the index and the exercise price of the warrant; if the value of the underlying index falls, the holder of a put warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the exercise price of the warrant and the value of the index. The holder of a warrant would not be entitled to any payments from the issuer at any time when, in the case of a call warrant, the exercise price is greater than the value of the underlying index or, in the case of a put warrant, the exercise price is less than the value of the underlying index. If the Fund were not to exercise an index warrant prior to its expiration, then the Fund would lose the amount of the purchase price paid by it for the warrant.
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The Fund will normally use index warrants in a manner similar to its use of options on securities indices. The risks of the Funds use of index warrants are generally similar to those relating to its use of index options. (See Options in this section of the SAI for information about index options.) Unlike most index options, however, index warrants are issued in limited amounts and are not obligations of a regulated clearing agency, but are backed only by the credit of the bank or other institution which issues the warrant. Also, index warrants generally have longer terms than index options. Although the Fund will normally invest only in exchange-listed warrants, index warrants are not likely to be as liquid as certain index options backed by a recognized clearing agency. In addition, the terms of index warrants may limit the Funds ability to exercise the warrants at such time, or in such quantities, as the Fund would otherwise wish to do.
When-Issued and Delayed Delivery Transactions
The Fund may purchase securities on a when-issued or forward commitment basis. These transactions are also known as delayed delivery transactions. (The phrase delayed delivery is not intended to include purchases where a delay in delivery involves only a brief period required by the selling party solely to locate appropriate certificates and prepare them for submission for clearance and settlement in the customary way.) Delayed delivery transactions involve a commitment by the Fund to purchase or sell securities at a future date (ordinarily up to 90 days later). The price of the underlying securities (usually expressed in terms of yield) and the date when the securities will be delivered and paid for (the settlement date) are fixed at the time the transaction is negotiated. When-issued purchases and forward commitments are negotiated directly with the selling party.
When-issued purchases and forward commitments enable the Fund to lock in what is believed to be an attractive price or yield on a particular security for a period of time, regardless of future changes in interest rates. For example, in periods of rising interest rates and falling bond prices, the Fund might sell debt securities it owns on a forward commitment basis to limit its exposure to falling prices. In periods of falling interest rates and rising prices, the Fund might sell securities it owns and purchase the same or similar securities on a when-issued or forward commitment basis, thereby obtaining the benefit of currently higher yields. The Fund will not enter into such transactions for the purpose of leverage.
The value of securities purchased on a when-issued or forward commitment basis and any subsequent fluctuations in their value will be reflected in the Funds NAV starting on the first business day after the date of the agreement to purchase the securities. The Fund will be subject to the rights and risks of ownership of the securities on the agreement date. However, the Fund will not earn interest on securities it has committed to purchase until they are paid for and received. A sellers failure to deliver securities to the Fund could prevent the Fund from realizing a price or yield considered to be advantageous and could cause the Fund to incur expenses associated with unwinding the transaction.
When the Fund makes a forward commitment to sell securities it owns, the proceeds to be received upon settlement will be included in the Funds assets. Fluctuations in the market value of the underlying securities will not be reflected in the Funds NAV as long as the commitment to sell remains in effect. Settlement of when-issued purchases and forward commitment transactions generally takes place up to 90 days after the date of the transaction, but the Fund may agree to a longer settlement period.
The Fund will make commitments to purchase securities on a when-issued basis or to purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or selling the securities. If deemed advisable as a matter of investment strategy, however, the Fund may dispose of or renegotiate a commitment after it is entered into. The Fund also may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. The Fund may realize a capital gain or loss in connection with these transactions.
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A Fund must comply with SEC Rule 18f-4 when engaging in reverse repurchase agreements. See Derivatives Instruments and Other Leveraged Transactions above.
TRUSTEES AND OFFICERS
The Board is responsible for the overall supervision of the Fund, including establishing the Funds policies and general supervision and review of their investment activities, and performs the various duties imposed on Trustees by the 1940 Act and Massachusetts business trust law. The officers, who administer the Funds daily operations, are appointed by the Board and generally are employees of the Administrator or one of its affiliates. The current Trustees and officers of the Fund performing a policy-making function and their affiliations and principal occupations for the past five years are set forth below. The Fund has no employees.
Unless otherwise noted, each Trustee of the Fund also serves as a Trustee of other Virtus Funds and the address of each Trustee and officer is c/o the Fund, 101 Munson Street, Suite 104, Greenfield, MA 01301. There is no stated term of office for officers of the Fund. Each Trustee currently serves a one- to three-year term concurrent with the class of Trustees for which they serve.
Independent Trustees*
Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
Independent Trustees |
||||||
Burke, Donald C. YOB: 1960 Portfolios Overseen: 94 |
Class II Trustee since 2022, term expires at the 2025 Annual Meeting |
Private investor (since 2009). Formerly, President and Chief Executive Officer, BlackRock U.S. Funds (2007 to 2009); Managing Director, BlackRock, Inc. (2006 to 2009); and Managing Director, Merrill Lynch Investment Managers (1990 to 2006). |
Trustee (since 2024) and Advisory Board Member (2023 to 2024), Virtus Convertible & Income 2024 Target Term Fund, Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II and Virtus Diversified Income & Convertible Fund; Trustee (since May 2023) and Advisory Board Member (May 2023), Virtus Artificial Intelligence & Technology Opportunities Fund, Virtus Dividend, Interest & Premium Strategy Fund and Virtus Equity & Convertible Income Fund; Trustee (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Trustee (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios), Virtus Investment Trust (13 portfolios) and Virtus Strategy Trust (7 portfolios); Director (2020 to 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Director (since 2020), Virtus Total Return Fund Inc.; Trustee (since 2020), Virtus Global Multi-Sector Income Fund; Trustee (since 2016), Virtus Mutual Fund Family (45 portfolios), Virtus Variable Insurance Trust (8 portfolios) and Virtus Alternative Solutions Trust (4 portfolios); Director (since 2014) closed-end funds managed by Duff & Phelps Investment Management Co. (3 funds); Director, Avista Corp. (energy company) (since 2011); Trustee, Goldman Sachs Fund Complex (2010 to 2014); and Director, BlackRock Luxembourg and Cayman Funds (2006 to 2010). |
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Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
Cogan, Sarah E. YOB: 1956 Portfolios Overseen: 91 |
Class II Trustee since 2022, term expires at the 2025 Annual Meeting | Retired Partner, Simpson Thacher & Bartlett LLP (STB) (law firm) (since 2019); Director, Girl Scouts of Greater New York (since 2016); Trustee, Natural Resources Defense Council, Inc. (since 2013); and formerly, Partner, STB (1989 to 2018). | Trustee (since 2022) and Advisory Board Member (2021 to 2022), Virtus Alternative Solutions Trust (4 portfolios), Virtus Mutual Fund Family (45 portfolios) and Virtus Variable Insurance Trust (8 portfolios); Trustee (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Trustee (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios) and Virtus Global Multi-Sector Income Fund; Advisory Board Member (February 2021 to June 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Director (since 2021), Virtus Total Return Fund Inc.; Trustee (since 2019), Virtus Investment Trust (13 portfolios) and Virtus Strategy Trust (7 portfolios); Trustee (since 2019), Virtus Artificial Intelligence & Technology Opportunities Fund, Virtus Convertible & Income 2024 Target Term Fund, Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II, Virtus Diversified Income & Convertible Fund, Virtus Equity & Convertible Income Fund, and Virtus Dividend, Interest & Premium Strategy Fund; and Trustee (since 2019), PIMCO Closed-End Funds(2) (30 portfolios). |
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Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
DeCotis, Deborah A. YOB: 1952 Portfolios Overseen: 91 |
Class I Trustee since 2022, term expires at the 2027 Annual Meeting | Director, Cadre Holdings Inc. (since 2022); Advisory Director, Morgan Stanley & Co., Inc. (since 1996); Member, Circle Financial Group (since 2009); Member, Council on Foreign Relations (since 2013); and Trustee, Smith College (since 2017). Formerly, Director, Watford Re (2017 to 2021); Co-Chair Special Projects Committee, Memorial Sloan Kettering (2005 to 2015); and Trustee, Stanford University (2010 to 2015). | Trustee (since 2022) and Advisory Board Member (2021 to 2022), Virtus Alternative Solutions Trust (4 portfolios), Virtus Mutual Fund Family (45 portfolios) and Virtus Variable Insurance Trust (8 portfolios); Trustee (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Trustee (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios), and Virtus Global Multi-Sector Income Fund; Advisory Board Member (February 2021 to June 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Director (since 2021), Virtus Total Return Fund Inc.; Trustee (since 2019), Virtus Artificial Intelligence & Technology Opportunities Fund; Trustee (since 2017), Virtus Convertible & Income 2024 Target Term Fund; Trustee (since 2015), Virtus Diversified Income & Convertible Fund; Trustee (since 2014), Virtus Investment Trust (13 portfolios); Trustee (since 2011), Virtus Strategy Trust (7 portfolios); Trustee (since 2011), Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II, Virtus Equity & Convertible Income Fund, and Virtus Dividend, Interest & Premium Strategy Fund; and Trustee (since 2011), PIMCO Closed-End Funds(2) (30 portfolios). |
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Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
Drummond, F. Ford YOB: 1962 Portfolios Overseen: 91 |
Class III Trustee since 2022, term expires at the 2026 Annual Meeting | President (since 1998), F.G. Drummond Ranches, Inc. Formerly, Director (1998 to 2008), The Cleveland Bank; and General Counsel (1998 to 2008), BMIHealth Plans (benefits administration). | President Elect (since 2023), Oklahoma Cattlemens Association; Trustee (since 2022) and Advisory Board Member (2021 to 2022), Virtus Alternative Solutions Trust (4 portfolios), Virtus Mutual Fund Family (45 portfolios), and Virtus Variable Insurance Trust (8 portfolios); Trustee (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Trustee (since 2021), The Merger Fund®, The Merger Fund® VL, and Virtus Event Opportunities Trust (2 portfolios); Advisory Board Member (February 2021 to June 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Trustee (since 2021), Virtus Global Multi-Sector Income Fund; Director (since 2021),Virtus Total Return Fund Inc.; Chairman, Oklahoma Nature Conservancy (2019 to 2020); Trustee (since 2019), Virtus Artificial Intelligence & Technology Opportunities Fund; Trustee (since 2017), Virtus Convertible & Income 2024 Target Term Fund; Director (since 2015), Texas and Southwestern Cattle Raisers Association; Trustee (since 2015), Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II, Virtus Diversified Income & Convertible Fund, Virtus Dividend, Interest & Premium Strategy Fund and Virtus Equity & Convertible Income Fund; Trustee (since 2014), Virtus Strategy Trust (7 portfolios); Trustee (since 2014), Frank Phillips Foundation; Trustee (since 2008), Oklahoma Nature Conservancy; Director (since 2011), Bancfirst Corporation; Trustee (since 2006), Virtus Investment Trust (13 portfolios); and Board Member (2006 to 2020), Oklahoma Water Resources Board. |
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Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
Harris, Sidney E. YOB: 1949 Portfolios Overseen: 84 |
Class III Trustee since 2022, term expires at the 2026 Annual Meeting | Private Investor (since 2021); Dean Emeritus (since 2015), Professor (2015 to 2021 and 1997 to 2014), and Dean (1997 to 2004), J. Mack Robinson College of Business, Georgia State University. | Trustee (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Trustee (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios), Virtus Investment Trust (13 portfolios) and Virtus Strategy Trust (7 portfolios); Director (2020 to 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Director (since 2020), Virtus Total Return Fund Inc.; Trustee (since 2020), Virtus Global Multi-Sector Income Fund; Trustee (since 2019), Mutual Fund Directors Forum; Trustee (since 2017), Virtus Mutual Fund Family (45 portfolios), Virtus Variable Insurance Trust (8 portfolios), and Virtus Alternative Solutions Trust (4 portfolios); Trustee (2013 to 2020) and Honorary Trustee (since 2020), KIPP Metro Atlanta; Director (1999 to 2019), Total System Services, Inc.; Trustee (2004 to 2017), RidgeWorth Funds; Chairman (2012 to 2017), International University of the Grand Bassam Foundation; Trustee (since 2012), International University of the Grand Bassam Foundation; and Trustee (2011 to 2015), Genspring Family Offices, LLC. |
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Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
Mallin, John R. YOB: 1950 Portfolios Overseen: 84 |
Class I Trustee since 2022, term expires at the 2027 Annual Meeting | Partner/Attorney (since 2003), McCarter & English LLP (law firm) Real Property Practice Group; and Member (2014 to 2022), Counselors of Real Estate. | Trustee (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Trustee (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios), Virtus Investment Trust (13 portfolios) and Virtus Strategy Trust (7 portfolios); Director (2020 to 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Director (since 2020), Virtus Total Return Fund Inc.; Trustee (since 2020), Virtus Global Multi-Sector Income Fund; Trustee (since 2016), Virtus Mutual Fund Family (45 portfolios) and Virtus Alternative Solutions Trust (4 portfolios); Director (since 2019), 1892 Club, Inc. (non-profit); Director (2013 to 2020), Horizons, Inc. (non-profit); and Trustee (since 1999), Virtus Variable Insurance Trust (8 portfolios). |
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Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
McDaniel, Connie D. YOB: 1958 Portfolios Overseen: 91 |
Class II Trustee since 2022, term expires at the 2025 Annual Meeting | Retired (since 2013). Vice President, Chief of Internal Audit, Corporate Audit Department (2009 to 2013); Vice President Global Finance Transformation (2007 to 2009); and Vice President and Controller (1999 to 2007), The Coca-Cola Company. | Vice Chair (since 2024), Trustee (since May 2023) and Advisory Board Member (May 2023), Virtus Artificial Intelligence & Technology Opportunities Fund, Virtus Convertible & Income 2024 Target Term Fund, Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II, Virtus Diversified Income & Convertible Fund, Virtus Dividend, Interest & Premium Strategy Fund and Virtus Equity & Convertible Income Fund; Vice Chair (since 2024) and Trustee (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Vice Chair (since 2024) and Trustee (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios), Virtus Investment Trust (13 portfolios) and Virtus Strategy Trust (7 portfolios); Director (2020 to 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Vice Chair (since 2024) and Director (since 2020), Virtus Total Return Fund Inc.; Vice Chair (since 2024) and Trustee (since 2020), Virtus Global Multi-Sector Income Fund; Director (since 2019), Global Payments Inc.; Chairperson (since 2021), Governance & Nominating Committee, Global Payments Inc; Vice Chair (since 2024) and Trustee (since 2017), Virtus Mutual Fund Family (45 portfolios), Virtus Variable Insurance Trust (8 portfolios), and Virtus Alternative Solutions Trust (4 portfolios); Director (since 2021), North Florida Land Trust; Director (2014 to 2019), Total System Services, Inc.; Member (2011 to 2022) and Chair (2014 to 2016), Georgia State University, Robinson College of Business Board of Advisors; and Trustee (2005 to 2017), RidgeWorth Funds. |
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Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
McLoughlin, Philip R. YOB: 1946 Portfolios Overseen: 94 |
Class III Trustee since 2022, term expires at the 2026 Annual Meeting | Private investor since 2010. | Trustee and Chair (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee and Chair (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Trustee and Chair (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios), Virtus Investment Trust (13 portfolios) and Virtus Strategy Trust (7 portfolios); Chair (since 2023) and Trustee (since 2021), Virtus Artificial Intelligence & Technology Opportunities Fund, Virtus Convertible & Income Fund II, Virtus Diversified Income & Convertible Fund, Virtus Equity & Convertible Income Fund and Virtus Dividend, Interest & Premium Strategy Fund; Chair (since 2023), Trustee (since 2022) and Advisory Board Member (2021), Virtus Convertible & Income 2024 Target Term Fund and Virtus Convertible & Income Fund; Director and Chair (since 2016), Virtus Total Return Fund Inc.; Director and Chair (2016 to 2019), the former Virtus Total Return Fund Inc.; Director and Chair (2014 to 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Trustee and Chair (since 2013), Virtus Alternative Solutions Trust (4 portfolios); Trustee and Chair (since 2011), Virtus Global Multi-Sector Income Fund; Chair and Trustee (since 2003), Virtus Variable Insurance Trust (8 portfolios); Director (since 1995), closed-end funds managed by Duff & Phelps Investment Management Co. (3 funds); Director (1991 to 2019) and Chairman (2010 to 2019), Lazard World Trust Fund (closed-end investment firm in Luxembourg); and Trustee (since 1989) and Chair (since 2002), Virtus Mutual Fund Family (45 portfolios). |
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Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
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McNamara, Geraldine M. YOB: 1951 Portfolios Overseen: 94 |
Class III Trustee since 2022, term expires at the 2026 Annual Meeting | Private investor (since 2006); and Managing Director, U.S. Trust Company of New York (1982 to 2006). | Trustee (since 2024) and Advisory Board Member (2023 to 2024), Virtus Convertible & Income 2024 Target Term Fund; Trustee (since May 2023) and Advisory Board Member (January 2023 to May 2023), Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II, Virtus Diversified Income & Convertible Fund and Virtus Dividend, Interest & Premium Strategy Fund; Trustee (since 2023), Virtus Artificial Intelligence & Technology Opportunities Fund and Virtus Equity & Convertible Income Fund; Trustee (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Trustee (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios), Virtus Investment Trust (13 portfolios) and Virtus Strategy Trust (7 portfolios); Director (2020 to 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Director (since 2020), Virtus Total Return Fund Inc.; Trustee (since 2020), Virtus Global Multi-Sector Income Fund; Trustee (since 2016) Virtus Alternative Solutions Trust (4 portfolios); Trustee (since 2015), Virtus Variable Insurance Trust (8 portfolios); Director (since 2003), closed-end funds managed by Duff & Phelps Investment Management Co. (3 funds); and Trustee (since 2001), Virtus Mutual Fund Family (45 portfolios). |
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Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
Walton, R. Keith YOB: 1964 Portfolios Overseen: 91 |
Class I Trustee since 2022, term expires at the 2027 Annual Meeting | Senior Adviser (since 2022), Brightwood Capital LLC; Venture and Operating Partner (2020 to 2021), Plexo Capital, LLC; Venture Partner ( 2019 to 2021) and Senior Adviser (2018 to 2019), Plexo, LLC; and Partner (since 2006), Global Infrastructure Partners. Formerly, Managing Director (2020 to 2021), Lafayette Square Holding Company LLC; Senior Adviser (2018 to 2019), Vatic Labs, LLC; Executive Vice President, Strategy (2017 to 2019), Zero Mass Water, LLC; and Vice President, Strategy (2013 to 2017), Arizona State University. | Trustee (since 2023) and Advisory Board Member (2022 to 2023), Virtus Convertible & Income 2024 Target Term Fund; Trustee (since May 2023) and Advisory Board Member (2022 to May 2023), Virtus Convertible & Income Fund II and Virtus Dividend, Interest & Premium Strategy Fund; Trustee (since 2022) and Advisory Board Member (January 2022 to July 2022), Virtus Artificial Intelligence & Technology Opportunities Fund, Virtus Convertible & Income Fund and Virtus Equity & Convertible Income Fund; Trustee (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Trustee (since 2022), Virtus Diversified Income & Convertible Fund; Trustee (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios), Virtus Investment Trust (13 portfolios) and Virtus Strategy Trust (7 portfolios); Trustee (since 2020) Virtus Alternative Solutions Trust (4 portfolios), Virtus Variable Insurance Trust (8 portfolios) and Virtus Mutual Fund Family (45 portfolios); Director (since 2017), certain funds advised by Bessemer Investment Management LLC (9 portfolios); Director (2016 to 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Trustee (since 2016), Virtus Global Multi-Sector Income Fund; Director (2006 to 2019), Systematica Investments Limited Funds; Director (2006 to 2017), BlueCrest Capital Management Funds; Trustee (2014 to 2017), AZ Service; Director (since 2004), Virtus Total Return Fund Inc.; and Director (2004 to 2019), the former Virtus Total Return Fund Inc. |
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Name, Year of Birth and Number of Portfolios in Fund Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
Zino, Brian T. YOB: 1952 Portfolios Overseen: 91 |
Class II Trustee since 2022, term expires at the 2025 Annual Meeting | Retired. Various roles at J. & W. Seligman & Co. Incorporated (1982 to 2009), including President (1994 to 2009). | Trustee (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Trustee (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios), Virtus Investment Trust (13 portfolios) and Virtus Strategy Trust (7 portfolios); Trustee (since 2022) and Advisory Board Member (2021), Virtus Artificial Intelligence & Technology Opportunities Fund, Virtus Convertible & Income 2024 Target Term Fund, Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II, Virtus Diversified Income & Convertible Fund, Virtus Equity & Convertible Income Fund, and Virtus Dividend, Interest & Premium Strategy Fund; Trustee (since 2020) Virtus Alternative Solutions Trust (4 portfolios), Virtus Variable Insurance Trust (8 portfolios) and Virtus Mutual Fund Family (45 portfolios); Director (2016 to 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Trustee (since 2016), Virtus Global Multi-Sector Income Fund; Director (since 2014), Virtus Total Return Fund Inc.; Director (2014 to 2019), the former Virtus Total Return Fund Inc.; Trustee (since 2011), Bentley University; Director (1986 to 2009) and President (1994 to 2009), J&W Seligman Co. Inc.; Director (1998 to 2009), Chairman (2002 to 2004) and Vice Chairman (2000 to 2002), ICI Mutual Insurance Company; Member, Board of Governors of ICI (1998 to 2008). |
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* | Those Trustees listed as Independent Trustees are not interested persons of the Fund, as that term is defined in the 1940 Act. |
(1) | The Virtus Fund Complex includes those registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services or for which the Adviser or an affiliate of the Adviser, including the Subadviser, serves as investment adviser. |
(2) | The PIMCO Closed-End Funds, which are not part of the Virtus Fund Complex, are as follows: PCM Fund, Inc.; PIMCO Access Income Fund; PIMCO California Flexible Municipal Income Fund; PIMCO California Municipal Income Fund; PIMCO California Municipal Income Fund II; PIMCO California Municipal Income Fund III; PIMCO Corporate & Income Opportunity Fund; PIMCO Corporate & Income Strategy Fund; PIMCO Dynamic Income Fund; PIMCO Dynamic Income Opportunities Fund; PIMCO Dynamic Income Strategy Fund; PIMCO Flexible Credit Income Fund; PIMCO Flexible Emerging Markets Income Fund; PIMCO Flexible Municipal Income Fund; PIMCO Global StocksPLUS® & Income Fund; PIMCO High Income Fund; PIMCO Income Strategy Fund; PIMCO Income Strategy Fund II; PIMCO Managed Accounts Trust (5 portfolios); PIMCO Municipal Income Fund; PIMCO Municipal Income Fund II; PIMCO Municipal Income Fund III; PIMCO New York Municipal Income Fund; PIMCO New York Municipal Income Fund II; PIMCO New York Municipal Income Fund III; and PIMCO Strategic Income Fund, Inc. |
Interested Trustee
Name, Year of Birth and Number of Portfolios in Funds Complex Overseen by Trustee(1) |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Other Directorships/ Trusteeships Held by Trustee During the Past Five Years | |||
Aylward, George R.* YOB: 1964 Portfolios Overseen: 99 |
Class I Trustee since 2022, term expires at the 2027 Annual Meeting |
Director, President and Chief Executive Officer (since 2008), Virtus Investment Partners, Inc. and/or certain of its subsidiaries; and various senior officer positions with Virtus affiliates (since 2005). |
Director (since 2023), Stone Harbor Investment Funds plc (21 sub-funds), Stone Harbor Global Funds plc (27 sub-funds) and Virtus Global Funds ICAV (5 portfolios); Trustee, President and Chief Executive Officer (since 2022), Virtus Stone Harbor Emerging Markets Income Fund; Trustee, President and Chief Executive Officer (2022 to 2023), Virtus Stone Harbor Emerging Markets Total Income Fund; Member, Board of Governors of the Investment Company Institute (since 2021); Trustee and President (since 2021), The Merger Fund®, The Merger Fund® VL, Virtus Event Opportunities Trust (2 portfolios), Virtus Investment Trust (13 portfolios) and Virtus Strategy Trust (7 portfolios); Trustee, President and Chief Executive Officer (since 2021), Virtus Artificial Intelligence & Technology Opportunities Fund, Virtus Convertible & Income 2024 Target Term Fund, Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II, Virtus Diversified Income & Convertible Fund, Virtus Equity & Convertible Income Fund, and Virtus Dividend, Interest & Premium Strategy Fund; Chair and Trustee (since 2015), Virtus ETF Trust II (8 portfolios); Director, President and Chief Executive Officer (2014 to 2021), Duff & Phelps Select MLP and Midstream Energy Fund Inc.; Trustee and President (since 2013), Virtus Alternative Solutions Trust (4 portfolios); Director (since 2013), Virtus Global Funds, plc (5 portfolios); Trustee (since 2012) and President (since 2010), Virtus Variable Insurance Trust (8 portfolios); Trustee, President and Chief Executive Officer (since 2011), Virtus Global Multi-Sector Income Fund; Trustee and President (since 2006) and Executive Vice President (2004 to 2006), Virtus Mutual Fund Family (45 portfolios); Director, President and Chief Executive Officer (since 2006), Virtus Total Return Fund Inc.; and Director, President and Chief Executive Officer (2006 to 2019), the former Virtus Total Return Fund Inc. |
(1) | The Virtus Fund Complex includes those registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services or for which the Adviser or an affiliate of the Adviser, including the Subadviser, serves as investment adviser. |
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Mr. Aylward is an interested person as defined in the 1940 Act, by reason of his position as President and Chief Executive Officer of Virtus, the ultimate parent company of the Adviser, and various positions with its affiliates including the Adviser.
Officers of the Fund Who Are Not Trustees
Name and Year of Birth | Position(s) held with the Fund and Length of Time Served |
Principal Occupation(s) During Past 5 Years | ||
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Batchelar, Peter J. YOB: 1970 |
Senior Vice President (since 2022) | Senior Vice President, Product Development (since 2017), Vice President, Product Development (2008 to 2017) and various officer positions (since 2008), Virtus Investment Partners, Inc. and/or certain of its subsidiaries; and various officer positions (since 2008) of various registered funds advised by subsidiaries of Virtus Investment Partners, Inc. |
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Bradley, W. Patrick YOB: 1972 |
Executive Vice President, Chief Financial Officer and Treasurer (since 2022) | Executive Vice President, Fund Services (since 2016), Senior Vice President, Fund Services (2010 to 2016) and various officer positions (since 2004), Virtus Investment Partners, Inc. and/or certain of its subsidiaries; Director (since 2023), Stone Harbor Investment Funds plc and Stone Harbor Global Funds plc; Director (since 2019), Virtus Global Funds ICAV; Director (since 2013), Virtus Global Funds, plc; various officer positions (since 2006) of various registered funds advised by subsidiaries of Virtus Investment Partners, Inc.; and Member (since 2022), BNY Mellon Asset Servicing Client Advisory Board. | ||
Branigan, Timothy YOB: 1976 |
Vice President and Fund Chief Compliance Officer (since 2022), Assistant Vice President and Deputy Fund Chief Compliance Officer (April to May 2022) | Various officer positions (since 2019) of various registered funds advised by subsidiaries of Virtus Investment Partners, Inc. | ||
Hackett, Amy YOB: 1968 |
Vice President and Assistant Treasurer (since 2022) | Vice President (since 2010) and Assistant Vice President (2007 to 2010), Fund Services, Virtus Investment Partners, Inc. and/or certain of its subsidiaries; and various officer positions (since 2007) of various registered funds advised by subsidiaries of Virtus Investment Partners, Inc. | ||
Krishnan, Suneeta YOB: 1965 |
Vice President and Assistant Treasurer (since 2022) | Vice President (since 2017) and Assistant Treasurer (since 2007), Mutual Fund Administration, Virtus Investment Partners, Inc. and/or certain of its subsidiaries; and various officer positions (since 2009) of various registered funds advised by subsidiaries of Virtus Investment Partners, Inc. | ||
Rahman, Mahmood YOB: 1967 |
Assistant Vice President (since 2022) | Vice President (since 2023), Tax Director (since 2020) and Assistant Vice President, Fund Administration (2020 to 2023), Virtus Investment Partners, Inc.; Assistant Vice President (since 2021) of various registered funds advised by subsidiaries of Virtus Investment Partners, Inc.; and Assistant Treasurer and Tax Director, Grantham, Mayo, Van Otterloo & Co. LLC (2007 to 2019). | ||
Santoro, Kathryn YOB: 1974 |
Vice President, Chief Legal Officer, Counsel and Secretary (since 2024) | Vice President and Senior Attorney (since 2024), Virtus Investment Partners, Inc.; and various officer positions (since 2024) of various registered funds advised by subsidiaries of Virtus Investment Partners, Inc. Vice President, General Counsel, and Secretary, Anuvu Corp. (2021 2023); Managing Counsel, Janus Hendreson Investors (2016 2020). | ||
Short, Julia R. YOB: 1972 |
Senior Vice President (since 2022) | Senior Vice President, Product Development (since 2017), Virtus Investment Partners, Inc. and/or certain of its subsidiaries; Senior Vice President (since 2017) of various registered funds advised by subsidiaries of Virtus Investment Partners, Inc.; and Managing Director, Product Manager, RidgeWorth Investments (2004 to 2017). |
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Smirl, Richard W. YOB: 1967 |
Executive Vice President (since 2022) | Chief Operating Officer (since 2021), Virtus Investment Partners, Inc.; Executive Vice President (since 2021), Virtus Investment Partners, Inc. and/or certain of its subsidiaries; Executive Vice President (since 2021) of various registered funds advised by subsidiaries of Virtus Investment Partners, Inc.; Chief Operating Officer (2018 to 2021), Russell Investments; Executive Director (Jan. to July 2018), State of Wisconsin Investment Board; and Partner and Chief Operating Officer (2004 to 2018), William Blair Investment Management. | ||
Thaker, Nikita K. YOB: 1978 |
Vice President, Controller and Assistant Treasurer (since 2022) | Vice President (since 2021) and Assistant Vice President (2016 to 2021), Mutual Fund Administration, Virtus Investment Partners, Inc. and/or certain of its subsidiaries; and various officer positions (since 2013) of various registered funds advised by subsidiaries of Virtus Investment Partners, Inc. |
Leadership Structure and the Board of Trustees
The Board is currently composed of 12 trustees, including 11 Independent Trustees. In addition to five regularly scheduled meetings per year, the Board holds special meetings either in person or via telephone to discuss specific matters that may require consideration prior to the next regular meeting. As discussed below, the Board has established several standing committees to assist the Board in performing its oversight responsibilities, and each such committee has a chairperson. The Board may also designate working groups or ad hoc committees as it deems appropriate.
The Trustees of the Fund believe that an effective board should have perspectives informed by a range of viewpoints, skills, expertise, experiences and backgrounds. The Trustees endorse a diverse, inclusive and equitable environment for the Board where all members are respected, valued and engaged. As a result, when identifying and recruiting new Trustees and considering Board composition, committee composition and leadership roles, the Governance and Nominating Committee shall consider, among other attributes, diversity of race, ethnicity, color, religion, national origin, age, gender, disability, sexuality, culture, thought and geography, as well as numerous other dimensions of human diversity.
The Board has appointed Mr. McLoughlin, an Independent Trustee, to serve in the role of Chair. The Chairs primary role is to participate in the preparation of the agenda for meetings of the Board and the identification of information to be presented to the Board with respect to matters to be acted upon by the Board. The Chair also presides at all meetings of the Board and between meetings generally acts as a liaison with the Funds service providers, officers, legal counsel, and the other Trustees. The Chair may perform such other functions as may be requested by the Board from time to time. Except for any duties specified herein or pursuant to the Funds Declaration of Trust or By-laws, or as assigned by the Board, the designation of Chair does not impose on such Independent Trustee any duties, obligations or liability that is greater than the duties, obligations or liability imposed on such person as a member of the Board, generally.
The Board believes that this leadership structure is appropriate because it allows the Board to exercise informed and independent judgment over matters under its purview, and it allocates areas of responsibility among committees or working groups of Trustees and the full Board in a manner that enhances effective oversight. Mr. McLoughlin previously served as the Chair and Chief Executive Officer of the company that is now Virtus; however, he is now an Independent Trustee due to (a) the fact that Virtus is no longer affiliated with The Phoenix Companies, Inc. (which was its parent company when Mr. McLoughlin retired) and (b) the passage of time. As a result of this balance, it is believed that Mr. McLoughlin has the ability to provide independent oversight of the Funds operations within the context of his detailed understanding of the perspective of the Adviser and the Funds other service providers. The Board therefore considers leadership by Mr. McLoughlin as enhancing the Boards ability to provide effective independent oversight of the Funds operations and meaningful representation of the shareholders interests.
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The Board also believes that having a super-majority of Independent Trustees is appropriate and in the best interest of the Funds shareholders. Nevertheless, the Board also believes that having an interested person serve on the Board brings corporate and financial viewpoints that are, in the Boards view, crucial elements in its decision-making process. In addition, the Board believes that Mr. Aylward, who is currently the Chair and President of the Adviser, and the President and Chief Executive Officer of Virtus, and serves in various executive roles with other affiliates of the Adviser who provide services to the Fund, provides the Board with the Advisers perspective in managing and sponsoring the Virtus Funds as well as the perspective of other service providers to the Fund. The leadership structure of the Board may be changed at any time and in the discretion of the Board, including in response to changes in circumstances or the characteristics of the Fund.
The Board has established several standing committees to oversee particular aspects of the Funds management. The members of each Committee are set forth below:
The Audit Committee
The Audit Committee is responsible for overseeing the Funds accounting and auditing policies and practices. The Audit Committee reviews the Funds financial reporting procedures, its system of internal control, the independent audit process, and the Funds procedures for monitoring compliance with investment restrictions and applicable laws and regulations and with the Code of Ethics. The Audit Committee is composed entirely of Independent Trustees; its members through February 26, 2024 were Connie D. McDaniel, Chair, Donald C. Burke, Deborah A. DeCotis, John R. Mallin and Brian T. Zino. Effective February 27, 2024 through February 29, 2024, its members were Connie D. McDaniel, Chair, Donald C. Burke, Deborah A. DeCotis, John R. Mallin, Geraldine M. McNamara and Brian T. Zino. Effective March 1, 2024, its members are Donald C. Burke, Chair, Deborah A. DeCotis, John R. Mallin, Geraldine M. McNamara and Brian T. Zino. The Audit Committee met six times during the Funds last fiscal year.
The Compliance Committee
The Compliance Committee is responsible for overseeing the Funds compliance matters. The Compliance Committee oversees and reviews (1) information provided by the Funds officers, including the Funds CCO, the Funds investment adviser and other principal service providers, and others as appropriate; (2) the codes of ethics; (3) whistleblower reports; and (4) distribution programs. The Compliance Committee is composed entirely of Independent Trustees; its members through February 26, 2024 were Sarah E. Cogan, F. Ford Drummond, Sidney E. Harris, Geraldine M. McNamara and R. Keith Walton. Geraldine M. McNamara served as Chair through August 31, 2023; effective September 1, 2023, R. Keith Walton replaced Geraldine M. McNamara as Chair, although Geraldine M. McNamara remained on the Audit Committee as a member through February 26, 2024. Effective February 27, 2024, its members are R. Keith Walton, Chair, Sarah E. Cogan, F. Ford Drummond and Sidney E. Harris. The Compliance Committee met four times during the Funds last fiscal year.
The Contracts Committee
The Contracts Committee is responsible for reviewing the contractual arrangements with the Funds investment adviser and subadviser and the other Virtus funds service providers affiliated with the Funds investment adviser and subadviser. The Contracts Committee is composed entirely of Independent Trustees; its members are Sarah E. Cogan, Chair, Donald C. Burke, Deborah A. DeCotis, F. Ford Drummond, Sidney E. Harris, John R. Mallin, Connie D. McDaniel, Philip R. McLoughlin, Geraldine M. McNamara, R. Keith Walton and Brian T. Zino. The Contracts Committee did not exist until November of the Trusts last fiscal year and did not meet during the Funds last fiscal year.
The Executive Committee
The function of the Executive Committee is to serve as a delegate of the full Board, as well as act on behalf of the Board when it is not in session, subject to limitations as set by the Board. The Executive Committee is composed entirely of Independent Trustees; its members through February 26, 2024 were Philip R. McLoughlin, Chair, Donald C. Burke, Deborah A. DeCotis, Sidney E. Harris and Brian T. Zino. Effective February 27, 2024, its members are Philip R. McLoughlin, Chair, Donald C. Burke, Deborah A. DeCotis, Sidney E. Harris, Connie D. McDaniel and Brian T. Zino. The Executive Committee met four times during the Funds last fiscal year.
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The Governance and Nominating Committee
The Governance and Nominating Committee is responsible for developing and maintaining governance principles applicable to the Fund, for nominating individuals to serve as Trustees, including as Independent Trustees, and annually evaluating the Board and Committees. The Governance and Nominating Committee is composed entirely of Independent Trustees; its members through August 31, 2023 were Brian T. Zino, Chair, Sarah E. Cogan, Sidney E. Harris, Philip R. McLoughlin and R. Keith Walton. Effective September 1, 2023, its members are Brian T. Zino, Chair, Sarah E. Cogan, F. Ford Drummond, Sidney E. Harris and Philip R. McLoughlin. The Governance and Nominating Committee met four times during the Funds last fiscal year.
The Governance and Nominating Committee considers candidates for trusteeship and makes recommendations to the Board with respect to such candidates. There are no specific required qualifications for trusteeship. The committee considers all relevant qualifications of candidates for trusteeship, such as industry knowledge and experience, financial expertise, current employment and other board memberships, and whether the candidate would be qualified to be considered an Independent Trustee. The Board believes that having among its members a diversity of viewpoints, skills and experience and a variety of complementary skills enhances the effectiveness of the Board in its oversight role. The committee considers the qualifications of candidates for trusteeship in this context.
The Board has adopted a policy for consideration of Trustee nominees recommended by shareholders. With regards to such policy, an individual shareholder or shareholder group submitting a nomination must hold either individually or in the aggregate for at least one full year as of the date of nomination 5% of the shares of a series of the Fund, among other qualifications and restrictions. Shareholders or shareholder groups submitting nominees must comply with all requirements set forth in the Funds policy for consideration of Trustee nominees recommended by shareholders and any such submission must be in writing, directed to the attention of the Governance and Nominating Committee in care of the Funds Secretary, and should include biographical information, including business experience for the past ten years and a description of the qualifications of the proposed nominee, along with a statement from the proposed nominee that he or she is willing to serve and meets the requirements to be an Independent Trustee, if applicable. Shareholder nominees for Trustee will be given the same consideration as any candidate provided the nominee meets certain minimum requirements.
Information about Each Trustees Qualification, Experience, Attributes or Skills
The following provides further information about each Trustees specific experience, qualifications, attributes or skills. The information in this section should not be understood to mean that any Trustee is an expert within the meaning of the federal securities laws.
George R. Aylward
In addition to his positions with the Fund, Mr. Aylward is a Director and the President and Chief Executive Officer of Virtus, the ultimate parent company of the Adviser. He also holds various executive positions with the Adviser, the Subadviser, the Administrator and various of their affiliates, and previously held such positions with the former parent company of Virtus. He therefore has experience in all aspects of the development and management of registered investment companies, and the handling of various financial, staffing, regulatory and operational issues. Mr. Aylward is a certified public accountant and holds an MBA, and he also serves as an officer and director/trustee of open-end and closed-end funds managed by the Adviser and its affiliates.
Donald C. Burke
Mr. Burke has extensive financial and business experience in the investment management industry. He was employed by BlackRock, Inc. (2006 to 2009) and Merrill Lynch Investment Managers (1990 to 2006) where he held a number of roles, including Managing Director and President and Chief Executive Officer of the BlackRock U.S. mutual funds. In this role, Mr. Burke was responsible for the accounting, tax and regulatory reporting requirements for over 300 open- and closed-end funds. He also served as a trustee for numerous global funds that were advised by BlackRock, Inc. Mr. Burke currently serves as a director and Audit Committee Chairman of Avista Corp., a public company involved in the production, transmission and distribution of energy. Mr. Burke started his career at Deloitte & Touche (formerly Deloitte Haskins & Sells) and is a certified public accountant. He has also served on a number of nonprofit boards. He is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates.
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Sarah E. Cogan
Ms. Cogan has substantial legal background and experience in the investment management industry. She was a partner at Simpson Thacher & Bartlett LLP, a large international law firm, in the corporate department for over 25 years and former head of the registered funds practice. She has extensive experience in oversight of investment company boards through her prior experience as counsel to the Independent Trustees of Virtus Artificial Intelligence & Technology Opportunities Fund, Virtus Convertible & Income 2024 Target Term Fund, Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II, Virtus Diversified Income & Convertible Fund, Virtus Dividend, Interest & Premium Strategy Fund and Virtus Equity & Convertible Income Fund and the series of the trusts now known as Virtus Investment Trust and Virtus Strategy Trust and as counsel to other independent trustees, investment companies and asset management firms. She is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates and closed-end funds managed by PIMCO.
Deborah A. DeCotis
Ms. DeCotis has substantial senior executive experience in the investment banking industry, having served as a Managing Director for Morgan Stanley. She has extensive board experience and/or experience in oversight of investment management functions through her experience as a trustee of Stanford University and Smith College and as a director of Cadre Holdings Inc., Armor Holdings and The Helena Rubinstein Foundation, Stanford Graduate School of Business. Ms. DeCotis is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates and closed-end funds managed by PIMCO.
F. Ford Drummond
Mr. Drummond has substantial legal background and experience in the oversight and management of regulated companies through his work as General Counsel of BMI Health Plans, a health benefits administrator. He has substantial board experience in the banking sector as a director of BancFirst Corporation, Oklahomas largest state chartered bank, and as a former director of The Cleveland Bank. Mr. Drummond also previously served as a member and chairman of the Oklahoma Water Resources Board, which provides tax exempt financing for water infrastructure projects in the state, and serves on the Board of Trustees of the Frank Philips Foundation (since 2014). He is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates.
Sidney E. Harris
Dr. Sidney Harris has extensive knowledge of best practices in executive management, familiarity with international business practices and expertise in corporate strategy implementation, risk management, technology, asset management compliance and investments. Dr. Harris is Dean Emeritus and, until recently, was a Professor at the J. Mack Robinson College of Business at Georgia State University. He was affiliated with the J. Mack Robinson College of Business from 1997 to 2021, including serving as Professor (2015 to 2021 and 1997 to 2014) and Dean (1997 to 2004). Most recently, Dr. Harris was Professor of Computer Information Systems, Management and International Business. Prior to joining Georgia State University, Dr. Harris was Professor (1987 to 1996) and former Dean (1991 to 1996) of the Peter F. Drucker Graduate School of Management at Claremont Graduate University (currently Peter F. Drucker and Masotoshi Ito Graduate School of Management). He served as Independent Trustee of the RidgeWorth Funds Board of Trustees (2004 to 2017) and as Independent Chairman (2007 to 2017). He served as a member of the RidgeWorth Funds Governance and Nominating Committee (2004 to 2017) and Audit Committee (2006 to 2017). Dr. Harris previously served on the Board of Transamerica Investors (1995 to 2005). Dr. Harris previously served as a Director of Total System Services, Inc. (1999 to 2019). He served on the Board of Directors of KIPP Metro Atlanta, served as Chairman of the International University of the Grand-Bassam (IUGB) Foundation (2012 to 2017), and serves on the Board of Directors of the IUGB Foundation (since 2012). Dr. Harris also serves as a Trustee of the Mutual Funds Directors Forum (since 2019). He is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates.
John R. Mallin
Mr. Mallin is a real estate partner and former practice group leader for the Real Property Practice Group at McCarter & English LLP. During his career, he has been involved in all aspects of real estate development and financial transactions related to real estate. Mr. Mallin also has oversight and corporate governance experience as a director, including as a chair, of non-profit entities. Mr. Mallin is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates.
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Connie D. McDaniel
Ms. McDaniel, currently retired, has extensive domestic and international business experience, particularly with respect to finance, strategic planning, risk management and risk assessment functions. She is retired from The Coca-Cola Company, where she served as Vice President and Chief of Internal Audit, Corporate Audit Department (2009 to 2013), Vice President, Global Finance Transformation (2007 to 2009), Vice President and Controller (1999 to 2007), and held various management positions (1989 to 1999). While at The Coca-Cola Company, Ms. McDaniel chaired that companys Ethics and Compliance Committee (2009 to 2013) and developed a knowledge of corporate governance matters. Prior to The Coca-Cola Company, she was associated with Ernst & Young (1980 to 1989). Ms. McDaniel served as Independent Trustee of the RidgeWorth Funds Board of Trustees from 2005 to 2017. She was Chairman of the RidgeWorth Funds Audit Committee (2008 to 2017), designated Audit Committee Financial Expert (2007 to 2017) and a member of the RidgeWorth Funds Governance and Nominating Committee (2015 to 2017). Ms. McDaniel also served as a Director of Total System Services, Inc. (2014 to 2019). She currently serves as a Director and Governance and Nominating Committee Chairperson of Global Payments Inc. (since 2019) and as a Director of North Florida Land Trust (since 2021). Ms. McDaniel served as Chair of the Georgia State University Robinson College of Business Board of Advisors (2014 to 2016) and served as a member of the Georgia State University Robinson College of Business Board of Advisors (2011 to 2022). Ms. McDaniel is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates, including serving as the vice chair of the board of many such funds.
Philip R. McLoughlin
Mr. McLoughlin has an extensive legal, financial and asset management background. In 1971, he joined Phoenix Investment Partners, Ltd. (then, Phoenix Equity Planning Corp.), the predecessor of Virtus Investment Partners, Inc., as Assistant Counsel with responsibility for various compliance and legal functions. During his tenure, Mr. McLoughlin assumed responsibility for most functions in the firms advisory, broker-dealer and fund management operations, and eventually ascended to the role of President. Mr. McLoughlin then served as General Counsel, and later Chief Investment Officer, of Phoenix Mutual Life Insurance Company, the parent company of Phoenix Investment Partners. Among other functions, he served as the senior management liaison to the boards of directors of the insurance companys mutual funds and closed-end funds, and had direct oversight responsibility for the funds portfolio managers. In 1994, Mr. McLoughlin was named Chief Executive Officer of Phoenix Investment Partners, and continued in that position, as well as Chief Investment Officer of Phoenix Mutual Life Insurance Company, until his retirement in 2002. He is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates, including serving as the chair of the board of many such funds.
Geraldine M. McNamara
Ms. McNamara was an executive at U.S. Trust Company of New York for 24 years, where she rose to the position of Managing Director. Her responsibilities at U.S. Trust included the oversight of U.S. Trusts personal banking business. In addition to her managerial and banking experience, Ms. McNamara has experience in advising individuals on their personal financial management, which has given her an enhanced understanding of the goals and expectations that individual investors may have. Ms. McNamara is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates.
R. Keith Walton
Mr. Waltons business and legal background, and his extensive service with other boards, provide valuable insight to the Board and its committees regarding corporate governance and best practices. He is an honors graduate of Yale College and the Harvard Law School. Mr. Walton was a Director of Systematica Investments Limited Funds (2006 to 2019) and a Director of BlueCrest Capital Management Funds (2006 to 2017). He is also the founding Principal and Chief Administrative Officer at Global Infrastructure Partners (since 2006) and Senior Adviser at Brightwood Capital, LLC (since 2022). He served as the Managing Director at Lafayette Square Holding Company LLC (2020 to 2021). Mr. Walton is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates and certain funds advised by Bessemer Investment Management LLC.
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Brian T. Zino
Mr. Zino, currently retired, was employed by J. & W. Seligman and Co. Inc., a privately held New York City investment firm managing closed-end investment companies, a family of mutual funds, and institutional accounts and operating a trust company (1982 to 2009). For the last 15 of those years, he served as president and CEO of Seligman. His extensive mutual fund, financial and business background and years of service as a director of a large non-affiliated family of both open- and closed-end funds bring valuable skills and business judgment to the Board and its committees. Mr. Zino is also a certified public accountant and has an extensive background in accounting matters relating to investment companies. He also served as a Director (1998 to 2009), Chairman (2002 to 2004) and Vice Chairman (2000 to 2002) on the board of the ICI Mutual Insurance Company and as a Member of the Board of Governors of ICI (1998 to 2008). Mr. Zino is also a director/trustee of open-end and closed-end funds managed by Virtus affiliates.
Board Oversight of Risk Management
As a registered investment company, the Fund is subject to a variety of risks, including investment risks, financial risks, compliance risks and regulatory risks. As part of its overall activities, the Board oversees the management of the Funds risk management structure by the Funds Adviser, Subadviser, Administrator, officers and others. The responsibility to manage the Funds risk management structure on a day-to-day basis is subsumed within the other responsibilities of these parties.
The Board considers risk management issues as part of its general oversight responsibilities throughout the year at regular meetings of the Board and its committees, and within the context of any ad hoc communications with the Funds service providers and officers. The Funds Adviser, Subadviser, Administrator, officers and legal counsel prepare regular reports to the Board that address certain investment, valuation, compliance and other matters, and the Board as a whole or its committees may also receive special written reports or presentations on a variety of risk issues at the request of the Board, a committee, the Chair or a senior officer.
The Board receives regular written reports describing and analyzing the investment performance of the Fund. In addition, the portfolio managers of the Fund and senior management of the Funds Subadviser meets with the Board periodically to discuss portfolio performance and answer the Boards questions with respect to portfolio strategies and risks.
The Board receives regular written reports from the Funds Chief Financial Officer that enable the Board to monitor the number of fair valued securities in the Funds portfolio, the reasons for the fair valuation and the methodology used to arrive at the fair value. The Board and/or the Audit Committee may also review valuation procedures and pricing results with the Funds independent auditors in connection with the review of the results of the audit of the Funds year-end financial statements.
The Board also receives regular compliance reports prepared by the compliance staff of the Adviser and meets regularly with the Funds CCO to discuss compliance issues, including compliance risks. As required under applicable rules, the Independent Trustees meet regularly in executive session with the CCO, and the CCO prepares and presents an annual written compliance report to the Board. The CCO, as well as the compliance staff of the Adviser and Virtus, provide the Board with reports on their examinations of functions and processes within the Adviser and the Subadviser that affect the Fund. The Board also adopts compliance policies and procedures for the Fund and approves such procedures for the Funds service providers. The compliance policies and procedures are specifically designed to detect and prevent violations of the federal securities laws.
In its annual review of the Funds advisory, subadvisory and administration agreements, the Board reviews information provided by the Adviser, the Subadviser and the Administrator relating to their operational capabilities, financial conditions and resources. The Board may also discuss particular risks that are not addressed in its regular reports and processes.
The Board recognizes that it is not possible to identify all of the risks that may affect the Fund or to develop processes and controls to eliminate or mitigate their occurrence or effects. The Board periodically reviews the effectiveness of its oversight of the Fund and the other funds in the Virtus Funds family, and the processes and controls in place to limit identified risks. The Board may, at any time and in its discretion, change the manner in which it conducts its risk oversight role.
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Trustees Fund Holdings as of December 31, 2023
As of December 31, 2023, the Trustees beneficially owned shares of the Fund as set forth in the table below.
Independent Trustees |
Dollar Range of Equity Securities in the Fund |
Aggregate Dollar Range of Trustee Ownership in all Funds Overseen by Trustee in Family of Investment Companies* | ||
Donald C. Burke |
$1 - $10,000 | Over $100,000 | ||
Sarah E. Cogan |
None |
Over $100,000 | ||
Deborah A DeCotis |
None |
Over $100,000 | ||
F. Ford Drummond |
$10,001 - $50,000 | Over $100,000 | ||
Sidney E. Harris |
None |
Over $100,000 | ||
John R. Mallin |
$10,001 - $50,000 | Over $100,000 | ||
Connie D. McDaniel |
None |
Over $100,000 | ||
Philip McLoughlin |
None |
Over $100,000 | ||
Geraldine M. McNamara |
None |
Over $100,000 | ||
R. Keith Walton |
None |
Over $100,000 | ||
Brian T. Zino |
$10,001 - $50,000 | Over $100,000 |
* Holdings exclude any exposure through the Deferred Compensation Plan, which may be counted towards the Trustee Ownership Policy but are not considered ownership for any other purpose.
Interested Trustee |
Dollar Range of Equity Securities in the Fund |
Aggregate Dollar Range of Trustee Ownership in all Funds Overseen by Trustee in Family of Investment Companies | ||
George R. Aylward |
None |
Over $100,000 |
As of [●, 2024,] the Trustees and Officers of the Fund as a whole owned less than 1% of the outstanding shares of the Fund.
Trustee Compensation
Trustees who are not employed by the Adviser or its affiliates receive an annual retainer and fees and expenses for attendance at Board and Committee meetings. Officers and employees of the Adviser of the Fund who are interested persons are compensated for their services by the Adviser of the Fund, or an affiliate of the Adviser, and receive no compensation from the Fund. The Fund does not have any retirement plan for its Trustees.
For the fiscal year ended November 30, 2023, the current Trustees received the following compensation:
Independent Trustees |
Aggregate Compensation from Fund |
Total Compensation From Trust and Fund Complex Paid to Trustees | ||
Donald C. Burke |
$1,383 | $453,000 | ||
Sarah E. Cogan |
$1,401 | $387,500 | ||
Deborah A. DeCotis |
$1,370 | $387,500 | ||
F. Ford Drummond |
$1,365 | $387,500 | ||
Sidney E. Harris |
$1,272 | $340,000 | ||
John R. Mallin |
$1,206 | $340,000 | ||
Connie D. McDaniel |
$1,436 | $402,500 | ||
Philip R. McLoughlin |
$1,543 | $635,000 | ||
Geraldine M. McNamara |
$1,372 | $503,897 | ||
R. Keith Walton |
$1,406 | $396,603 | ||
Brian T. Zino |
$1,401 | $422,500 |
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Interested Trustees |
Aggregate Compensation from EDF |
Total Compensation From Trust and Fund Complex Paid to Trustees | ||
George R. Aylward |
None | None |
Portfolio Transactions
In effecting transactions for the Fund, the adviser or subadviser (throughout this section, Subadviser) adheres to the Funds policy of seeking best execution and price, determined as described below, except to the extent it is permitted to pay higher brokerage commissions for brokerage and research services as defined herein. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations including, without limitation, the overall direct net economic result to the Fund (involving both price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction at all where a large block is involved, availability of the broker to stand ready to execute possibly difficult transactions in the future, the financial strength and stability of the broker and its ability to provide research services. Such considerations are judgmental and are weighed by the Subadviser in determining the overall reasonableness of brokerage commissions paid by the Fund.
The Subadviser may cause the Fund to pay a broker an amount of commission for effecting a securities transaction in excess of the amount of commission which another broker or dealer would have charged for effecting that transaction if the Subadviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker. As provided in Section 28(e) of the Securities Exchange Act of 1934, brokerage and research services include advising as to the value of securities, the advisability of investing in, purchasing or selling securities, the availability of securities or purchasers or sellers of securities; furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts, and effecting securities transactions and performing functions incidental thereto (such as clearance and settlement). Brokerage and research services provided by brokers to the Fund are considered to be in addition to and not in lieu of services required to be performed by the Subadviser under its contract with the Fund and may benefit the Fund and other accounts of the Subadviser. Conversely, brokerage and research services provided by brokers to other accounts of the Subadviser may benefit the Fund.
If the securities in which the Fund invests are traded primarily in the over-the-counter market, where possible the Fund will deal directly with the dealers who make a market in the securities involved unless better prices and executions are available elsewhere. Such securities may be purchased directly from the issuer. Bonds and money market instruments are generally traded on a net basis and do not normally involve either brokerage commissions or transfer taxes.
The Fund has adopted a policy governing the execution of aggregated advisory client orders (bunching policy) in an attempt to lower commission costs on a per-share and per-dollar basis. According to the bunching policy, no Subadviser shall aggregate transactions unless it believes in its sole discretion that such aggregation is consistent with its duty to seek best execution (which shall include the duty to seek best price) for the Fund. No advisory account of the Subadviser is to be favored over any other account and each account that participates in an aggregated order is expected to participate at the average share price for all transactions of the Subadviser in that security on a given business day, with all transaction costs shared pro rata based on the Fund s participation in the transaction. If the aggregated order is filled in its entirety, it shall be allocated among the Subadvisers accounts in accordance with the allocation order, and if the order is partially filled, it shall be allocated pro rata based on the allocation order. Notwithstanding the foregoing, the order may be allocated on a basis different from that specified in the allocation order if good reason for such different allocation is provided and approved in accordance with the Subadvisers policies and procedures adopted in accordance with the Funds policy. The Board will review the bunching policy from time to time as they deem appropriate.
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For the fiscal years ended November 30, 2021, November 30, 2022 and November 30, 2023, the Fund did not pay brokerage commissions.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of the date of this SAI, the following persons owned of record the number of common shares noted below, representing the indicated percentage of the Funds outstanding equity securities as of such date. To the knowledge of the Fund, no other person owned of record or beneficially 5% or more of the Funds outstanding equity securities on such date.
Shareholder |
Number of Common Shares |
Percentage of the Funds outstanding shares as of October 31, 2023 | ||||||
● |
[●] (1) | [●]% |
(1) [Based on ●, 2024 Section 13 filing.]
Code of Ethics
The Fund, its Adviser and Subadviser have each adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. Personnel subject to the Codes of Ethics may purchase and sell securities for their personal accounts, including securities that may be purchased, sold or held by the Fund, subject to certain restrictions and conditions. Generally, personal securities transactions are subject to preclearance procedures, reporting requirements and holding period rules. The Codes also restrict personal securities transactions in private placements, initial public offerings and securities in which the Fund has a pending order. The Fund has also adopted a Code of Ethics for Chief Executive and Senior Financial Officers as required by Section 406 of the Sarbanes-Oxley Act of 2002. These Codes of Ethics are available on the EDGAR Database on the Commissions internet site at http://www.sec.gov, and that copies of these codes of ethics may be obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov.
The Fund has adopted a Policy Regarding Proxy Voting (the Policy) stating the Funds 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 the 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 partys policies and procedures used to vote proxies for the fund 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:
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◾ | 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 Issuesexecutive 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 issuers 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 funds 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 Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 will be available, no later than August 31 of each year, free of charge by calling, toll-free, (800) 243-1574, on the SECs website at www.sec.gov.
Following is information about the policies and procedures followed by the Subadviser to the Fund in voting proxies for the Fund.
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 Harbors 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 Harbors Compliance & Risk Committee, unless the situation involves a conflict of interest. All overrides are subject to review by the Stone Harbor Compliance & Risk Committee.
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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 Harbors 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.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser
The investment adviser to the Fund is VAIA, located at One Financial Plaza, Hartford, Connecticut 06103. VAIA, an indirect, wholly-owned subsidiary of Virtus, had approximately [$●] in assets under management as of December 31, 2023.
Investment Advisory Agreement and Expense Limitation Agreement
The investment advisory agreement, approved by the Board, provides that the Fund will bear all costs and expenses (other than those specifically referred to as being borne by the Adviser) incurred in the operation of the Fund. Such expenses include, but shall not be limited to, all expenses incurred in the operation of the Fund and public offering of its shares, including, among others, interest, taxes, brokerage fees and commissions, fees of Trustees who are not employees of the Adviser, the Subadviser or any of their affiliated persons, expenses of Trustees and shareholders meetings including the cost of printing and mailing proxies, expenses of Adviser personnel attending Trustee meetings as required, expenses of insurance premiums for fidelity and other coverage, expenses of repurchase and redemption of shares, expenses of issue and sale of shares (to the extent not borne by its underwriter(s) pursuant to an agreement with the Fund), expenses of printing and mailing share certificates representing shares of the Fund, association membership dues, charges of custodians, transfer agents, dividend disbursing agents and financial agents, bookkeeping, auditing and legal expenses. The Fund will also pay the fees and bear the expense of registering and maintaining the registration of the Fund and its shares with the SEC to the extent required by law, listing its shares on any exchange, and registering or qualifying its shares under state or other securities laws and the expense of preparing and mailing prospectuses and reports to shareholders to the extent required by law. Additionally, if authorized by the Trustees, the Fund shall pay for extraordinary expenses and expenses of a nonrecurring nature which may include, but not be limited to the reasonable and proportionate cost of any reorganization or acquisition of assets and the cost of legal proceedings to which the Fund is a party.
As compensation for its services to the Fund, the Adviser receives a fee at an annual rate of 1.00% of the average daily value of the Funds total assets (including any assets attributable to any leverage used) minus the Funds accrued liabilities (other than Fund liabilities incurred for any leverage) (Managed Assets) provided that the Adviser fee does not exceed 1.50% of the Funds net assets.
VAIA has contractually agreed to limit the Funds annual operating expenses other than the management fees, subject to the exclusions listed below, so that such expenses do not exceed, on an annualized basis, 0.58% of average daily net assets through April 10, 2025. Following the contractual period, the Adviser may discontinue these expense reimbursement arrangements at any time.
The exclusions include investment advisory fees, interest, any other fees or expenses relating to financial leverage, preferred shares (such as dividends on preferred shares, auction agent fees and commissions and rating agency fees) or borrowing (such as interest, commitment, amendment and renewal expenses on credit or redemption facilities), taxes, extraordinary, unusual or infrequently occurring expenses (such as litigation), costs related to share offerings, brokerage commissions, expenses incurred in connection with any merger or reorganization, underlying fund expenses and dividend expenses, if any (each expressed as a percentage of average daily net assets attributable to common shares).
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Under certain conditions, the Adviser may recapture operating expenses reimbursed or fees waived under these arrangements within three years after the date on which such amounts were incurred or waived. The Fund must pay its ordinary operating expenses before the Adviser is entitled to any reimbursement and must remain in compliance with any applicable expense limitations or, if none, the expense limitation in effect at the time of the waiver or reimbursement.
The investment advisory agreement also provides that the Adviser shall not be liable to the Fund or to any shareholder of the Fund for any error of judgment or mistake of law or for any loss suffered by the Fund or by any shareholder of the Fund in connection with the matters to which the agreement relates, except a loss resulting from willful misfeasance, bad faith, gross negligence or reckless disregard on the part of such Adviser in the performance of its duties thereof.
The investment advisory agreement shall remain in effect for a period of two years from the date of the advisory agreement, and continues from year to year with respect to the Fund provided that (1) such continuance is approved at least annually by either the Trustees or by a vote of the majority of the outstanding shares of the Fund and (2) the terms and any continuation of the advisory agreement have been approved by the vote of a majority of the Trustees who are not parties to the agreement or interested persons, as that term is defined in the 1940 Act, of the Fund or the Adviser, cast in person (or otherwise, as consistent with applicable laws, regulations and related guidance and relief) at a meeting called for the purpose of voting on such approval. On sixty days written notice to the Adviser and without penalty, the Fund may terminate the agreement by a vote of the majority of the outstanding securities of the Fund. The Adviser may terminate the agreement upon sixty days notice to the Fund, without the payment of any penalty. The agreement automatically terminates upon its assignment (within the meaning of the 1940 Act). The agreement provides that upon its termination, or at the request of the Adviser, the Fund will eliminate all reference to Virtus from its name and will not thereafter transact business in a name using the word Virtus.
Advisory Fees
The following table shows the dollar amount of fees received by the Adviser for services to the Fund, the amount of expenses reimbursed by the Adviser, and the actual fee received by the Adviser, during the fiscal years ended November 30, 2021, 2022 and 2023 pursuant to the investment advisory agreement in effect.
Gross Advisory Fee ($)(*) | Advisory Fee Waived and/or Expenses Reimbursed ($)(*) |
Net Advisory Fee ($)(*) | ||||||||||||||||||||||
Fund | 2021 | 2022 | 2023 | 2021 | 2022 | 2023 | 2021 | 2022 | 2023 | |||||||||||||||
Stone Harbor Emerging Markets Income Fund |
$1,614,000 | $1,209,000 | [$●] | -- | ($1,000) | [$●] | $1,614,000 | $1,208,000 | [$●] |
(*) For periods prior to April 11, 2022, Stone Harbor Investment Partners LLC (or its predecessor, Stone Harbor Investment Partners LP) served as adviser to the Fund. VAIA replaced Stone Harbor Investment Partners LLC and became the Funds adviser effective April 11, 2022. All advisory fees paid prior to April 11, 2022, were paid to Stone Harbor Investment Partners LLC (or its predecessor, Stone Harbor Investment Partners LP) and all advisory fees paid from April 11, 2022 through November 30, 2022 were paid to VAIA.
Subadviser and Subadvisory Agreement
The Adviser has entered into a subadvisory agreement with respect to the Fund. The subadvisory agreement provides that the Adviser will delegate to the Subadviser the performance of certain of its investment management services under the Investment Advisory Agreement with respect to the Fund. The Subadviser furnishes at its own expense the office facilities and personnel necessary to perform such services. The Adviser remains responsible for the supervision and oversight of the Subadvisers performance. The subadvisory agreement is initially scheduled to remain in effect for two years, and will continue in effect from year to year if specifically approved by the Trustees, including a majority of the Independent Trustees. The subadvisory fees are paid by the Adviser out of its advisory fees from the Fund.
VFIA, an affiliate of VAIA, has its principal office at One Financial Plaza, Hartford, CT 06103. VFIA operates through its division, Stone Harbor, in subadvising the Fund. Stone Harbor is located at 31 West 52nd Street, 16th Floor, New York, New York 10019. As of December 31, 2023, the three divisions that make up VFIA managed approximately [$● billion] in aggregate assets under management.
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The Stone Harbor division of VFIA is a global credit specialist with expertise in emerging and developed markets debt, with three decades of informed experience allocating risk in complex areas of the fixed income markets. As of [$●], the Stone Harbor division of VFIA had approximately [$●] in assets under management.
Subadvisory Fees
The following table shows the dollar amount of fees payable to the Subadviser for managing the Fund, the amount of expenses reimbursed by the Subadviser, and the actual fee received by the Subadviser during the fiscal years ended November 30, 2022 and 2023 pursuant to the subadvisory agreement in effect. The Fund did not have a subadviser before April 11, 2022 and therefore subadvisory fees were only paid for a portion of the fiscal year ended 2022.
Gross Subadvisory Fee ($) | Subadvisory Fee Waived and/or Expenses Reimbursed ($) |
Net Subadvisory Fee ($) |
||||||||||||||||||||||
Fund |
4/11/2022- 11/30/2022(*)
|
2023 | 4/11/2022- 11/30/2022(*) |
2023 | 4/11/2022- 11/30/2022(*) |
2023 | ||||||||||||||||||
Stone Harbor Emerging Markets Income Fund |
$331,642 | [$●] | -- | [$●] | $331,642 | [$●] |
(*) | Stone Harbor became subadviser to the Fund on April 11, 2022. |
Administrator
VFS is the Funds administrator. VFS is an indirect, wholly-owned subsidiary of Virtus and an affiliate of the Adviser. For its services as administrator, the Fund pays the administrator an asset-based fee calculated on the Funds average daily Managed Assets. This fee is calculated daily and paid monthly.
The following table shows the dollar amount of fees paid to the Administrator for the fiscal years ended November 30, 2021, 2022 and 2023, for its administrative services.
Administration Fee ($)(*) | ||||||||||||
Fund | 2021 | 2022 | 2023 | |||||||||
Stone Harbor Emerging Markets Income Fund |
$255,000 | $153,000 | [$●] |
(*) VFS became administrator to the fund effective on April 11, 2022. All administrative fees paid for the fiscal year ended 2021 and for the fiscal year ended 2022 prior to April 11, 2022, were paid to ALPS Fund Services, Inc. All administrative fees paid from April 11, 2022 through November 30, 2022 were paid to VFS.
Custodian
The Bank of New York, 240 Greenwich Street, New York, NY 10286, serves as Custodian of the Funds assets. The Custodian designated by the Board holds the securities in the Funds portfolios and other assets for safe keeping. The Custodian does not and will not participate in making investment decisions for the Fund. The Fund has authorized the Custodian to appoint one or more sub-custodians for the assets of the Fund held outside the United States.
Transfer Agent and Sub-Transfer Agent
Computershare Trust Company, N.A. (Computershare) acts as transfer agent for the Fund. Computershares business address is P.O. Box 43078, Providence, RI 02940-3078.
Legal Counsel to the Fund
Dechert LLP, One Bush Street, Suite 1600, San Francisco, CA, 94104, acts as legal counsel to the Fund and reviews certain legal matters for the Fund in connection with various matters, including the shares offered by its registration statement.
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Independent Registered Public Accounting Firm
● serves as the independent registered public accounting firm for the Fund and audited the Funds most recent annual financial statements and expressed an opinion thereon. Deloitte previously served as the independent registered public accounting firm for the Fund. The independent registered public accounting firm or one of its affiliates also provides other accounting and tax-related services as requested by the Fund from time to time. ● business address is ●. Deloittes business address is 1601 Wewatta Street, Suite 400, Denver, Colorado 80202.
PORTFOLIO MANAGERS
Other Accounts Managed by Portfolio Managers and Potential Conflicts of Interest
There may be certain inherent conflicts of interest that arise in connection with the portfolio managers management of the Funds 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 Subadviser may have in place that could benefit the Fund and/or such other accounts. The Board has adopted on behalf of the Fund policies and procedures designed to address any such conflicts of interest to ensure that all transactions are executed in the best interest of the Funds shareholders. The Subadviser is required to certify its compliance with these procedures to the Board on a quarterly basis. There have been no material compliance issues with respect to any of these policies and procedures during the Funds most recent fiscal year. Additionally, any conflicts of interest between the investment strategies of the Fund and the investment strategies of other accounts managed by portfolio managers are not expected to be material since portfolio managers generally manage funds and other accounts having similar investment strategies.
The following tables provide information as of November 30, 2023, regarding all accounts managed by the portfolio managers and portfolio management team members for the Fund as named in the Prospectus. In the tables, Registered Investment Companies include all open and closed-end mutual funds. Pooled Investment Vehicles include, but are not limited to, securities of issuers exempt from registration under Section 3(c) of the Investment Company Act, such as private placements and hedge funds. Other accounts would include, but are not limited to, individual managed accounts, separate accounts, institutional accounts, pension funds, collateralized bond obligations and collateralized debt obligations. The portfolio managers managing the Fund may also manage or be members of management teams for other Virtus Funds 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: | $ | $ | |||||||||
Other Pooled Investment Vehicles: | $ | $ | ||||||||||
Other Accounts: | $ | $ | ||||||||||
James E. Craige |
Registered Investment Companies: | $ | $ | |||||||||
Other Pooled Investment Vehicles: | $ | $ | ||||||||||
Other Accounts: | $ | $ | ||||||||||
Kumaran Damodaran |
Registered Investment Companies: | $ | $ | |||||||||
Other Pooled Investment Vehicles: | $ | $ | ||||||||||
Other Accounts: | $ | $ | ||||||||||
Stuart Sclater-Booth |
Registered Investment Companies: | $ | $ | |||||||||
Other Pooled Investment Vehicles: | $ | $ | ||||||||||
Other Accounts: | $ | $ | ||||||||||
David A. Oliver |
Registered Investment Companies: | $ | $ | |||||||||
Other Pooled Investment Vehicles: | $ | $ | ||||||||||
Other Accounts: | $ | $ | ||||||||||
Darin Batchman1 |
Registered Investment Companies: | $ | $ | |||||||||
Other Pooled Investment Vehicles: | $ | $ | ||||||||||
Other Accounts: | $ | $ | ||||||||||
James E. Craige |
Registered Investment Companies: | $ | $ | |||||||||
Other Pooled Investment Vehicles: | $ | $ | ||||||||||
Other Accounts: | $ | $ | ||||||||||
Richard Lange1 |
Registered Investment Companies: | $ | $ | |||||||||
Other Pooled Investment Vehicles: | $ | $ | ||||||||||
Other Accounts: | $ | $ | ||||||||||
Peter J. Wilby |
Registered Investment Companies: | $ | $ | |||||||||
Other Pooled Investment Vehicles: | $ | $ | ||||||||||
Other Accounts: | $ | $ |
1 Messrs. Batchman and Lange began providing portfolio management services to the Fund March 1, 2024. The data presented for each of Messrs. Batchman and Lange is as of May 31, 2024.
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Portfolio Manager Compensation
Virtus, along with certain of its affiliated investment management firms, including Stone Harbor (collectively, Virtus), believe that the firms 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 individuals 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 managers 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 funds 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.
Securities Ownership
For the most recently completed fiscal year ended November 30, 2023, beneficial ownership of shares of the Fund by Messrs. Wilby, Craige, Damodaran, Oliver, Sclater-Booth, Batchman and Lange, 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)).
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Name of Portfolio Manager or Team Member |
Dollar ($) Range of Fund Shares Beneficially Owned | |
Peter J. Wilby, CFA |
$● | |
James E. Craige, CFA |
$● | |
Kumaran Damodaran, PhD |
$● | |
David A. Oliver, CFA |
$● | |
Stuart Sclater-Booth |
$● | |
Darin Batchman |
$● | |
Richard Lange |
$● |
1 Messrs. Batchman and Lange began providing portfolio management services to the Fund March 1, 2024. The data presented for each of Messrs. Batchman and Lange is as of May 31, 2024.
CALCULATION OF NET ASSET VALUE
The NAV per share of the Fund generally is determined as of the close of regular trading (normally 4:00 PM Eastern time) on days when the NYSE is open for trading. The Fund will not calculate its NAV per share on days when the NYSE is closed for trading.
The NYSE will be closed on the following observed national holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Juneteenth, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Since the Fund does not price securities on weekends or United States national holidays, the NAV of the Funds foreign assets may be significantly affected on days when the investor may not be able to purchase or sell shares of the Fund. The NAV per share of the Fund is determined by adding the values of all securities and other assets of the Fund, subtracting liabilities, and dividing by the total number of outstanding shares of the Fund. Assets and liabilities are determined in accordance with generally accepted accounting principles and applicable rules and regulations of the SEC.
A security that is listed or traded on more than one exchange generally is valued at the official closing price on the exchange representing the principal exchange for such security. Because of the need to obtain prices as of the close of trading on various exchanges throughout the world, the calculation of NAV may not take place for the Fund which invests in foreign securities contemporaneously with the determination of the prices of the majority of the portfolio securities of the Fund. The foreign currency exchange rate used to price the currency in which foreign securities are denominated is generally the 4:00 PM Eastern time spot rate. If at any time the Fund has investments where market quotations are not readily available or are determined not to be reliable indicators of the value of the securities priced, such investments are valued at the fair value thereof as determined by the Adviser pursuant to policies and procedures approved by the Board.
Security valuation procedures for the Fund, include nightly price variance as well as back-testing such as bi-weekly unchanged price, monthly secondary source and transaction analysis. The Funds Board designated the Adviser as the valuation designee to perform fair valuations pursuant to Rule 2a-5 under the 1940 Act. All internally fair valued securities are approved by a valuation committee (the Valuation Committee) appointed by the Adviser. The Valuation Committee is comprised of certain Trust officers and/or representatives of the Adviser and/or Administrator. All internally fair valued securities, referred to below, are updated daily and reviewed in detail by the Valuation Committee monthly unless changes occur within the period. The Valuation Committee reviews the validity of any model inputs and any changes to the model when applicable.
The Fund utilizes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
● | Level 1 quoted prices in active markets for identical securities |
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● | Level 2 prices determined using other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) |
● | Level 3 prices determined using significant unobservable inputs (including the valuation committees own assumptions in determining the fair value of investments) |
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
A description of the valuation techniques applied to the Funds major categories of assets and liabilities measured at fair value on a recurring basis is as follows:
Equity securities are valued at the official closing price (typically last sale) on the exchange on which the securities are primarily traded, or if no closing price is available, at the last bid price and are categorized as Level 1 in the hierarchy. Restricted equity securities and private placements that are not widely traded, are illiquid or are internally fair valued by the Valuation Committee, are generally categorized as Level 3 in the hierarchy.
Certain non-U.S. securities may be fair valued in cases where closing prices are not readily available or are deemed not reflective of readily available market prices. For example, significant events (such as movement in the U.S. securities market, or other regional and local developments) may occur between the time that non-U.S. markets close (where the security is principally traded) and the time that the Fund calculates its NAV that may impact the value of securities traded in these non-U.S. markets. In such cases the Fund fair values non-U.S. securities using an independent pricing service which considers the correlation of the trading patterns of the non-U.S. security to the intraday trading in the U.S. markets for investments such as ADRs, financial futures, exchange traded funds, and certain indexes as well as prices for similar securities. Such fair valuations are categorized as Level 2 in the hierarchy. Because the frequency of significant events is not predictable, fair valuation of certain non-U.S. common stocks may occur on a frequent basis.
Debt securities, including convertible bonds and restricted securities, are valued based on evaluated quotations received from independent pricing services or from dealers who make markets in such securities. For most bond types, the pricing service utilizes matrix pricing which considers one or more of the following factors: yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type, activity of the underlying equities, and current day trade information, as well as dealer supplied prices. These valuations are generally categorized as Level 2 in the hierarchy. Structured debt instruments such as mortgage-backed and asset-backed securities may also incorporate collateral analysis and utilize cash flow models for valuation and are generally categorized as Level 2 in the hierarchy. Pricing services do not provide pricing for all securities and therefore indicative bids from dealers are utilized which are based on pricing models used by market makers in the security and are generally categorized as Level 2 in the hierarchy. Debt securities that are internally fair valued by the Valuation Committee are generally categorized as Level 3 in the hierarchy.
Listed derivatives, such as options and futures, that are actively traded are valued at the last posted settlement price from the exchange where they are principally traded and are categorized as Level 1 in the hierarchy. Over-the-counter (OTC) derivative contracts, which include forward currency contracts, swaps, swaptions, options and equity linked instruments, are valued based on model prices provided by independent pricing services or from dealer quotes. Depending on the derivative type and the specific terms of the transaction, these models vary and include observable inputs in actively quoted markets including but not limited to: underlying reference entity details, indices, spreads, interest rates, yield curves, dividend and exchange rates. These instruments are generally categorized as Level 2 in the hierarchy. Centrally cleared swaps listed or traded on a bilateral or trade facility platform, such as a registered exchange, are valued at the last posted settlement price determined by the respective exchange. These securities are generally categorized as Level 2 within the hierarchy.
The following discussion is a brief summary of U.S. federal income tax considerations generally applicable to the Fund and the ownership and disposition of the Funds common shares. Except as otherwise noted, this discussion assumes you are a taxable U.S. person (as defined for U.S. federal income tax purposes) and that you hold your common shares as capital assets for U.S. federal income tax purposes (generally, assets held for investment).
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The tax information set forth in the Prospectus and the information in this section relates solely to Federal income tax law and assumes that the Fund qualifies as a RIC (as discussed below). Such information is only a summary of certain key Federal income tax considerations affecting the Fund and its shareholders and is in addition to the information provided in the Prospectus. No attempt has been made to present a complete explanation of the Federal tax treatment of the Fund or the tax implications to shareholders. The discussions here and in the Prospectus are not intended as substitutes for careful tax planning.
This Taxation section is subject to the qualifications set forth in the Funds Prospectus and is based on the Internal Revenue Code of 1986, as amended (the Code) and applicable Treasury Regulations (the Regulations) in effect on the date of the Funds Prospectus. Future legislative or administrative changes or court decisions may significantly change the tax rules applicable to the Fund and its shareholders. Any of these changes or court decisions may have a retroactive effect.
All investors should consult their own tax advisors as to the Federal, state, local and foreign tax consequences of an investment in the Fund.
Qualification as a RIC
The Fund intends, for each tax year, to qualify as a regulated investment company (a RIC) under the Code.
Federal Income Tax Consequences of Qualification
As a RIC, the Fund will generally not be subject to Federal income tax on the portion of its investment company taxable income (that is, taxable interest, dividends, net short-term capital gains and other taxable ordinary income, net of expenses) and net capital gain (that is, the excess of net long-term capital gains over net short-term capital losses) that it distributes to shareholders. To be subject to tax as a RIC, generally the Fund must satisfy the following requirements:
● | The Fund must distribute an amount at least equal to the sum of 90% of its investment company taxable income, determined without regard to any deduction for dividends paid, and 90% of its net tax-exempt interest, if any, each tax year (certain distributions made by the Fund after the close of its tax year are considered distributions attributable to the previous tax year for purposes of satisfying this requirement (Distribution Requirement)). |
● | The Fund must derive at least 90% of its gross income each tax year from dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of securities, or other income (including gains from options and futures contracts) derived from its business of investing in securities and net income derived from interests in qualified publicly traded partnerships (Qualifying RIC Income). |
● | The Fund must satisfy the following asset diversification test at the close of each quarter of the Funds tax year: (1) at least 50% of the value of the Funds assets must consist of cash, cash items, U.S. Government securities, securities of other RICs, and securities of other issuers (as to which the Fund has not invested more than 5% of the value of the Funds total assets in securities of an issuer and as to which the Fund does not hold more than 10% of the outstanding voting securities of the issuer); and (2) no more than 25% of the value of the Funds total assets may be invested in the securities (other than U.S. Government securities and securities of other RICs) of any one issuer, or in two or more issuers which the Fund controls and which are engaged in the same or similar trades or businesses or in the securities of one or more qualified publicly traded partnerships. |
While the Fund presently intends to make cash distributions (including distributions reinvested in Fund shares) for each tax year in an aggregate amount sufficient to satisfy the Distribution Requirement and eliminate Federal income tax, the Fund may use equalization accounting (in lieu of making some or all cash distributions) for those purposes. To the extent that the Fund uses equalization accounting it will allocate a portion of its undistributed investment company taxable income and net capital gain to repurchases of Fund shares and will correspondingly reduce the amount of such income and gain that it distributes in cash. If the IRS determines that the Funds allocation is improper and that the Fund has under-distributed its income and gain for any tax year, the Fund may be liable for Federal income and/or excise tax, and, if the Distribution Requirement has not been met, may also be unable to continue to qualify for treatment as a RIC (see discussion below on what happens if the Fund fails to qualify for that treatment).
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Failure to Qualify
If for any tax year the Fund does not qualify as a RIC, all of its taxable income (including its net capital gain) will be subject to tax at the regular corporate rate without any deduction for dividends paid to shareholders, and the dividends will generally be taxable to the shareholders as ordinary income to the extent of the Funds current and accumulated earnings and profits. In addition, the Fund could be required to recognize unrealized gains, pay taxes and make distributions (any of which could be subject to interest charges) before re-qualifying for taxation as a RIC. If the Fund fails to satisfy either the income test or asset diversification test described above, in certain cases, however, the Fund may be able to avoid losing its status as a RIC by timely providing notice of such failure to the IRS, curing such failure and possibly paying an additional tax or penalty.
Failure to qualify as a RIC would thus have a negative impact on the Funds income and performance. It is possible that the Fund will not qualify as a RIC in any given tax year.
Fund Distributions
The Fund anticipates distributing substantially all of its investment company taxable income and net tax-exempt interest (if any) for each tax year. Distributions paid to you out of such income generally would be characterized as ordinary income. A portion of these distributions may qualify for the dividends-received deduction when paid to certain corporate shareholders to the extent of dividends received by the Fund from U.S. corporations, provided that certain holding period and other requirements are met.
A portion of the Funds distributions paid to individuals may be treated as qualified dividend income, which is subject to a reduced maximum Federal income tax rate. A properly reported distribution is treated as qualified dividend income to the extent that the Fund receives dividend income from taxable domestic corporations and certain qualified foreign corporations, provided that holding period and other requirements are met by the Fund and the shareholder. To the extent the Funds distributions are attributable to other sources, such as interest or capital gains, such distributions are not treated as qualified dividend income.
Given the Funds investment strategies, it is not expected that a significant portion of the Funds dividends will be eligible to be designated as qualified dividend income or the dividends-received deduction.
Certain distributions reported by the Fund as section 163(j) interest dividends may be treated as interest income by shareholders for purposes of the tax rules applicable to interest expense limitations under section 163(j) of the Code. Such treatment by the shareholder is generally subject to holding period requirements and other potential limitations, although the holding period requirements are generally not applicable to dividends declared by money market funds and certain other funds that declare dividends daily and pay such dividends on a monthly or more frequent basis. The amount that the Fund is eligible to report as a section 163(j) dividend for a tax year is generally limited to the excess of the Funds business interest income over the sum of the Funds (i) business interest expense and (ii) other deductions properly allocable to the Funds business interest income.
An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from repurchases or other taxable dispositions of Fund shares) of U.S. individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceeds certain threshold amounts.
The Fund anticipates distributing substantially all of its net capital gain for each tax year. These distributions generally are made only once a year, usually in November or December, but the Fund may make additional distributions of net capital gain at any time during the year. These distributions to you generally would be characterized as long-term capital gain, regardless of how long you have held shares. These distributions do not qualify for the dividends-received deduction.
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The Fund is generally permitted to carry forward a net capital loss in any taxable year to offset its own capital gains, if any. These amounts are available to be carried forward to offset future capital gains to the extent permitted by the Code and applicable tax regulations. Any such loss carryforwards will retain their character as short-term or long-term. In the event that the Fund were to experience an ownership change as defined under the Code, the capital loss carryforwards and other favorable tax attributes of the Fund, if any, may be subject to limitation.
In determining its net capital gain, including in also connection with determining the amount available to support a capital gain dividend, its taxable income and its earnings and profits, the Fund generally may also elect to treat part or all of any post-October capital loss (defined as any net capital loss attributable to the portion, if any, of the taxable year after October 31 or, if there is no such loss, the net long-term capital loss or net short-term capital loss attributable to any such portion of the taxable year) or late-year ordinary loss (generally, the sum of its (i) net ordinary loss, if any, from the sale, exchange or other taxable disposition of property, attributable to the portion, if any, of the taxable year after October 31, and its (ii) other net ordinary loss, if any, attributable to the portion, if any, of the taxable year after December 31) as if incurred in the succeeding taxable year.
The Fund intends to operate, each year, using a fiscal and taxable year ending November 30.
Distributions by the Fund that do not constitute ordinary income dividends, qualified dividend income or capital gain dividends generally will be treated as a return of capital. Return of capital distributions reduce your tax basis in the shares and are treated as gain from the sale of the shares to the extent your basis would be reduced below zero.
All distributions by the Fund will be treated in the manner described above regardless of whether the distribution is paid in cash or reinvested in additional shares of the Fund (or of another fund). If you receive distributions in the form of additional shares, you will be treated as receiving a distribution in an amount equal to the amount of cash that could have been received instead of shares.
You may purchase shares with a NAV at the time of purchase that reflects undistributed net investment income or recognized capital gain, or unrealized appreciation in the value of the assets of the Fund. Distributions of these amounts are taxable to you in the manner described above, although the distribution economically constitutes a return of capital to you.
Ordinarily, you are required to take distributions by the Fund into account in the year in which they are made. A distribution declared in October, November or December of any calendar year and payable to shareholders of record on a specified date in those months, however, is deemed to be paid by the Fund and received by you on December 31 of that calendar year if the distribution is actually paid in January of the following year.
The Fund will send you information annually as to the Federal income tax consequences of distributions made (or deemed made) during the year.
The Fund will be treated as a publicly offered regulated investment company (within the meaning of Section 67 of the Code) if either (i) shares of the Fund are held by at least 500 persons at all times during a taxable year, (ii) shares of the Fund are treated as regularly traded on an established securities market or (iii) shares of the Fund are continuously offered pursuant to a public offering (within the meaning of section 4 of the 1933 Act). If the Fund is not treated as a publicly offered RIC for any calendar year, for purposes of computing the taxable income of shareholders that are individuals, trusts or estates, (i) the Funds earnings will be computed without taking into account such shareholders allocable shares of the management fees paid to the Funds investment adviser and certain of the Funds other expenses, (ii) each such shareholder will be treated as having received or accrued a dividend from the Fund in the amount of such shareholders allocable share of these fees and expenses for the calendar year, (iii) each such shareholder will be treated as having paid or incurred such shareholders allocable share of these fees and expenses for the calendar year, and (iv) each such shareholders allocable share of these fees and expenses will be treated as miscellaneous itemized deductions by such shareholder. Miscellaneous itemized deductions are not deductible for taxable years that begin before January 1, 2026, and thereafter generally (i) will be deductible only to the extent that they exceed 2% of the adjusted gross income of the taxpayer, (ii) will not be deductible for purposes of the alternative minimum tax, and (iii) will be subject to the overall limitation on itemized deductions under Section 68 of the Code.
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The IRS requires that a RIC that has two or more classes of stock allocate to each class proportionate amounts of each type of its income (such as ordinary income, capital gains and dividends qualifying for the dividends-received deduction) based upon the percentage of total dividends paid to each class for the tax year. Accordingly, if the Fund issues preferred shares, the Fund will allocate capital gain dividends and dividends qualifying for the dividends-received deduction, if any, between its Common Shares and shares of preferred stock in proportion to the total dividends paid to each class with respect to such tax year.
Although the Fund currently does not intend to do so, the Fund has the ability to declare a large portion of a distribution in shares. The Fund is not subject to restrictions on the circumstances in which it may declare a portion of a distribution in shares but would generally anticipate doing so only in unusual situations such as, for example, if the Fund does not have sufficient cash to meet its RIC distribution requirements under the Code. Generally, were the Fund to declare such a distribution, the Fund would allow shareholders to elect payment in cash and/or shares of equivalent value. Under published IRS guidance, the entire distribution by a publicly offered RIC will generally be treated as a taxable distribution for U.S. federal income tax purposes, and count towards the Funds RIC distribution requirements under the Code, if certain conditions are satisfied. Among other things, the aggregate amount of cash available to be distributed to all shareholders is required to be at least 20% of the aggregate declared distribution. If too many shareholders elect to receive cash, the cash available for distribution is required to be allocated among the shareholder electing to receive cash (with the balance of the distribution paid in shares) under a formula provided in the applicable IRS guidance. Each shareholder electing to receive cash could be entitled to receive cash in an amount equal to at least the lesser of (1) the portion of the distribution such shareholder elected to receive in cash and (2) such shareholders entire distribution multiplied by the percentage limitation on cash available for distribution. The number of shares distributed would thus depend on the applicable percentage limitation on cash available for distribution, the shareholders individual elections to receive cash or stock, and the value of the shares. Each shareholder generally would be treated as having received a taxable distribution on the date the distribution is received in an amount equal to the cash that such shareholder would have received if the entire distribution had been paid in cash, even if the shareholder received all or most of the distribution in shares. This may result in shareholders having to pay tax on such distribution, even if no cash is received.
Certain Tax Rules Applicable to Fund Transactions
For Federal income tax purposes, when put and call options purchased by the Fund expire unexercised, the premiums paid by the Fund give rise to short- or long-term capital losses at the time of expiration (depending on the length of the respective exercise periods for the options). When put and call options written by the Fund expire unexercised, the premiums received by the Fund give rise to short-term capital gains at the time of expiration. When the Fund exercises a call, the purchase price of the underlying security is increased by the amount of the premium paid by the Fund. When the Fund exercises a put, the proceeds from the sale of the underlying security are decreased by the premium paid. When a put or call written by Fund is exercised, the purchase price (selling price in the case of a call) of the underlying security is decreased (increased in the case of a call) for tax purposes by the premium received.
Some of the debt securities that may be acquired by the Fund may be treated as debt securities that are issued with original issue discount (OID). Generally, the amount of the OID is treated as interest income and is included in income over the term of the debt security, even though payment of that amount is not received until a later time, usually when the debt security matures. Additionally, some of the debt securities that may be acquired by the Fund in the secondary market may be treated as having market discount. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on such debt security. The Fund may make one or more of the elections applicable to debt securities having market discount, which could affect the character and timing of recognition of income. The Fund generally will be required to distribute dividends to shareholders representing discount on debt securities that is currently includable in income, even though cash representing such income may not have been received by the Fund. Cash to pay such dividends may be obtained from sales proceeds of securities held by the Fund.
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The Fund may invest a portion of its net assets in below investment grade instruments. Investments in these types of instruments may present special tax issues for the Fund. U.S. federal income tax rules are not entirely clear about issues such as when the Fund may cease accruing interest, OID or market discount, when and to what extent deductions may be taken for bad debts or worthless instruments, how payments received on obligations in default should be allocated between principal and income and whether exchanges of debt obligations in a bankruptcy or workout context are taxable. These and other issues will be addressed by the Fund to the extent necessary to seek to ensure that it distributes sufficient income that it does not become subject to U.S. federal income or excise tax.
Certain listed options, regulated futures contracts and forward currency contracts are considered Section 1256 contracts for Federal income tax purposes. Section 1256 contracts held by the Fund at the end of each tax year are marked to market and treated for Federal income tax purposes as though sold for fair market value on the last business day of the tax year. Gains or losses realized by the Fund on Section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains or losses. The Fund can elect to exempt its Section 1256 contracts that are part of a mixed straddle (as described below) from the application of Section 1256 of the Code.
Any option, futures contract or other position entered into or held by the Fund in conjunction with any other position held by the Fund may constitute a straddle for Federal income tax purposes. A straddle of which at least one, but not all, the positions are Section 1256 contracts, may constitute a mixed straddle. In general, straddles are subject to certain rules that may affect the character and timing of the Funds gains and losses with respect to straddle positions by requiring, among other things, that: (1) the loss realized on disposition of one position of a straddle may not be recognized to the extent that the Fund has unrealized gains with respect to the other position in such straddle; (2) the Funds holding period in straddle positions being suspended while the straddle exists (possibly resulting in a gain being treated as short-term capital gain rather than long-term capital gain); (3) the losses recognized with respect to certain straddle positions which are part of a mixed straddle and which are non-Section 1256 contracts being treated as 60% long-term and 40% short-term capital loss; (4) losses recognized with respect to certain straddle positions which would otherwise constitute short-term capital losses be treated as long-term capital losses; and (5) the deduction of interest and carrying charges attributable to certain straddle positions may be deferred. Various elections are available to the Fund, which may mitigate the effects of the straddle rules, particularly with respect to mixed straddles. In general, the straddle rules described above do not apply to any straddles held by the Fund if all of the offsetting positions consist of Section 1256 contracts.
Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time the Fund accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities are treated as ordinary income or ordinary loss. Similarly, gains or losses from the disposition of foreign currencies, from the disposition of debt securities denominated in a foreign currency, or from the disposition of a forward contract, futures contract or similar financial instrument denominated in a foreign currency which are attributable to fluctuations in the value of the foreign currency between the date of acquisition of the asset and the date of disposition also are treated as ordinary income or loss. These gains or losses, referred to under the Code as Section 988 gains or losses, increase or decrease the amount of the Funds investment company taxable income available to be distributed to its shareholders as ordinary income, rather than increasing or decreasing the amount of the Funds net capital gain.
The Fund may invest in shares of foreign corporations (including equity interests in certain CLOs) which may be treated as passive foreign investment companies (PFICs) under the Code. In general, a foreign corporation is treated as a PFIC if at least one-half of its assets constitute investment-type assets or 75% or more of its gross income is investment-type income. If the Fund receives a so-called excess distribution with respect to PFIC stock, the Fund itself may be subject to a tax on a portion of the excess distribution, whether or not the corresponding income is distributed by the Fund to shareholders. In general, under the PFIC rules, an excess distribution is treated as having been realized ratably over the period during which the Fund held the PFIC shares. The Fund itself will be subject to tax on the portion, if any, of an excess distribution that is so allocated to prior Fund tax years and an interest factor will be added to the tax, as if the tax had been payable in such prior tax years. Certain distributions from a PFIC as well as gain from the sale of PFIC shares are treated as excess distributions. Excess distributions are characterized as ordinary income even though, absent application of the PFIC rules, certain excess distributions might have been characterized as capital gain.
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The Fund may be eligible to elect alternative tax treatment with respect to PFIC shares. Under an election that currently is available in some circumstances, the Fund generally would be required to include in its gross income its share of the earnings of a PFIC on a current basis, regardless of whether distributions are received from the PFIC in a given tax year. If this election were made, the special rules, discussed above, relating to the taxation of excess distributions, would not apply.
Alternatively, the Fund may elect to mark-to-market its PFIC shares at the end of each taxable year, with the result that unrealized gains would be treated as though they were realized and reported as ordinary income. Any mark-to-market losses would be deductible as ordinary losses to the extent of any net mark-to-market gains included in income in prior tax years.
Because the application of the PFIC rules may affect, among other things, the character of gains, the amount of gain or loss and the timing of the recognition of income with respect to PFIC shares, as well as subject the Fund itself to tax on certain income from PFIC shares, the amount that must be distributed to shareholders, and which will be taxed to shareholders as ordinary income or long-term capital gain, may be increased or decreased substantially as compared to a fund that did not invest in PFIC shares. Treasury regulations generally would treat the Funds income inclusion with respect to a PFIC with respect to which the Fund has made a QEF election as Qualifying RIC Income either if (i) there is a current distribution out of the earnings and profits of the PFIC that are attributable to such income inclusion or (ii) such inclusion is derived with respect to the Funds business of investing in stock, securities, or currencies.
If the Fund holds more than 10% of the interests treated as equity for U.S. federal income tax purposes in a foreign corporation that is treated as a controlled foreign corporation (CFC) (including equity tranche investments and certain debt tranche investments in a CLO treated as CFC), the Fund may be treated as receiving a deemed distribution (taxable as ordinary income) each tax year from such foreign corporation in an amount equal to the Funds pro rata share of the corporations income for the tax year (including both ordinary earnings and capital gains), whether or not the corporation makes an actual distribution during such year. In general, a foreign corporation will be classified as a CFC if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S. shareholders. A U.S. shareholder, for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power or value of all classes of shares of a corporation. If the Fund is treated as receiving a deemed distribution from a CFC, the Fund will be required to include such distribution in the Funds investment company taxable income regardless of whether the Fund receives any actual distributions from such CFC, and the Fund must distribute such income to satisfy the distribution requirements applicable to RICs. Treasury regulations generally would treat the Funds income inclusion with respect to a CFC as Qualifying RIC Income either if (i) there is a distribution out of the earnings and profits of the CFC that are attributable to such income inclusion or (ii) such inclusion is derived with respect to the Funds business of investing in stock, securities, or currencies.
The Fund might invest directly or indirectly in residual interests in real estate mortgage investment conduits (REMICs) or equity interests in taxable mortgage pools (TMPs). Under a notice issued by the IRS in October 2006 and Treasury regulations that have not yet been issued (but may apply with retroactive effect) a portion of the Funds income from a REMIC or a TMP, or from real estate investment trust (REIT) that is attributable to the REITs residual interest in a REMIC or a TMP (referred to in the Code as an excess inclusion), will be subject to Federal income tax in all events. This notice also provides, and the regulations are expected to provide, that excess inclusion income of a RIC, such as the Fund, will generally be allocated to shareholders of the RIC in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related REMIC or TMP residual interest directly.
In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions) and (ii) will constitute unrelated business taxable income (UBTI) to entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated excess inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income. In addition, because the Code provides that excess inclusion income is ineligible for treaty benefits, a RIC must withhold tax on excess inclusions attributable to its foreign shareholders at a 30% rate of withholding, regardless of any treaty benefits for which a shareholder is otherwise eligible.
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Federal Excise Tax
A 4% nondeductible excise tax is imposed on a RIC that fails to distribute in each calendar year an amount at least equal to the sum of: (1) 98% of its ordinary taxable income (taking into account certain deferrals and elections) for the calendar year; (2) 98.2% of its capital gain net income (adjusted for certain ordinary losses) for the one-year period ended on October 31 of the calendar year; and (3) all ordinary taxable income and capital gains for previous years that were not distributed or taxed during such years and on which the RIC did not incur any Federal income tax. The balance of the Funds income must be distributed during the next calendar year. The Fund will be treated as having distributed any amount on which it is subject to income tax for any tax year ending in the calendar year.
The Fund intends to make sufficient distributions of its ordinary taxable income and capital gain net income prior to the end of each calendar year to avoid liability for the excise tax. Investors should note, however, that the Fund might in certain circumstances be required to liquidate portfolio investments to make sufficient distributions to avoid the imposition of any excise tax liability.
Sale, Exchange or Repurchase of Shares
In general, you will recognize gain or loss on the sale, exchange or repurchase of Fund shares (including in connection with a termination of the Fund) in an amount equal to the difference between the proceeds of the sale, exchange or repurchase and your adjusted tax basis in the shares. All or a portion of any loss so recognized may be disallowed if you purchase (for example, by reinvesting dividends) shares of the Fund within 30 days before or after the sale, exchange or repurchase (a wash sale). If disallowed, the loss will be reflected in an upward adjustment to the basis of the shares purchased. In general, any gain or loss arising from the sale, exchange or repurchase of Fund shares will be considered capital gain or loss and will be long-term capital gain or loss if the shares were held for longer than one year. Any capital loss arising from the sale, exchange or repurchase of shares held for six months or less, however, will be treated as a long-term capital loss to the extent of the amount of distributions of net capital gain received on such shares. In determining the holding period of such shares for this purpose, any period during which your risk of loss is offset by means of options, short sales or similar transactions is not counted. Capital losses in any tax year are deductible only to the extent of capital gains plus, in the case of a non-corporate taxpayer, $3,000 of ordinary income.
Different tax consequences may apply for tendering and non-tendering shareholders in connection with a repurchase offer. For example, if a shareholder does not tender all of his or her shares (including shares deemed owned by shareholders under constructive ownership rules) or does not meet certain other requirements, such repurchase may not be treated as a sale or exchange for U.S. federal income tax purposes (and instead would be treated as a dividend to the extent of the Funds earnings and profits), and may result in deemed distributions to non-tendering shareholders. On the other hand, shareholders holding shares as capital assets who tender all of their shares (including shares deemed owned by shareholders under constructive ownership rules) or meet certain other requirements will be treated as having sold their shares and generally will recognize capital gain or loss. The amount of the gain or loss will be equal to the difference between the amount received for the shares and the shareholders adjusted tax basis in the relevant shares. Such gain or loss generally will be a long-term capital gain or loss if the shareholder has held such shares as capital assets for more than one year. Otherwise, the gain or loss will be treated as short-term capital gain or loss.
The Fund (or its administrative agent) is required to report to the IRS and furnish to shareholders the cost basis information for sale transactions of shares. Shareholders should consult with their tax advisors to determine the best cost basis method for their tax situation. Shareholders that hold their shares through a financial intermediary should contact such financial intermediary with respect to reporting of cost basis and available elections for their accounts.
Backup Withholding
The Fund will be required in certain cases to withhold and remit to the U.S. Treasury backup withholding on taxable distributions and the proceeds of repurchases of shares paid to you if you: (1) have failed to provide your correct taxpayer identification number; (2) are otherwise subject to backup withholding by the IRS for failure to report the receipt of interest or dividend income properly; or (3) have failed to certify to the Fund that you are not subject to backup withholding or that you are a C corporation or other exempt recipient. Backup withholding is not an additional tax; rather any amounts so withheld may be credited against your Federal income tax liability or refunded if proper documentation is provided.
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State and Local Taxes
The tax rules of the various states of the U.S. and their local jurisdictions with respect to an investment in the Fund can differ from the Federal income taxation rules described above. These state and local rules are not discussed herein. You are urged to consult your tax advisor as to the consequences of state and local tax rules with respect to an investment in the Fund.
Foreign Income Tax
Investment income received by the Fund from sources within foreign countries as well as gains or the proceeds from the sale or other disposition of foreign securities may be subject to foreign income taxes withheld at the source. The United States has entered into tax treaties with many foreign countries that may entitle the Fund to a reduced rate of such taxes or exemption from taxes on such income. It is impossible to know the effective rate of foreign tax in advance since the amount of the Funds assets to be invested within various countries cannot be determined. If more than 50% of the value of the Funds total assets at the close of its tax year consists of stocks or securities of foreign corporations, the Fund will be eligible and intends to file an election with the IRS to pass through to its shareholders the amount of foreign taxes paid by the Fund subject to certain exceptions. However, there can be no assurance that the Fund will be able to do so. Pursuant to this election, you will be required to: (1) include in gross income (in addition to taxable dividends actually received) your pro rata share of foreign taxes paid by the Fund; (2) treat your pro rata share of such foreign taxes as having been paid by you and (3) either deduct such pro rata share of foreign taxes in computing your taxable income or treat such foreign taxes as a credit against Federal income taxes. You may be subject to rules which limit or reduce your ability to fully deduct, or claim a credit for, your pro rata share of the foreign taxes paid by the Fund.
Foreign Shareholders
The foregoing discussion relates only to U.S. Federal income tax law as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic corporations, trusts and estates). shareholders who are not U.S. persons (foreign shareholders) should consult their tax advisers regarding U.S. and foreign tax consequences of ownership of shares of the Fund including the likelihood that taxable distributions to them would be subject to withholding of U.S. tax at a rate of 30% (or a lower treaty rate for eligible investors). An investment in the Fund may also be included in determining a foreign shareholders U.S. estate tax liability.
Properly reported dividends received by a foreign shareholder from a RIC are generally exempt from U.S. Federal withholding tax when they (i) were paid in respect of the RICs qualified net interest income (generally, the RICs U.S. source interest income, reduced by expenses that are allocable to such income), or (ii) are paid in connection with the RICs qualified short-term capital gains (generally, the excess of the RICs net short-term capital gain over the RICs long-term capital loss for such taxable year). There can be no assurance that the Fund may report all, some or none of the Funds potentially eligible dividends as derived from such qualified net interest income or as qualified short-term capital gains, and a portion of the Funds distributions (e.g., interest from non-U.S. sources or any foreign currency gains) would be ineligible for this potential exemption from withholding. Furthermore, in the case of Fund shares held through an intermediary, the intermediary may have withheld U.S. Federal income tax, even if the Fund report all or a portion of such potentially eligible dividends as having been derived from qualified net interest or income or from qualified short-term capital gains.
If we declare a large portion of a distribution in shares of our stock (as described above), each foreign shareholder generally would be treated as having received a taxable distribution (including for purposes of the application of the withholding tax rules discussed above) on the date the distribution is received in an amount equal to the cash that such foreign shareholder would have received if the entire distribution had been paid in cash, even if such foreign shareholder received all or most of the distribution in shares of our stock. In such a circumstance, all or substantially all of the cash that would otherwise be distributed to a foreign shareholder may be withheld or shares of our stock may be withheld and sold to fund the applicable withholding.
Withholding of U.S. tax (at a 30% rate) is required on payments of taxable dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. The information required to be reported includes the identity and taxpayer identification number of each account holder and transaction activity within the holders account. Shareholders may be requested to provide additional information to the Fund to enable the Fund to determine whether withholding is required.
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Shareholder Liability
Under Massachusetts law, shareholders could, in certain circumstances, be held personally liable for the obligations of the Fund. However, the Funds Declaration of Trust contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the Trustees. The Funds Declaration of Trust further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held personally liable for obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is remote.
Anti-Takeover Provisions
The Funds Declaration of Trust and the Bylaws include provisions that could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status.
The Funds Trustees are divided into three classes. At each annual meeting of shareholders, the term of one class expires and each Trustee elected to that class holds office for a term of three years. The classification of the Board in this manner could delay for an additional year the replacement of a majority of the Board. In addition, the Funds Declaration of Trust provides that a Trustee may be removed only for cause and only (i) by action of at least 75% of the outstanding shares of the classes or series of shares entitled to vote for the election of such Trustee, or (ii) by at least 75% of the remaining Trustees.
The Funds Declaration of Trust grants special approval rights with respect to certain matters to members of the Board who qualify as Continuing Trustees, which means Trustees who either (i) have been members of the Board for a period of at least thirty-six months, or since the commencement of the Funds operations, if less than thirty-six months, or (ii) were nominated to serve as members of the Board by a majority of the Continuing Trustees then members of the Board.
The Funds Declaration of Trust requires the affirmative vote or consent of at least 75% of the Trustees and holders of at least 75% of the Funds common shares to authorize certain Fund transactions not in the ordinary course of business, including a merger or consolidation, issuance or transfer by the Fund of the Funds shares, except as may be pursuant to a public offering, the Funds dividend reinvestment plan or upon exercise of any stock subscription rights, a sale, transfer or other disposition of Fund assets, or any shareholder proposal regarding specific investment decisions, unless the transaction is authorized by both a majority of the Trustees and 75% of the Continuing Trustees, in which case no shareholder authorization would be required by the Funds Declaration of Trust, but may be required in certain cases under the 1940 Act.
The Funds Declaration of Trust also requires the affirmative vote or consent of holders of at least 75% of the Funds common shares entitled to vote on the matter to authorize a conversion of the Fund from a closed-end to an open-end investment company, unless the conversion is authorized by both a majority of the Trustees and 75% of the Continuing Trustees, in which case shareholders would have only the minimum voting rights required by the 1940 Act with respect to the conversion. Also, the Funds Declaration of Trust provides that the Fund may be terminated at any time by vote or consent of at least 75% of the Funds shares or, alternatively, by vote or consent of both a majority of the Trustees and 75% of the Continuing Trustees.
The Trustees may from time to time grant other voting rights to shareholders with respect to these and other matters in the Bylaws, certain of which are required by the 1940 Act.
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The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. These provisions also provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Funds investment objective and policies. The provisions of the Funds Declaration of Trust and Bylaws described above could have the effect of discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The Board has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its shareholders.
The foregoing is intended only as a summary and is qualified in its entirety by reference to the full text of the Funds Declaration of Trust and the Bylaws, both of which are on file with the SEC.
Liability of Trustees
The Funds Declaration of Trust provides that the obligations of the Fund are not binding upon the Trustees of the Fund individually, but only upon the assets and property of the Fund, and that the Trustees shall not be liable for errors of judgment or mistakes of fact or law. Nothing in the Funds Declaration of Trust, however, protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
Repurchase of Common Shares; Conversion to Open-End Fund
The Fund is a closed-end investment company and as such common shareholders do not have the right to cause the Fund to redeem their common shares. Instead, the common shares trade in the open market at a price that is a function of several factors, including dividend levels, NAV, call protection, portfolio credit quality, relative demand for and supply of such shares in the market, general market and economic conditions, conditions affecting individual issuers and other factors. Shares of a closed-end investment company may frequently trade at prices lower than NAV. To the extent permitted under applicable law, the Board reserves the right to purchase its common shares on the open market at any time. For example, the Board regularly monitors the relationship between the market price and NAV of the common shares. If the common shares were to trade at a substantial discount to NAV for an extended period of time, the Board may consider the repurchase of its common shares on the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Fund to an open-end investment company. The Fund cannot assure you that the Board will decide to take or propose any of these actions, or that share repurchases or tender offers will actually reduce market discount.
If the Fund were to convert to an open-end company, it would be required to redeem all preferred shares and other preferred shares then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), and the common shares would no longer be listed on the NYSE. In addition, the Fund may have to close out any credit default swaps that it had written. In contrast to a closed-end investment company, shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their NAV, less any redemption charge that is in effect at the time of redemption. In addition, if the Fund were to convert to an open-end company, it would not be able to invest more than 15% of its net assets in illiquid investments, which may necessitate a substantial repositioning of the Funds investment portfolio, which may in turn generate substantial transaction costs, which would be borne by common shareholders, and may adversely affect the Funds performance and common share dividends.
Before deciding whether to take any action to convert the Fund to an open-end investment company, the Board would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Funds portfolio, the effect of any action that might be taken on the Fund or its shareholders, and market considerations. Based on these considerations, even if the Funds common shares should trade at a discount, the Board may determine that, in the interest of the Fund and its shareholders, no action should be taken.
Registration Statement
This SAI and the Prospectus do not contain all the information included in the registration statement filed with the SEC under the 1933 Act with respect to the securities offered hereby. The registration statement, including the exhibits filed therewith, are available on the SECs website at www.sec.gov or may be examined at the office of the SEC in Washington, D.C.
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FINANCIAL STATEMENTS AND SUPPLEMENTAL FINANCIAL INFORMATION
The audited financial statements and related report of [●] contained in the Funds November 30, 2023 Annual Report are hereby incorporated by reference. Such financial statements have been incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The unaudited financial statements contained in the [Funds May 31, 2024 Semiannual Report] are hereby incorporated by reference. No other parts of any Annual and Semiannual Report are incorporated by reference herein.
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APPENDIX A DESCRIPTION OF RATINGS
A-1 and P-1 Commercial Paper Ratings
Commercial paper rated A-1 by Standard & Poors Corporation (S&P) has the following characteristics: Liquidity ratios are adequate to meet cash requirements. Long-term senior debt is rated A or better. The issuer has access to at least two additional channels of borrowing. Basic earnings and cash flow have an upward trend with allowance made for unusual circumstances. Typically, the issuers industry is well established and the issuer has a strong position within the industry. The reliability and quality of management are unquestioned.
The rating P-1 is the highest commercial paper rating assigned by Moodys. Among the factors considered by Moodys in assigning ratings are the following: (1) evaluation of the management of the issuer; (2) economic evaluation of the issuers industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; (3) evaluation of the issuers products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationship which exists with the issuer; and (8) recognition by the management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations.
Moodys Investors Service, Inc.
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as gilt-edge. Interest payments are protected by a large or exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuations of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
A-1
C Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Standard and Poors Corporation Corporate Bond Ratings
AAA Bonds rated AAA have the highest rating assigned by Standard & Poors Corporation. Capacity to pay interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from AAA issues only in small degree.
A Bonds rated A have a very strong capacity to pay interest and repay principal, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than in higher rated categories.
BB, B, CCC, CC Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to issuers capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.
D Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized.
S&Ps top ratings for municipal notes issued after July 29, 1984 are SP-1 and SP-2. The designation SP-1 indicates a very strong capacity to pay principal and interest. A + is added for those issues determined to possess overwhelming safety characteristics. An SP-2 designation indicates a satisfactory capacity to pay principal and interest.
Commercial paper rated A-2 or better by S&P is described as having a very strong degree of safety regarding timeliness and capacity to repay. Additionally, as a precondition for receiving an S&P commercial paper rating, a bank credit line and/or liquid assets must be present to cover the amount of commercial paper outstanding at all times.
Fitch
Rated entities in a number of sectors, including financial and non-financial corporations, sovereigns and insurance companies, are generally assigned Issuer Default Ratings (IDRs). IDRs opine on an entitys relative vulnerability to default on financial obligations. The threshold default risk addressed by the IDR is generally that of the financial obligations whose non-payment would best reflect the uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy, administrative receivership or similar concepts, although the agency recognizes that issuers may also make pre-emptive and therefore voluntary use of such mechanisms.
In aggregate, IDRs provide an ordinal ranking of issuers based on the agencys view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood of default. For historical information on the default experience of Fitch-rated issuers, please consult the transition and default performance studies available from the Fitch Ratings website.
A-2
AAA Bonds rated AAA are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of very high credit quality. The obligors ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+.
A Bonds rated A are considered to be investment grade and of high credit quality. The obligors ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligors ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have an adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligors ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements.
B Bonds rated B are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligors limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics, which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment.
CC Bonds rated CC are minimally protected. Default in payment of interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest or principal.
DDD, DD and D Bonds rated DDD, DD and D are in actual default of interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on these bonds and D represents the lowest potential for recovery.
Plus (+) and minus () signs are used with a rating symbol to indicate the relative position of a credit within the rating categories.
A-3
VIRTUS STONE HARBOR EMERGING MARKETS INCOME FUND
PART C
OTHER INFORMATION
Item 25. | Exhibits |
(1) | Financial Statements |
(2) | Exhibits |
(a)(1) |
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(a)(2) |
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(b)(1) |
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(b)(2) |
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(c) |
Not applicable. | |
(d)(1) |
Article III (Shares) and Article V (Shareholders Voting Powers and Meetings) of the Amended and Restated Agreement and Declaration of Trust, as set forth in Exhibit (a)(1). | |
(d)(2) |
Article 10 (Shareholders Voting Powers and Meetings) of the Amended and Restated Bylaws, as set forth in Exhibit (a)(2). | |
(d)(3) |
||
(e) |
||
(f) |
Not applicable | |
(g)(1) |
Form of Advisory Agreement by and between Registrant and VAIA, filed via EDGAR as Appendix A to the Registrants Definitive Proxy Statement on Schedule 14A (File No. 333-169361) on November 17, 2021, and incorporated herein by reference. |
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(g)(2) |
||
(g)(3) |
||
(h) |
Form of Distribution Agreement between Registrant and Foreside Fund Services, LLC (filed herewith).* | |
(i) |
||
(j)(1) |
||
(j)(2) |
||
(j)(3) |
||
(j)(4) |
||
(j)(5) |
||
(j)(6) |
||
(k)(1) |
||
(k)(2) |
||
(k)(3) |
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(k)(4) |
||
(k)(5) |
||
(k)(6) |
||
(k)(7) |
||
(k)(8) |
||
(k)(9) |
||
(k)(10) |
||
(k)(11) |
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(k)(12) |
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(k)(13) |
||
(k)(14) |
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(k)(15) |
||
(k)(16) |
||
(k)(17) |
||
(k)(18) |
||
(k)(19) |
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(k)(20) |
||
(k)(21) |
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(k)(22) |
Placement Agent Agreement to be filed by amendment. | |
(l) |
Opinion of Counsel to be filed by amendment. | |
(m) |
Not Applicable. | |
(n) |
Consent of Independent Registered Public Accounting Firm to be filed by amendment. | |
(o) |
Not applicable. | |
(p) |
Not applicable. | |
(q) |
Not applicable. | |
(r)(1) |
Code of Ethics of Virtus Stone Harbor Emerging Markets Income Fund (filed herewith).* | |
(r)(2) |
Code of Ethics of Virtus Alternative Investment Advisers, Inc. and Virtus Fixed Income Adivsers, LLC (filed herewith).* | |
(s) |
Calculation of Filing Fee Tables (filed herewith) * |
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(t) |
*Filed herewith.
Item 26. | Marketing Arrangements |
The information contained under the heading Plan of Distribution in the Prospectus is incorporated by reference, and any information concerning any underwriters will be contained in the accompanying Prospectus Supplement, if any.
Item 27. | Other Expenses of Issuance and Distribution |
The following table sets forth the estimated expenses expected to be incurred in connection with the offering described in this Registration Statement:
[To be completed by amendment]
CATEGORY |
ESTIMATED EXPENSES* | |||
Legal Fees |
$ | [ ] | ||
Transfer Agent / Subscription Agent |
$ | [ ] | ||
Printing and Postage Fees |
$ | [ ] | ||
Securities and Exchange Commission Registration Fees |
$ | [ ] | ||
Listing Fees |
$ | [ ] | ||
Information Agent |
$ | [ ] | ||
Audit Fees |
$ | [ ] |
* This information may be subject to future contingencies.
Item 28. | Persons Controlled by or Under Common Control with Registrant |
None.
Item 29. Number of Holders of Securities as of [ ], 2024
[To be completed by amendment]
Title of Class |
Number of Record Holders | |||
Common Stock, par value $0.001 per share |
[ ] |
Item 30. Indemnification
Reference is made to Article VIII, Sections 1 through 4, of the Registrants Amended and Restated Agreement and Declaration of Trust, which is incorporated by reference herein.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the Act), may be permitted to trustees, officers and controlling persons of the Registrant by the Registrant pursuant to the Trusts Agreement and Declaration of Trust, its Bylaws or otherwise, the Registrant is aware that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and, therefore, is unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by trustees, officers or controlling persons of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustees, officers or controlling persons in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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Reference is made to Section 6 of the Form of Underwriting Agreement filed as Exhibit (h)(1), which is incorporated herein by reference.
The Investment Advisory Agreement, Subadvisory Agreements, Custody Agreement, Foreign Custody Manager Agreement, Sub-Administration and Accounting Services Agreement and Transfer Agency and Shareholder Services Agreement, each as amended, respectively provide that the Registrant will indemnify the other party (or parties, as the case may be) to the agreement for certain losses. Similar indemnities to those listed above may appear in other agreements to which the Registrant is a party.
The Registrant, in conjunction with Virtus Alternative Investment Advisers, Inc. (VAIA), the Registrants Trustees, and other registered investment management companies managed by VAIA or their affiliates, maintains insurance on behalf of any person who is or was a Trustee, officer, employee, or agent of the Registrant, or who is or was serving at the request of the Registrant as a trustee, director, officer, employee or agent of another trust or corporation, against any liability asserted against such person and incurred by him or arising out of his position. However, in no event will Registrant maintain insurance to indemnify any such person for any act for which the Registrant itself is not permitted to indemnify him.
Insofar as indemnification for liability arising under the Securities Act of 1933, as amended (the Act), may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item 31. | Business and Other Connections of Investment Adviser and Subadvisers |
See Management of the Fund in the Prospectus and Investment Advisory and Other Services in the Statement of Additional Information which is included in this Registration Statement. For information as to the business, profession, vocation or employment of a substantial nature of directors and officers of the Adviser and Subadvisers, reference is made to the Advisers and Subadvisers current Form ADV filed under the Investment Advisers Act of 1940, and incorporated herein by reference.
Adviser | SEC File No.: | |
Virtus Investment Advisers, Inc. |
801-5995 | |
Virtus Fixed Income Advisers, LLC |
801-68743 |
Item 32. | Location of Accounts and Records |
Persons maintaining physical possession of accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the Rules promulgated thereunder include:
Secretary of the Trust:
Kathryn Santoro
One Financial Plaza
Hartford, CT 06103
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Investment Adviser:
Virtus Alternative Investment Advisers, Inc.
One Financial Plaza
Hartford, CT 06103
Subadviser:
Stone Harbor Investment Partners, a division of Virtus Fixed Income Advisers, LLC
31 West 52nd Street, 16th Floor
New York, NY 10019
Administrator:
Virtus Fund Services, LLC
One Financial Plaza
Hartford, CT 06103
Transfer Agent:
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Custodian:
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286-1048
Item 33. Management Services
Not Applicable.
Item 34. | Undertakings |
(1) | Not applicable. |
(2) | Not applicable. |
(3) | The Registrant undertakes that: |
(a) to file, during any period in which offers or sales are being made, a post-effective amendment to the Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of the Securities Act;
(2) to reflect in the prospectus any facts or events after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement; and
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(3) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement.
(b) that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at that time shall be deemed to be the initial bona fide offering thereof;
(c) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering;
(d) that, for the purpose of determining liability under the Securities Act to any purchaser:
(1) | if the Registrant is relying on Rule 430B under the Securities Act: |
a. | Each prospectus filed by the Registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and |
b. | Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (x), or (xi) for the purpose of providing the information required by Section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date. |
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(e) that for the purpose of determining liability of the Registrant under the Securities Act to any purchaser in the initial distribution of securities:
The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser:
(1) any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 497 or Rule 424 under the Securities Act;
(2) free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant;
(3) the portion of any other free writing prospectus or advertisement pursuant to Rule 482 under the Securities Act relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and
(4) any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.
(4) The Registrant undertakes that:
(a) for the purpose of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 497 or 424(b)(1) will be deemed to be a part of the Registration Statement as of the time it was declared effective.
(b) for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus will be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof.
(5) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrants annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference into the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(7) The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any prospectus or Statement of Additional Information.
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SIGNATURES
As required by the Securities Act of 1933, this registration statement has been signed on behalf of the Registrant, in the City of Hartford and the State of Connecticut on the 5th day of August, 2024.
VIRTUS STONE HARBOR EMERGING MARKETS INCOME FUND |
By: |
/s/ George R. Aylward | |
George R. Aylward President & Chief Executive Officer |
As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on the 5th day of August, 2024.
Signature |
Title | |||
/s/ George R. Aylward George R. Aylward |
Trustee, President and Chief Executive Officer (principal executive officer) | |||
/s/ W. Patrick Bradley W. Patrick Bradley |
Chief Financial Officer and Treasurer (principal financial and accounting officer) | |||
* Donald C. Burke |
Trustee | |||
* Sarah E. Cogan |
Trustee | |||
* Deborah A. DeCotis |
Trustee | |||
* F. Ford Drummond |
Trustee | |||
* Sidney E. Harris |
Trustee | |||
* John R. Mallin |
Trustee | |||
* Connie D. McDaniel |
Trustee | |||
* Philip R. McLoughlin |
Trustee and Chairman | |||
* Geraldine M. McNamara |
Trustee | |||
* R. Keith Walton |
Trustee | |||
* Brian T. Zino |
Trustee |
By: |
/s/ George R. Aylward | |
George R. Aylward President & Chief Executive Officer |
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EXHIBIT INDEX
[FORM OF DISTRIBUTION AGREEMENT]
This DISTRIBUTION AGREEMENT (this Agreement) made as of [ ], 2024 by and between Virtus Stone Harbor Emerging Markets Income Fund, a Massachusetts business trust (the Fund), and Foreside Fund Services, LLC, a Delaware limited liability company (the Distributor).
WITNESSETH:
WHEREAS, the Fund is registered under the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (collectively, the Investment Company Act), as a non-diversified, closed-end, management investment company;
WHEREAS, the Fund has filed a registration statement on Form N-2 (File No. 333- [ ] and 811-22473) (the Registration Statement) pursuant to the Investment Company Act and the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively, the Securities Act), to register common shares of beneficial interest, $0.001 par value per share, of the Fund (the Common Shares), which may be issued and sold from time to time through various specified transactions, including at-the-market (ATM) offerings pursuant to Rule 415 under the Securities Act;
WHEREAS, the Distributor is registered as a broker-dealer under the provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (collectively, the Exchange Act), and is a member in good standing of the Financial Industry Regulatory Authority, Inc. (FINRA); and
WHEREAS, the Fund and the Distributor wish to enter into a distribution agreement with each other with respect to ATM offerings, from time to time, of Common Shares.
NOW THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor; ATM Offerings.
(a) Subject to the terms and conditions of this Agreement, the Fund hereby appoints the Distributor as its principal underwriter and placement agent for up to [ ] Common Shares of the Fund to be offered pursuant to the Registration Statement (as defined herein) through ATM offerings from time to time (the Shares) and the Fund agrees that it will issue such Shares as the Distributor may sell. The Distributor agrees to enter into non-exclusive sub-placement agent agreements with selected dealers, each of whom shall be registered as a broker-dealer under the provisions of the Exchange Act and a member in good standing of FINRA who will use reasonable efforts to identify opportunities for the sale of Shares (each, a sub-placement agent), but neither the Distributor nor any sub-placement agent is obligated to sell any specific number of the Shares (though the Distributor will only be authorized to sell on any Offering Date, subject to the terms and conditions of this Agreement, the maximum number of Shares agreed to with the Fund pursuant to Section 1(d) hereof). The Distributor will not purchase any Shares for its own account. The Shares will only be sold on such days as shall be agreed to by the Distributor and the Fund (each, an Offering Date). The Distributor hereby accepts such appointment.
(b) The Distributor acknowledges that Shares will be offered and sold only as set forth from time to time in the Registration Statement including, without limitation, pricing of Shares, handling of investor funds and payment of sales commissions.
(c) The Fund may suspend or terminate any ATM offering of its Shares at any time. Upon notice to the Distributor of the terms of such suspension or termination, the Distributor shall suspend the ATM offering of Shares in accordance with such terms until the Fund notifies the Distributor that such ATM offering may be resumed; provided, however, that such suspension or termination shall not affect or impair the parties respective obligations with respect to the Shares sold hereunder prior to the giving of such notice.
(d) The price per Share shall be determined by the Fund together with the Distributor or any sub-placement agent by reference to trades in the Common Shares on the primary exchange for the Common Shares. In no event shall the price per Share be less than the then current net asset value per Common Share (which net asset value shall be determined as of a time within twenty-four (24) hours, excluding Saturdays, Sundays and holidays, next preceding the time of such determination) plus the per Share amount of the commission to be paid to the Distributor (the Minimum Price). The Fund may establish a minimum sales price per Share on any Offering Date in excess of the Minimum Price (the Minimum Sales Price), and the Fund shall communicate such Minimum Sales Price to the Distributor. The Fund shall have sole discretion to establish a Minimum Sales Price for any Offering Date. The Distributor agrees that it will not sell Shares if the per share price of the Shares is less than the Minimum Price or, if applicable, the Minimum Sales Price. The Fund shall determine the maximum number of Shares to be sold through the Distributor or through such sub-placement agent for any Offering Date, and the Distributor or such sub-placement agent shall not be authorized to sell Shares on any Offering Date in excess of such maximum.
(e) The Distributor will confirm to the Fund, following the close of trading on the Funds primary exchange on each Offering Date for the Shares, the number of Shares sold through the Distributor and through any sub-placement agent, the time of sale, the gross sales price per Share and the compensation payable to the Distributor and such sub-placement agent, or to which the Distributor and such sub-placement agent are entitled with respect to such sales. The Fund reserves the right to reject any order in whole or in part.
(f) Settlement for sales of the Shares pursuant to this Section 1 will occur on the second business day following the date on which such sales are made (each such day, a Settlement Date), unless otherwise agreed to in writing by the parties hereto. On each Settlement Date, the Shares sold through the Distributor and through any sub-placement agent for settlement on such date shall be delivered by the Fund at the Distributors request to such sub-placement agents account at The Depository Trust Company through its Deposit and Withdrawal at Custodian System or by such other means of delivery as may be mutually agreed upon by the parties, against payment of the gross sales proceeds for the sale of such Shares, less the sales commission to be paid to the Distributor.
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(g) In selling Shares, the Distributor shall act solely as an agent of the Fund and not as principal.
Section 2. Representations and Warranties by the Fund. The Fund represents, warrants to and agrees with the Distributor, as of the date hereof and as of each Offering Date and Settlement Date, that:
(a) The Registration Statement (i) has been prepared by the Fund in conformity with the requirements of the Securities Act and the Investment Company Act in all material respects; (ii) has been filed with the U.S. Securities and Exchange Commission (the Commission) under the Securities Act and the Investment Company Act; and (iii) heretofore became, and is, effective; the Registration Statement sets forth the terms of the offering, sale and plan of distribution of the Shares and contains additional information concerning the Fund and its business; no stop order of the Commission preventing or suspending the use of the Basic Prospectus (as defined herein), the Prospectus Supplement (as defined herein) or the Prospectus (as defined herein), or the effectiveness of the Registration Statement, has been issued, and no proceedings for such purpose have been instituted or, to the Funds knowledge, have been threatened by the Commission. Except where the context otherwise requires, Registration Statement, as used herein, means, collectively, the various parts of the registration statement, as amended at the time of effectiveness for purposes of Section 11 of the Securities Act (the Effective Time), as such section applies to the Distributor, including (1) all documents filed as a part thereof or incorporated or deemed to be incorporated by reference therein, and (2) any information contained or incorporated by reference in a prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act, to the extent such information is deemed to be part of the registration statement at the Effective Time. Basic Prospectus, as used herein, means the final prospectus filed as part of the Registration Statement, including the related statement of additional information, together with any amendments or supplements thereto as of the date of this Agreement. Except where the context otherwise requires, Prospectus Supplement, as used herein, means the final prospectus supplement, including the related statement of additional information, relating to the Shares, filed by the Fund with the Commission pursuant to Rule 424(b) under the Securities Act, in the form furnished by the Fund to the Distributor in connection with the offering of the Shares. Except where the context otherwise requires, Prospectus, as used herein, means the Prospectus Supplement together with the Basic Prospectus attached to or used with the Prospectus Supplement. Any reference herein to the registration statement, the Registration Statement, the Basic Prospectus, the Prospectus Supplement or the Prospectus shall be deemed to refer to and include the documents, if any, incorporated by reference, or deemed to be incorporated by reference, therein.
(b) The Fund is duly registered under the Investment Company Act as a closed-end management investment company. A notification of registration of the Fund as an investment company under the Investment Company Act on Form N-8A (the Investment Company Act Notification) has been prepared by the Fund in conformity with the Investment Company Act and has been filed with the Commission and, at the time of filing thereof and at the time of filing any amendment or supplement thereto, conformed in all material respects with all applicable provisions of the Investment Company Act. The Fund has not received any notice in writing from the Commission pursuant to Section 8(e) of the Investment Company Act with respect to the Investment Company Act Notification or the Registration Statement (or any
3
amendment or supplement to either of them). No person is serving or acting as an officer, trustee or investment adviser of the Fund except in accordance with the provisions of the Investment Company Act, provided that for purposes of the foregoing representation with respect to officers and trustees, the Fund shall be entitled to rely on representations from such officers and trustees.
(c) The Registration Statement, the Investment Company Act Notification and the Prospectus, as from time to time amended or supplemented, each complied when it became effective or was filed (as the case may be), complies as of the date hereof and, as amended or supplemented, will comply, at each time of purchase of Shares in connection with the ATM offerings, and at all times during which a prospectus is required by the Securities Act to be delivered in connection with any sale of Shares, in all material respects, with the requirements of the Securities Act and the Investment Company Act; the Registration Statement did not, as of the Effective Time, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; at no time during the period that begins on the earlier of the date of the Basic Prospectus or the date the Basic Prospectus was filed with the Commission and ends at the later of the time of purchase of Shares in connection with the ATM offerings or the end of the period during which a prospectus is required by the Securities Act to be delivered in connection with any sale of Shares did or will the Prospectus, as from time to time amended or supplemented, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Fund does not make any representation or warranty with respect to any statement contained in the Registration Statement, the Basic Prospectus or the Prospectus in reliance upon and in conformity with information furnished in writing by the Distributor or any sub-placement agents, or on the Distributors or any sub-placement agents behalf, to the Fund expressly for use in the Registration Statement or the Prospectus (the Agent Provided Information).
(d) The financial statements incorporated by reference in the Registration Statement or the Prospectus, together with the related notes and schedules, (i) present fairly in all material respects the financial position of the Fund as of the dates indicated and the results of operations, cash flows and changes in shareholders equity of the Fund for the periods specified and (ii) have been prepared in compliance in all material respects with the requirements of the Securities Act, the Investment Company Act and the Exchange Act, and in conformity in all material respects with U.S. generally accepted accounting principles applied on a consistent basis during the periods involved; the other financial and statistical data contained or incorporated by reference in the Registration Statement or the Prospectus are accurately and fairly presented, in all material respects, and prepared on a basis consistent with the financial statements and books and records of the Fund in all material respects; there are no financial statements that are required to be included or incorporated by reference in the Registration Statement, the Basic Prospectus or the Prospectus by the Securities Act, the Investment Company Act or the Exchange Act that are not included or incorporated by reference as required; and the Fund does not have any material liabilities or obligations, direct or contingent (including any off-balance sheet obligations), not described in the Registration Statement (excluding the exhibits thereto).
(e) As of the date of this Agreement, the Fund has an authorized and outstanding capitalization as set forth in the Registration Statement, the Basic Prospectus and the Prospectus
4
and, with respect to any issuance and sale under this Agreement, the Fund shall have as of the date of the most recent amendment or supplement to the Registration Statement or Prospectus, an authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus; all of the issued and outstanding Common Shares have been duly authorized and validly issued and are fully paid and non-assessable, have been issued in material compliance with all applicable securities laws and were not issued in violation of any preemptive right, resale right, right of first refusal or similar right.
(f) The Fund has been duly formed, has legal existence as an unincorporated voluntary association (commonly known as a Massachusetts business trust) and is in good standing under the laws of The Commonwealth of Massachusetts, with full power and authority to own, lease and operate and conduct its business as described in the Registration Statement, the Basic Prospectus and the Prospectus and to issue, sell and deliver the Shares as contemplated herein. The Fund is duly qualified to do business as a foreign entity and is in good standing in each jurisdiction where the conduct of its business requires such qualification, except where the failure to be so qualified and in good standing would not, individually or in the aggregate, have a material adverse effect on the business, properties, financial condition or results of operations of the Fund.
(g) The Shares have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and non-assessable and free of statutory and contractual preemptive rights, resale rights, rights of first refusal and similar rights; the Shares, when issued and delivered against payment therefor as provided herein, will be free of any restriction upon the voting or transfer thereof pursuant to the Funds Amended and Restated Agreement and Declaration of Trust, as further amended or supplemented, the Funds Amended and Restated Bylaws, as further amended or supplemented, or any agreement or other instrument to which the Fund is a party. The Common Shares, including the Shares, conform in all material respects to the description thereof, if any, contained or incorporated by reference in the Registration Statement, the Basic Prospectus or the Prospectus; and the certificates for the Shares, if any, are in due and proper form.
(h) The Fund is in material compliance with the rules of the New York Stock Exchange (the Stock Exchange), including, without limitation, the requirements for continued listing of the Shares on the Stock Exchange and the Fund has not received any written notice from the Stock Exchange regarding the delisting of the Shares from the Stock Exchange. The Shares will be duly listed, and admitted and authorized for trading, subject to official notice of issuance, on the Stock Exchange.
(i) No approval, authorization, consent or order of or filing with any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency, or of or with any self-regulatory organization or other non-governmental regulatory authority (including, without limitation, the Stock Exchange), or approval of the shareholders of the Fund that has not already been obtained, is required in connection with the issuance and sale of the Shares or the consummation by the Fund of the transactions contemplated hereby, other than (i) the registration of the Shares under the Securities Act, which has been effected, (ii) the listing of the Shares with the Stock Exchange, upon official notice of issuance, (iii) any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Fund or (iv) any necessary qualification pursuant to the rules of FINRA.
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Section 3. Duties of the Fund.
(a) The Fund shall take, from time to time, but subject always to any necessary approval of the Board of Trustees of the Fund (each a Trustee, and together the Board) or of its shareholders, all necessary action to fix the number of authorized Common Shares, to the end that the Fund will have a number of authorized but unissued Common Shares at least equal to the number of Common Shares available for sale pursuant to this Agreement.
(b) For purposes of the ATM offering of Shares, the Fund will furnish to the Distributor and any sub-placement agents copies of its most recent amendment to its Registration Statement, its most recent Prospectus and all amendments and supplements thereto, and other documentation the Distributor may reasonably request for use in the ATM offering of Shares, including without limitation, and to the extent applicable, a 415 No Objections Letter from FINRA. The Distributor and the sub-placement agents are authorized to furnish to prospective investors only such information concerning the Fund and the ATM offering as may be contained in the Registration Statement, the Prospectus, the Funds publicly available formation documents, or any other documents (including sales material), that are expressly approved by the Fund for such purpose.
(c) The Fund shall furnish to the Distributor copies of all financial statements of the Fund which the Distributor may reasonably request for use in connection with its duties hereunder, and this shall include, upon request by the Distributor, one certified copy of all financial statements prepared for the Fund by independent public accountants.
(d) The Fund shall use its best efforts to qualify and maintain, to the extent required by applicable law, the qualification of Shares for sale under the securities laws of such jurisdictions as the Distributor and the Fund may approve, provided that the Fund shall not be required in connection therewith to qualify as a foreign corporation or dealer in securities or to file a general consent to service of process in any jurisdiction or meet any other requirement in connection with this Section 3(d) deemed by the Fund to be unduly burdensome. Any such qualification may be withheld, terminated or withdrawn by the Fund at any time in its discretion. The expense of qualification and maintenance of qualification shall be borne by the Fund. The Distributor shall furnish such information and other material relating to its affairs and activities as may be required by the Fund in connection with such qualification.
(e) The Fund will furnish, in reasonable quantities upon request by the Distributor, copies of its annual and semi-annual reports.
(f) The Fund will furnish the Distributor with such other documents as it may reasonably require, from time to time, for the purpose of enabling it to perform its duties as contemplated by this Agreement.
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Section 4. Duties of the Distributor.
(a) The Distributor shall use its reasonable best efforts to perform its duties hereunder. The services of the Distributor to the Fund hereunder are not to be deemed exclusive and nothing herein contained shall prevent the Distributor from entering into like arrangements with other investment companies so long as the performance of its obligations with respect to the Fund hereunder is not impaired thereby.
(b) In performing its duties hereunder, the Distributor shall comply in all material respects with the requirements of all applicable laws, including securities laws relating to the ATM offerings of Shares. Neither the Distributor nor any sub-placement agent having an agreement to offer and sell Shares pursuant to Section 5 hereof nor any other person is authorized by the Fund to give any information or to make any representations, other than those contained in its Registration Statement, Prospectus and any sales literature specifically approved for such use by the Fund.
(c) The Distributor or any sub-placement agent shall review and file with FINRA as applicable, all sales literature (advertisements, brochures and shareholder communications) prepared in connection with the ATM offerings for the Fund.
(d) The Distributor agrees to supply the following additional services, together with such other services as set forth throughout this Agreement:
1. | handling inquiries from sub-placement agents regarding the Fund; |
2. | assisting in the enhancement of communications between sub-placement agents and the Fund; |
3. | communicating the Minimum Price or Minimum Sales Price to any sub-placement agents and instructing any sub-placement agents not to sell Shares if such sales cannot be effected at or above the Minimum Price or the Minimum Sales Price; |
4. | communicating the maximum amount of Shares to be sold on any Offering Date and any other Fund instructions to any sub-placement agents; |
5. | notifying any sub-placement agents of any suspension or termination of the ATM offering of Shares, together with any corresponding resumption of the ATM offering of Shares; |
6. | coordinating delivery of any Shares sold through sub-placement agents to such sub-placement agents on the Settlement Date against payment of the gross sales proceeds for the sale of such Shares, less any applicable sub-placement agent selling commission; |
7. | delivering the Funds Prospectus to any sub-placement agents; |
8. | identifying potential sub-placement agents; |
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9. | monitoring the performance of sub-placement agents; |
10. | providing any necessary reconciliation, accounting and recordkeeping services in respect of the ATM offerings of Shares, including with respect to the underwriting compensation paid by the Fund to the Distributor in respect thereof; and |
11. | providing such other information, assistance and services as may be reasonably requested by the Fund. |
(e) The Distributor shall report to the Board at least quarterly, or more frequently, as requested by the Board, regarding: (i) the nature of the services provided by the Distributor hereunder; (ii) the amount of compensation sub-placement agents, if any, are entitled to retain or be paid by the Distributor; and (iii) the aggregate amount of underwriting compensation paid by the Fund to the Distributor in respect of the ATM offerings of Shares.
(f) The Distributor represents and warrants to the Fund that it has all necessary licenses to perform the services contemplated hereunder and will perform such services in compliance with all applicable rules and regulations.
Section 5. Agreements with Sub-Placement Agents.
(a) The Distributor may enter into sub-placement agent agreements or selected dealer agreements, on such terms and conditions as the Distributor determines are not inconsistent with this Agreement, with sub-placement agents to act as the Distributors agents to effect the sale of the Shares in the ATM offerings, and the Distributor will terminate one or more of its sub-placement agent agreements or selected dealer agreements, to the extent instructed by the Fund. Such sub-placement agents shall sell Shares only at market prices subject to the Minimum Price and the Minimum Sales Price. This Agreement shall not be construed as authorizing any dealer or other person to accept orders for sale on the Funds behalf or to otherwise act as the Funds agent for any purpose. The Distributor shall not be responsible for the acts of other dealers or agents except as and to the extent that they shall be acting for the Distributor or under the Distributors direction or authority.
(b) The Distributor shall offer and sell Shares only through such sub-placement agents who are acting as brokers or dealers who are registered as broker-dealers under the provisions of the Exchange Act and members in good standing of FINRA and who agree to abide by the rules of FINRA.
(c) The Distributor shall obtain assurance, reasonably satisfactory to the Fund, from any sub-placement agents which it engages of the compliance by such sub-placement agents with the terms of this Agreement, applicable federal and state securities laws and the rules of FINRA.
Section 6. Sales Commission; Compensation.
(a) The Fund shall pay the Distributor an amount equal to 1.00% of the gross sales price per Share of the Shares sold.
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(b) The Distributor shall pay to the sub-placement agents the sub-placement agent commissions agreed to between the Distributor and such sub-placement agents, or may authorize such sub-placement agents to retain such sub-placement agent commissions from the gross sales proceeds from the sale of such Shares, which shall be payable from the commissions payable to the Distributor under Section 6(a) hereof; provided that the Distributor will not pay to the sub-placement agents compensation in excess of the usual and customary distributors or selling agents commission in the ATM offerings of Shares.
(c) The Fund hereby represents and warrants to the Distributor that (i) the terms of this Agreement, (ii) the fees and expenses associated with this Agreement, and (iii) any benefits accruing to the Distributor or to the Funds investment adviser or sponsor or another affiliate of the Fund in connection with this Agreement, which the Fund has agreed to pay, including but not limited to any fee waivers, conversion cost reimbursements, up-front payments, signing payments or periodic payments relating to this Agreement have been fully disclosed to the Board and that, if required by applicable law, the Board has approved or will approve the terms of this Agreement, any such fees and expenses, and any such benefits.
Section 7. Payment of Expenses.
(a) The Fund shall bear all of its own costs and expenses, including fees and disbursements of its counsel and auditors, in connection with the preparation of its Prospectus, Statement of Additional Information, if any, the preparation and filing of any required registration statements under the Securities Act and/or the Investment Company Act, and all amendments and supplements thereto, and in connection with any fees and expenses incurred with respect to any filing requirements of FINRA and preparing and mailing annual and interim reports and proxy materials to shareholders (including but not limited to the expense of setting in type any such Registration Statement, Prospectus, interim reports or proxy materials).
(b) The Fund shall bear any cost and expenses of qualification of the Shares for sale pursuant to this Agreement.
(c) The Distributor shall bear all expenses incurred by it in connection with its duties and activities under this Agreement, including the compensation of sub-placement agents for sales of the Shares, provided that it shall pay such sub-placement agents only for so long as and to the extent that it receives such compensation from the Fund, and fees and expenses of Distributors counsel (except for any FINRA filing fees or blue sky fees paid on behalf of the Fund or the Distributor by such counsel).
Section 8. Limitation of Liability; Indemnification.
(a) The Distributor shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from material breach or reckless disregard by it of its obligations and duties under this Agreement. The Distributor shall not be liable for any damages arising out of any action or omission to act by any prior service provider of the Fund or for any failure to discover any such error or omission (provided that this sentence shall not apply where the
9
Distributor was the prior service provider). Notwithstanding anything in this Agreement to the contrary, the Distributor shall not be liable for damages occurring directly or indirectly by reason of circumstances beyond its reasonable control.
(b) The Fund agrees that it will indemnify, defend and hold harmless the Distributor, its several officers, and directors, and any person who controls the Distributor within the meaning of Section 15 of the Securities Act, from and against any losses, claims, damages or liabilities, joint or several, to which the Distributor, its several officers, and directors, and any person who controls the Distributor within the meaning of Section 15 of the Securities Act, may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) (i) arise out of, or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectuses or in any application or other document executed by or on behalf of the Fund or are based upon information furnished by or on behalf of the Fund filed in any state in order to qualify the Shares under the securities or blue sky laws thereof (Blue Sky Application) or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) arise out of, or are based upon, any material breach of the representations, warranties or covenants of the Fund contained in this Agreement; provided, however, that the Fund shall not be liable in any case to the extent that such loss, claim, damage or liability arises out of, or is based upon, any untrue statement, alleged untrue statement, or omission or alleged omission made in the Registration Statement, the Prospectus or any Blue Sky Application with respect to the Fund in reliance upon and in conformity with any Agent Provided Information, or arising out of the failure of the Distributor or any sub-placement agent to deliver a current Prospectus. Notwithstanding anything in this Agreement to the contrary, the Fund shall not be liable for damages occurring directly or indirectly by reason of circumstances beyond its reasonable control.
(c) The Distributor will indemnify, defend and hold harmless the Fund and its several officers and trustees, and any person who controls the Fund within the meaning of Section 15 of the Securities Act, from and against any losses, claims, damages or liabilities, joint or several, to which any of them may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectus or any Blue Sky Application, or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, which statement or omission was made in reliance upon and in conformity with information furnished in writing to the Fund or any of its several officers by or on behalf of the Distributor specifically for inclusion therein, and will reimburse the Fund and its several officers, trustees and such controlling persons for any legal or other expenses reasonably incurred by any of them in investigating, defending or preparing to defend any such action, proceeding or claim.
(d) An indemnified person under this Section 8 (the Indemnified Party) shall give written notice to the other party (the Indemnifying Party) of any loss, damage, expense, liability or claim in respect of which the Indemnifying Party has a duty to indemnify such Indemnified Party under Section 8(b) or (c) hereof (a Claim), specifying in reasonable detail
10
the nature of the loss, damage, expense, liability or claim for which indemnification is sought, except that any delay or failure so to notify such Indemnifying Party shall only relieve such Indemnifying Party of its obligations hereunder to the extent, if at all, that such Indemnifying Party is actually prejudiced by reason of such delay or failure.
(e) If a Claim results from any action, suit or proceeding brought or asserted against an Indemnified Party, the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses. The Indemnified Party shall have the right to employ separate counsel in such action, suit or proceeding and participate in such defense thereof, but the fees and expenses of such separate counsel shall be at the expense of the Indemnified Party unless (i) the Indemnifying Party has agreed in writing to pay such fees and expenses, (ii) the Indemnifying Party has failed within a reasonable time to assume the defense and employ counsel or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Indemnified Party and Indemnifying Party and such Indemnified Party shall have been advised by its counsel that representation of such Indemnified Party and Indemnifying Party by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between the Indemnifying Party and the Indemnified Party (in which case the Indemnifying Party shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Indemnified Party). It is understood, however, that the Indemnifying Party shall, in connection with any one action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties not having actual or potential differing interests with the Indemnifying Party or among themselves, which firm shall be designated in writing by an authorized representative of such parties and that all such fees and expenses shall be reimbursed promptly as they are incurred. The Indemnifying Party shall not be liable for any settlement of any such action, suit or proceeding effected without its written consent, but if settled with such written consent or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the Indemnifying Party agrees to indemnify and hold harmless any Indemnified Party from and against any loss, liability, damage or expense by reason by such settlement or judgment.
(f) With respect to any Claim not within Section 8(e) hereof, the Indemnifying Party shall have twenty (20) days from receipt of notice from the Indemnified Party of such Claim within which to respond thereto. If the Indemnifying Party does not respond within such twenty-day period, it shall be deemed to have accepted responsibility to make payment and shall have no further right to contest the validity of such Claim. If the Indemnifying Party notifies the Indemnified Party within such twenty-day period that it rejects such Claim in whole or in part, the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party under applicable law.
(g) If the indemnification provided for in this Section 8 is unavailable to an Indemnified Party or insufficient to hold an Indemnified Party harmless in respect of any losses, damages, expenses, liabilities or claims referred to therein, then each applicable Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses,
11
damages, expenses, liabilities or claims in such proportion as is appropriate to reflect (i) the relative benefits received by the Indemnified Party, on the one hand, and the Indemnifying Party, on the other hand, from the offering of the Shares; or (ii) if, but only if, the allocation provided for in clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Indemnified Party, on the one hand, and of the Indemnifying Party, on the other, in connection with any statements or omissions or other matters which resulted in such losses, damages, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative fault of the parties hereto shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by such party, on one hand, or by the other party, on the other hand, and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party hereto as a result of the losses, damages, expenses, liabilities and claims referred to in this subsection shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating, preparing to defend or defending any proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this Section 8(g). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
(h) Notwithstanding any other provisions in this Section 8, no party shall be entitled to indemnification or contribution under this Agreement against any loss, claim, liability, expense or damage arising by reason of such persons willful misfeasance, bad faith or gross negligence in the performance of its duties hereunder or by reason of such persons material breach or reckless disregard of such persons obligations and duties thereunder.
(i) The indemnity and contribution agreements contained in this Section 8 and the covenants, warranties and representations of the parties contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the Fund, its, trustees or officers or any person (including each officer or trustee of such person) who controls the Fund within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, or by or on behalf of the Distributor, its directors or officers or any person who controls the Distributor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and shall survive any termination of this Agreement or the issuance and delivery of the Shares.
(j) IN NO EVENT WILL ANY PARTY TO THIS AGREEMENT BE LIABLE TO ANY OTHER PERSON OR ANY THIRD PARTY FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL OR INDIRECT DAMAGES (INCLUDING BUT NOT LIMITED TO LOST PROFITS), EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSSES.
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Section 9. Duration and Termination of this Agreement.
(a) This Agreement may be terminated at any time, without the payment of any penalty, by the Fund or by the Distributor, on sixty (60) days written notice to the other party.
(b) Unless earlier terminated pursuant to Section 9(a) hereof, this Agreement shall automatically terminate upon the issuance and sale of all of the Shares through the Distributor or any sub-placement agents on the terms and subject to the conditions set forth herein.
(c) This Agreement shall remain in full force and effect unless terminated pursuant to Sections 9(a) or 9(b) hereof.
(d) Any termination of this Agreement shall be effective on the date specified in such notice of termination; provided that such termination shall not be effective until the close of business on the date of receipt of such notice by the other party. If such termination shall occur prior to the Settlement Date for any sale of Shares, such Shares shall settle in accordance with the provisions of this Agreement.
Section 10. Amendments of this Agreement. This Agreement may be amended by the parties only pursuant to a written instrument executed by the Fund and the Distributor.
Section 11. Governing Law. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement, directly or indirectly, shall be governed by, and construed in accordance with, the internal laws of the State of New York. To the extent that the applicable law of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company Act, the latter shall control.
Section 12. Waiver of Jury Trial. EACH OF THE FUND (ON ITS BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF ITS AFFILIATES) AND THE DISTRIBUTOR (ON ITS BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF ITS MEMBERS AND AFFILIATES) WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) IN ANY WAY ARISING OUT OF OR RELATING TO THIS AGREEMENT.
Section 13. Miscellaneous.
(a) The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
(b) This Agreement constitutes the entire agreement and supersedes all other prior and contemporaneous agreements and undertakings, both written and oral, among the parties hereto with regard to the subject matter hereof. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
(c) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns and the officers, and directors, trustees, and controlling persons referred to in Section 8 hereof. Neither party may assign its rights or obligations under this Agreement without the prior written consent of the other party.
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(d) The parties acknowledge and agree that all share-related numbers contained in this Agreement shall be adjusted to take into account any stock split, stock dividend or similar event effected with respect to the Shares.
(e) The terms affiliated person and interested person, when used in this Agreement, shall have the respective meanings specified in the Investment Company Act.
Section 14. Proprietary and Confidential Information. The Distributor agrees on behalf of itself and its employees to treat confidentially and as proprietary information of the Fund all records and other information relative to the Fund and prior, present or potential shareholders, and not to use such records and information for any purpose other than performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Fund, which approval shall not be required where the Distributor may be exposed to civil or criminal contempt proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when so requested by the Fund. The provisions of this Section 14 shall survive termination of this Agreement.
Notwithstanding anything in this Agreement to the contrary, each party hereto agrees that: (i) any Nonpublic Personal Information, as defined under Section 248.3(t) of Regulation S-P (Regulation S-P), promulgated under the Gramm-Leach-Bliley Act (the Act), disclosed by a party hereunder is for the specific purpose of permitting the other party to perform the services set forth in this Agreement, and (ii) with respect to such information, each party will comply with Regulation S-P and the Act and will not disclose any Nonpublic Personal Information received in connection with this Agreement to any other party, except to the extent as necessary to carry out the services set forth in this Agreement or as otherwise permitted by Regulation S-P or the Act.
Section 15. Notices. All communications hereunder will be in writing and effective only on receipt, and will be mailed, delivered or emailed and confirmed to:
If to the Distributor:
[Foreside Fund Services, LLC
Three Canal Plaza, Suite 100
Portland, Maine 04101]
Attention: [Legal Department]
Email: [legal@foreside.com]
[For all operational notices or communications: etp-services@foreside.com]
If to the Fund:
Virtus Stone Harbor Emerging Markets Income Fund
c/o [Virtus Alternative Investment Advisers, Inc.]
[address]
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Attention: [ ]
Email: [ ]
[The remainder of this page is intentionally left blank]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. This Agreement may be executed by the parties hereto in any number of counterparts, all of which shall constitute one and the same instrument.
VIRTUS STONE HARBOR EMERGING MARKETS INCOME FUND | ||
By: |
| |
Name: | George R. Aylward | |
Title: | President and Chief Executive | |
[FORESIDE FUND SERVICES, LLC] | ||
By: |
| |
Name: | [Teresa Cowan] | |
Title: | [President] |
EXPENSE LIMITATION AGREEMENT
Virtus Stone Harbor Emerging Markets Income Fund
(EDF or the Fund)
101 Munson Street, Suite 104
Greenfield, MA 01301
April 11, 2022
Virtus Alternative Investment Advisers, Inc.
One Financial Plaza
Hartford, CT 06103
Ladies and Gentlemen:
Virtus Alternative Investment Advisers, Inc. (Virtus) and EDF, as parties to this Expense Limitation Agreement (the Agreement), dated as of April 11, 2022, hereby agree as follows:
1. The Fund is a closed-end management investment company with a single investment portfolio.
2. Pursuant to an Investment Advisory Agreement between the Fund and Virtus dated on or after the date hereof (as from time to time in effect, the Advisory Agreement), the Fund has retained or will retain Virtus to provide the Fund and the Funds shareholders with investment management services.
3. With respect to each the common shares of the Fund (the Common Shares)), as used in this Agreement:
(a) Attributable Operating Expenses means the actual operating expenses attributable to the Common Shares, excluding investment advisory fees paid to Virtus, interest, any other fees or expenses relating to financial leverage, preferred shares (such as dividends on preferred shares, auction agent fees and commissions and rating agency fees) or borrowing (such as interest, commitment, amendment and renewal expenses on credit or redemption facilities), taxes, extraordinary, unusual or infrequently occurring expenses (such as litigation), costs related to share offerings, brokerage commissions, expenses incurred in connection with any merger or reorganization, Underlying Fund Expenses and dividend expenses, if any (each expressed as a percentage of average daily net assets attributable to Common Shares), prior to any waiver, reduction or reimbursement by Virtus under this Agreement, but after any waiver, reduction or reimbursement by Virtus or its affiliates under any other agreement, including, without limitation, any investment advisory fee waiver agreement or administrative fee waiver agreement;
(b) Effective Operating Expenses means the actual operating expenses attributable to the Common Shares, excluding investment advisory fees paid to Virtus, interest, any other fees or expenses relating to financial leverage, preferred shares (such as dividends on preferred shares, auction agent fees and commissions and rating agency fees) or borrowing (such as interest, commitment, amendment and renewal expenses on credit or redemption facilities), taxes, extraordinary, unusual or infrequently occurring expenses (such as litigation), costs related to share offerings, brokerage commissions, expenses incurred in connection with any merger or reorganization, Underlying Fund Expenses and dividend expenses, if any (each expressed as a percentage of average daily net assets attributable to Common Shares), after any waiver, reduction or reimbursement by Virtus or its affiliates under this Agreement or under any other agreement;
(c) Expense Limit means the Expense Limit listed for the Common Shares on Schedule A hereto.
(d) Annual Excess Amount means the extent to which the annual Attributable Operating Expenses for a fiscal year (or portion thereof if the Fund commenced operations during the course of such fiscal year) exceed the Expense Limit; and
(e) Underlying Fund Expenses means any fees and expenses incurred indirectly by the Fund as a result of investment by the Fund in shares of one or more investment companies (within the meaning of the 1940 Act (defined below)) or entities that would be investment companies but for the exceptions from that definition provided for in sections 3(c)(1) and 3(c) (7) of the 1940 Act.
4. Each month, the Attributable Operating Expenses of the Common Shares for such month shall be annualized as of the last day of the month. Until the Expense Limitation Expiration Date as specified in Schedule A, if such annualized Attributable Operating Expenses exceed the Expense Limit, Virtus shall waive, reduce or reimburse the management fee it is entitled to receive from the Fund under the Advisory Agreement or otherwise reimburse Fund expenses for that month by an amount such that the annualized Effective Operating Expenses of the Common Shares for such month equal the Expense Limit.
5. If in any month during which the Advisory Agreement is in effect, the annualized Attributable Operating Expenses of the Common Shares are less than the Expense Limit, then Virtus will be entitled to reimbursement by the Fund of any or all management fees previously waived, reduced or reimbursed by Virtus or other expenses reimbursed with respect to the Common Shares (the Aggregate Reimbursement Amount) pursuant to this Agreement and not subsequently reimbursed to Virtus pursuant to this paragraph, to the extent that the Attributable Operating Expenses of the Common Shares for such month plus the amount so reimbursed, when annualized, does not exceed the lower of the Expense Limit of such Common Shares in effect at the time of the applicable waiver or reimbursement by Virtus and any Expense Limitation in effect at the time of such recoupment; provided, however, that no amount would be reimbursed by the Fund more than three years after the date on which it was incurred or waived by Virtus; and provided, further, that the amount of any such reimbursement shall in no event exceed the Aggregate Reimbursement Amount of the Common Shares. Amounts eligible for recoupment by Virtus will be deemed reimbursed in the order in which amounts were waived, reduced or reimbursed by Virtus.
6. As necessary, and subject to any reimbursements made pursuant to paragraph 5 of this Agreement, on or before the last day of the first month of each fiscal year of the Fund, an adjustment payment shall be made by Virtus or the Fund such that the amount of the management fees or other expenses waived, reduced or reimbursed by Virtus pursuant to this Agreement with respect to such Common Shares during the previous fiscal year shall equal the Annual Excess Amount, if any, for such previous fiscal year.
7. This Agreement has an initial term of two years, and shall apply for each fiscal year thereafter so long as it is in effect. After the end of the initial term, this Agreement shall automatically renew for one-year terms unless Virtus provides written notice to the Fund at the above address of the termination of this Agreement, which notice shall be received by the Fund at least thirty (30) days prior to the end of the then-current term. In addition, this Agreement may be terminated by the Fund, upon ninety (90) days prior written notice to Virtus at its principal place of business.
8. Nothing herein contained shall be deemed to require the Fund to take any action contrary to the Funds Agreement and Declaration of Trust, as amended or supplemented from time to time (the Declaration of Trust) or Bylaws, as amended or supplemented from time to time, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or that relieves or deprives the Funds Board of Trustees of its responsibility for and control of the conduct of the affairs of the Fund.
9. Any term or provision of this Agreement, including but not limited to the advisory fee, the computations of net asset values and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (the 1940 Act), has the same meaning as in the Advisory Agreement and the 1940 Act, as applicable, unless otherwise specified herein, and any question of interpretation of such term or provision will be resolved by reference to the Advisory Agreement and the 1940 Act, as applicable.
10. If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions shall not be affected thereby.
11. A copy of the Funds Declaration of Trust is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Trustees of the Fund as Trustees and not individually, and that the obligations of or arising out of this instrument are not binding upon any of the Trustees or shareholders individually but are binding only upon the assets and property of the Fund.
If the foregoing correctly sets forth the agreement between the Fund and Virtus, please so indicate by signing and returning to Virtus the enclosed copy hereof.
Very truly yours,
VIRTUS STONE HARBOR EMERGING MARKETS INCOME FUND
By: | /s/ W. Patrick Bradley | |
Name: | W. Patrick Bradley | |
Title: | Executive Vice President |
ACCEPTED AND AGREED TO:
VIRTUS ALTERNATIVE INVESTMENT ADVISERS, INC.
By: | /s/ Richard W. Smirl | |
Name: | Richard W. Smirl | |
Title: | Executive Vice President |
SCHEDULE A
(updated as of April 11, 2022)
Fund Name |
Expense Limit |
Expense Limitation Expiration Date | ||
Virtus Stone Harbor Emerging Markets Income Fund | 0.58% | April 10, 2024 | ||
CODE OF ETHICS
Each Fund1 has adopted this Code of Ethics pursuant to Rule 17j-1 of the Investment Company Act of 1940 (the 1940 Act) and it applies to a Funds Access Persons. Individuals that may meet the definition of Access Person below may not be required to comply with this particular Code of Ethics if such individuals are subject to another code of ethics that satisfies Rule 17j-1 of the 1940 Act. For example, the Funds investment advisers and service providers that are subsidiaries of Virtus Investment Partners, Inc. (Virtus) and affiliates of one another have adopted separate codes of ethics (the Affiliate Codes) that are substantially similar to this Code of Ethics, satisfy Rule 17j-1 and apply to individuals who would otherwise be covered by this Code of Ethics. In addition, the Funds subadvisers, if any, that are not Virtus affiliates have adopted their own codes of ethics.
This Code of Ethics is administered by the Virtus Compliance Department on behalf of the Funds together with the Affiliate Codes.
Standard of Business Conduct
Each Fund acknowledges the integrity and good faith of all of the employees, officers, trustees or directors of the Fund and of those entities providing services on behalf of the Fund. Each Fund recognizes, however, that the knowledge of present or future portfolio transactions or the power to influence portfolio transactions, if held by such individuals, could place them in a position where their personal interests might conflict with the interests of the Fund if they were to trade in securities eligible for investment by the Fund.
In view of the foregoing and of the provisions of Rule 17j-1 under the 1940 Act, each Fund has adopted this Code of Ethics to specify and prohibit certain types of transactions deemed to create conflicts of interest (or at least the potential for or the appearance of such conflicts) and to establish related reporting requirements and enforcement procedures.
When persons covered by the terms of this Code of Ethics engage in personal securities transactions, they must adhere to the following general principles as well as to the Codes specific provisions:
(a) | At all times, the interests of Fund shareholders must be paramount; |
1 | Registered Investment Companies (Funds) include ETFis Series Trust I, Virtus ETF Trust II, The Merger Fund®, The Merger Fund® VL, Virtus Alternative Solutions Trust, Virtus Asset Trust, Virtus Equity Trust, Virtus Event Opportunities Trust, Virtus Investment Trust, Virtus Opportunities Trust, Virtus Strategy Trust, Virtus Variable Insurance Trust, Virtus Global Multi-Sector Income Fund, Virtus Total Return Fund Inc., Virtus Artificial Intelligence & Technology Opportunities Fund, Virtus Convertible & Income 2024 Target Term Fund, Virtus Convertible & Income Fund, Virtus Convertible & Income Fund II, Virtus Diversified Income & Convertible, Virtus Equity & Convertible Income Fund, Virtus Dividend, Interest & Premium Strategy Fund, and Virtus Stone Harbor Emerging Markets Income Fund. (2023.12) |
(b) | Personal transactions must be conducted consistent with this Code of Ethics in a manner that avoids or mitigates any actual or potential conflict of interest; |
(c) | No inappropriate advantage should be taken of any position of trust or responsibility; |
(d) | Non-public information regarding security holdings in any Fund must remain confidential; |
(e) | Compliance with all applicable federal securities laws must be maintained; and |
(f) | Access Persons are required to adhere to the standards of business conduct in the Virtus Code of Conduct. |
Definitions of Terms Used in this Code
Access Person of a Fund means any Advisory Person of a Fund. In addition, all of the Funds directors, officers, and general partners are presumed to be Access Persons of the Fund. Access Persons also includes any director, officer or general partner of ETF Distributors LLC, VP Distributors, LLC and Virtus Fund Services, LLC who, in the ordinary course of business, makes, participates in or obtains information regarding the purchase or sale of Covered Securities by the Fund for which ETF Distributors, VP Distributors or Virtus Fund Services acts as service provider, distributor or principal underwriter, or whose functions or duties in the ordinary course of business relate to the making of any recommendation to the Fund regarding the purchase or sale of Covered Securities.
Advisory Person of a Fund means:
(a) | Any director, officer, general partner or employee of the Fund or its investment adviser (or of any company in a control relationship to the Fund or its investment adviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding, the purchase or sale of Covered Securities by a Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; |
(b) | Any natural person in a control relationship to the Fund or its investment adviser who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of Covered Securities by the Fund; and |
(c) | Any Investment Personnel. |
Affiliated Open-End Mutual Fund means any open-end mutual fund as to which a Virtus affiliate serves as the investment adviser or principal underwriter.
Affiliated person of another person means (A) any person directly or indirectly owning, controlling, or holding with power to vote, 5 per centum or more of the outstanding voting securities of such other person; (B) any person 5 per centum or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other person; (C) any person directly or indirectly controlling, controlled by, or under common control with, such other person; (D) any officer, director, partner, copartner, or employee of such other person; (E) if such other person is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (F) if such other person is an unincorporated investment company not having a board of directors, the depositor thereof.
Being considered for Purchase or Sale means a security for which a recommendation to purchase or sell has been made and communicated; and with respect to the Advisory Person making the recommendation, when such person seriously considers making such a recommendation.
Beneficial Ownership shall be interpreted in the same manner as it would be under Rule 16a-1(a)(2) in determining whether a person is the beneficial owner of a security for purposes of Section 16 of the Securities Exchange Act of 1934 (the Exchange Act) and the rules and regulations there under. Generally, Beneficial Ownership means having or sharing, directly or indirectly through any contract, arrangement, understanding, relationship, or otherwise, a direct or indirect pecuniary interest in the security. For the purposes hereof,
(a) | Pecuniary interest means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the security. |
(b) | Indirect pecuniary interest includes, but is not limited to: |
(i) securities held by members of the persons immediate family (this means any child, child-in-law, stepchild, grandchild, parent, parent-in-law, stepparent, grandparent, spouse, partner, sibling, or sibling-in-law and includes adoptive relationships) sharing the same household (which ownership interest may be rebutted);
(ii) a general partners proportionate interest in portfolio securities held by a general or limited partnership;
(iii) a persons right to dividends that is separated or separable from the underlying securities (otherwise, a right to dividends alone will not constitute a pecuniary interest in securities);
(iv) a persons interest in securities held by a trust;
(v) a persons right to acquire securities through the exercise or conversion of any derivative security, whether or not presently exercisable; and
(vi) a performance-related fee, other than an asset based fee, received by any broker, dealer, bank, insurance company, investment company, investment manager, trustee, or person or entity performing a similar function, with certain exceptions (see Rule 16a-1(a)(2) of the Exchange Act).
Crowdfunding Offering means an offering that is exempt from registration under the Securities Act of 1933 pursuant to Section 4(a)(6).
Chief Compliance Officer or CCO refers to the person appointed by the Boards of the Funds pursuant to the provisions of Rule 38a-1.
Control shall have the same meaning as that set forth in Section 2(a)(9) of the 1940 Act.
Covered Security means a security as defined in Section 2(a)(36) of the 1940 Act, except securities that are direct obligations of the Government of the United States, bankers acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments, including repurchase agreements and shares of traditional, unaffiliated registered open-end investment companies.
Disinterested Trustee or Director means a Member of the Board of Trustees or Board of Directors of a Fund who is not an interested person of the Fund within the meaning of Section 2(a)(19) of the 1940 Act.
Immediate Family Member means any Access Persons spouse or domestic partner who shares the same household and any relative by blood, adoption or marriage living in the Access Persons household. This definition includes children (including financially dependent children away at school), stepchildren, grandchildren, parents, stepparents, grandparents, siblings and parents, children, or siblings-in-law.
Initial Public Offering or IPO means an offering of securities registered under the Securities Act of 1933, as amended, the issuer of which, immediately before the registration, was not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.
Investment Personnel shall mean:
(a) | any employee of the Fund or its adviser (or of any company in a control relationship to the Fund or its adviser) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Fund; and |
(b) | any natural person who controls the Fund or its adviser and who obtains information concerning recommendations made to the Fund regarding the purchase or sale of securities by the Fund. Investment Personnel includes any Portfolio Manager or other investment person, such as an analyst or trader, who provides information and advice to a Portfolio Manager or assists in the execution of the investment decisions. |
Limited Offering or Private Placement means an offering that is exempt from registration under the Securities Act of 1933 pursuant to Section 4(a)(2) or Section 4(a)(5), or pursuant to Rule 504, Rule 505, or Rule 506 thereunder.
Managed Portfolio shall mean those Funds, individually and collectively, for which the Portfolio Manager makes buy and sell decisions. For those Funds operating as series companies, Managed Portfolio shall include only the series for which the Portfolio Manager serves as the Portfolio Manager.
Personal Brokerage Account refers to any account (including, without limitation, a custody account, safekeeping account, and an account maintained by an entity that may act in a brokerage or a principal capacity) in which securities may be traded or custodied, and in which an Access Person has any Beneficial Ownership, and any such account of an Immediate Family member, through which an Access Person may hold or acquire Reportable Securities, even though the account currently holds only non-Reportable Securities (such as Unaffiliated Open-end Mutual Funds). To the extent that the Virtus 401(k) plan and potentially 401(k) plans of an Access Persons prior employer(s) or 401(k) plans of Immediate Family Members have the capacity to invest in Affiliated Open-end Mutual Funds and/or other Reportable Securities, such accounts are considered Personal Brokerage Accounts. Furthermore, Individual Retirement Accounts (IRAs) that are constructed within a brokerage account capable of transacting in Reportable Securities are also considered Personal Brokerage Accounts.
The meaning of Personal Brokerage Account does not include the following: Open-end mutual funds held directly with the sponsor in an account that is not capable of transacting in Reportable Securities; 401(k) accounts that may only hold Unaffiliated Open-end Mutual Funds; other accounts that cannot transact in Reportable Securities as determined by the Virtus Compliance Department; direct purchase accounts such as DRIP plans and Section 529 Plans that are not managed, distributed marketed or underwritten by a Virtus affiliate; or managed accounts over which an individual has given investment discretion to an unrelated third party.
Portfolio Manager means the person or portfolio management team entrusted to make or participate in the making of the buy and sell decisions for a Fund, or series thereof, as disclosed in the Fund(s) prospectus.
Purchase or sale of a Reportable Security includes, among other things, the writing of an option to purchase or sell a security or the purchase or sale of a security that is exchangeable for or convertible into a security.
Reportable Security means a security as defined in Section 2(a)(36) of the 1940 Act and includes: common stocks, preferred stocks, stock options (put, call and straddles, etc.), debt securities, privileges on any security or on any group or index of securities (including any interest therein or based on the value thereof) and derivative instruments; ETFs, UIT ETFs, closed end funds, stock indices vehicles (such as the Standard & Poors Composite Stock Indices, SPDR S&P 500, SPDR S&P MidCap 400, iShares, etc.); Affiliated Open-end Mutual Funds and municipal securities.
Reportable Security does not include direct obligations of the Government of the United States; money market instruments; bankers acceptances; bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments; shares of money market funds; shares of Unaffiliated Open-end Mutual Funds; and units of a unit investment trust if the unit investment trust is invested exclusively in Unaffiliated Open-end Mutual Funds. Note: This exception extends only to open-end funds registered in the U.S.; therefore, transactions and holdings in offshore funds are reportable.
Security Held or to be Acquired by a Fund means:
(i) | any Covered Security which, within the most recent 15 days: |
(A) | is or has been held by the Fund; or |
(B) | is being or has been considered by the Fund or any of its investment advisers for purchase by the Fund; and |
(ii) | any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security. |
Unaffiliated Open-End Mutual Fund means any open-end mutual fund as to which a Virtus affiliate does not serve as the investment adviser or principal underwriter for the fund.
Unlawful Actions
It is unlawful for any Affiliated person of any Fund or any of its advisers, in connection with the purchase or sale, directly or indirectly, by the person of a Security Held or to be Acquired by any Fund:
(a) | to employ any device, scheme or artifice to defraud any Fund; |
(b) | to make any untrue statement of a material fact to any Fund or omit to state a material fact necessary in order to make the statements made to any Fund, in light of the circumstances under which they are made, not misleading; |
(c) | to engage in any act, practice or course of business that operates or would operate as a fraud or deceit on any Fund; |
(d) | to engage in any manipulative practice with respect to any Fund; or |
(e) | to divulge or act upon any material, non-public information, as such term is defined under relevant securities laws. |
Disclosure of Personal Brokerage Accounts
All Access Persons must disclose their Personal Brokerage Accounts to their respective Compliance Department. It is each Access Persons responsibility to notify their respective Compliance Department of all Personal Brokerage Accounts and to direct the broker to provide their Compliance Department with brokerage transaction confirmations and account statements (and verify that it has been done). Access Persons do not need to disclose the existence of their Virtus-Fidelity 401(k) account, however, any other Virtus Fidelity account holding securities, options or restricted stock of Virtus must be disclosed. 401(k) plans of an Access Persons prior employer(s) or 401(k) plans of Immediate Family Members must be disclosed if such accounts have the capacity to invest in Affiliated Open-End Mutual Funds and/or other Reportable Securities.
Prohibited Activities and Restrictions
Initial Public Offering (IPO) Rule: No Access Person may directly or indirectly acquire beneficial ownership in any securities in an Initial Public Offering (including IPOs offered through the Internet), except with the prior written approval of the Virtus Compliance Department. No FINRA registered person may participate in an IPO pursuant to FINRA Rule 5130.
Crowdfunding Offering/Limited Offering/Private Placement Rule: No Access Person may directly or indirectly acquire beneficial ownership in any securities in a Crowdfunding Offering, Limited Offering or Private Placement except with the prior written approval of the Virtus Compliance Department.
Preclearance Rule: No Advisory Person may directly or indirectly acquire or dispose of beneficial ownership in a Reportable Security unless such transaction has been precleared by the Virtus Compliance Department. Preclearance is valid through the next business day to the close of the U.S. Market following the approval. An order not executed within that time must be resubmitted for pre-clearance approval. Advisory Persons must wait for approval before placing the order with their broker.
Exceptions: The following transactions do not require preclearance:
(a) | Purchases or sales of up to 1000 shares per month of: (i) Reportable Securities of an issuer ranked in the Standard & Poors 500 Composite Stock Index (S&P 500) at the time of the transaction; (ii) exchange traded funds (ETFs) not managed by a Virtus affiliate; and (iii) closed-end funds not managed by a Virtus affiliate. |
(b) | Open-end Mutual Funds. (However such funds are subject to Quarterly Transaction and Annual Holdings reporting requirements.) |
(c) | Purchases of shares of Reportable Securities necessary to establish an automatic investment or dividend reinvestment plan, as well as any subsequent purchases and sales pursuant to any such plan. |
(d) | Purchases or sales effected in any managed account over which the Advisory Person has no direct or indirect influence or control in the reasonable estimation of the Virtus Compliance Department. This exemption will also apply to Personal Brokerage Accounts for which a third party (e.g. broker or financial adviser) makes all investment decisions on behalf of the Advisory Person. The discretionary arrangement must be documented to the Virtus Compliance Department. |
(e) | Purchases or sales of Reportable Securities not eligible for purchase or sale by the Fund(s). |
(f) | Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. |
(g) | Purchase or sale of securities issued under an employee stock purchase or incentive program unless otherwise restricted. |
Open Order Rule: No Advisory Person may directly or indirectly transact in any Reportable Security which requires preclearance on a day during which a Fund has a pending order for that security of the same type (i.e.. buy or sell) as the proposed personal trade, until the Funds order is executed or withdrawn.
Black-Out Rule: Investment Personnel may not directly or indirectly acquire or dispose of Beneficial Ownership in a Reportable Security within seven calendar days before and after the portfolio(s) associated with the Investment Personnels assigned duties trades in that security. The seven day period is exclusive of the execution date. The Black-Out Rule applies to transactions in securities that are required to be precleared.
Holding Period Rule: Except as provided herein, Advisory Persons must hold all Reportable Securities, including options, for no less than thirty (30) days, regardless of whether or not the purchase was exempt from preclearance under this Code. Generally, a last in, first out (LIFO) accounting methodology will be applied for determining compliance with this holding rule.
This Holding Period Rule does not apply to the following Reportable Securities and transactions:
| Affiliated Open-End Mutual Funds; |
| Sales of Virtus shares after restricted stock units vest; |
| Sales of Virtus shares after exercising employee stock options; or |
| Sales effected in any account over which the Advisory Person has no direct or indirect influence or control. |
Gifts and Entertainment: Access Persons may not give or receive gifts or entertainment that may be construed to have an influence on business transactions conducted by the Fund(s) or its investment adviser. Moreover, pursuant to Section 17(e) of the 1940 Act, gifts and entertainment may not be received by fund advisory personnel as compensation for the purchase or sale of any Fund property.
Gifts include any items of value, including sports paraphernalia or equipment, wine or food baskets, and gift certificates for goods or services. Tickets to events are also considered gifts if the provider of such tickets does not attend the event. Gifts to or from any person or entity doing business with or seeking to do business with the Fund(s) or its investment adviser must not exceed $100 per person per year.
Entertainment includes events that are attended by the provider and recipient, and the $100 limit that applies to gifts does not apply to entertainment. Nonetheless, entertainment must be neither so frequent nor so extensive as to raise any question of impropriety.
All gifts and entertainment received or given must be reported to the Virtus Compliance Department.
Service as Director: No Advisory Person shall serve on the board of directors of a publicly traded company without prior authorization by the President or the Chief Compliance Officer of the Fund. If board service is authorized, such Advisory Person shall have no role in making investment decisions with respect to the publicly traded company.
Excessive Trading Rule: Access Persons shall comply with any mutual funds disruptive trading or market timing policies.
Reporting Requirements
The Code of Ethics, and any amendments thereto, shall be provided to every Access Person. Access Persons will provide written acknowledgement of receipt.
Duplicate Trade Confirmations and Personal Brokerage Account Statements: All Access Persons (other than Disinterested Trustees or Directors) shall direct their brokers to supply, at the same time that they are sent to the Access Person, a copy of the confirmation for each Reportable Securities trade in a Personal Brokerage Account, and a copy, at least quarterly, of an account statement for each Personal Brokerage Account to the Virtus Compliance Department (an electronic feed from the broker will satisfy these requirements). Access to duplicate confirmations and account statements will be restricted to those persons assigned to perform review functions, and all materials will be kept confidential except as required by law.
Quarterly Transaction Reports: Access Persons shall report to the Fund the information (specified further below) with respect to transactions in any Reportable Security in which such Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Reportable Security.
Access Persons shall not be required to make a report with respect to transactions effected for any account over which that person lacks any direct or indirect influence or control in the reasonable estimation of the Virtus Compliance Department which may make reasonable periodic inquiries and request reasonable assurances in making such determination.
Every Quarterly Transaction Report shall be made not later than 15 days after the end of the calendar quarter, and shall include all transactions in Reportable Securities effected during the calendar quarter being reported on. Quarterly Transaction Reports shall contain such information as the Virtus Compliance Department may request and shall be reported in such manner (e.g., utilizing an on-line service) as the Virtus Compliance Department directs.
Initial and Annual Holdings Reports: Each Access Person shall submit an Initial Holdings and Annual Holdings Report listing all personal Reportable Securities holdings to the Virtus Compliance Department, upon commencement of service and annually thereafter (the Initial Holdings Report and the Annual Holdings Report, respectively) in the form and content requested by the Virtus Compliance Department. The information on the Initial Holdings Report must be current as of a date not more than 45 days prior to the date the individual becomes an Access Person. An Initial Holdings Report and certification must be submitted to the designated Compliance Officer no later than 10 days after becoming an Access Person. The Annual Holdings Report information shall be as of December 31 of the prior year. Access Persons shall submit the Annual Holdings Report and Certification to the designated Compliance Officer by January 31 of each year. Access Persons shall include on their Annual Holdings Report any holdings in Affiliated Open-end Mutual Funds, including those held in the Access Persons Virtus-Fidelity 401(k) plan.
Disinterested Trustees and Directors
A Disinterested Trustee or Director of the Fund who would be considered an Access Person solely by reason of being a trustee or director of the Fund shall not be subject to the pre-clearance or reporting requirements applicable to Access Persons or the IPO Rule or Limited Offering/Private Placement Rule set forth in this Code of Ethics, except that such Trustee or Director shall report any transaction where the Trustee or Director knew, or, in the ordinary course of fulfilling his or her official duties as a Fund Trustee or Director, should have known, that during the 15-day period immediately before or after the Trustees/Directors transaction in a Covered Security, the Fund purchased or sold the Covered Security or the Fund or any of its investment advisers or subadvisers considered purchasing or selling the Covered Security. Any report made pursuant to the Reporting Requirements of this Code of Ethics may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect Beneficial Ownership in the security to which the report relates.
401(k) Plans
Disclosure of Personal Brokerage Accounts: Access Persons are not required to disclose the existence of their Virtus-Fidelity 401(k) plan, but Access Persons must disclose any other 401(k) account if the account can transact in Affiliated Open-end Mutual Funds and/or other Reportable Securities.
Preclearance Rule: Advisory Persons are not required to preclear transactions in Affiliated Open-end Mutual Funds (e.g., transferring amounts from one fund to another) or contributions in the form of payroll deductions. Advisory Persons are required to preclear transactions in Reportable Securities that are not exceptions to the Preclearance Rule (e.g., the sale of previous employers stock).
Duplicate Trade Confirmations and Personal Brokerage Account Statements: If an Access Person has a 401(k) account from a previous employer that can transact in Affiliated Open-end Mutual Funds and/or other Reportable Securities, the Access Person shall direct his or her broker to supply, at the same time that they are sent to the Access Person, a copy of the confirmation for each personal Reportable Securities trade and a copy, at least quarterly, of an account statement to the Virtus Compliance Department for each 401(k) account other than the Virtus-Fidelity 401(k) plan.
Quarterly Transactions Reports: For 401(k) accounts other than the Virtus-Fidelity 401(k) plan, Access Persons are required to submit a Quarterly Transaction Report for transactions in Reportable Securities (e.g., Affiliated Open-end Mutual Funds or a previous employers stock).
Initial and Annual Holdings Reports: Access Persons are required to report all holdings in Reportable Securities, including holdings in the Virtus-Fidelity 401(k) plan (e.g., Affiliated Open-end Mutual Funds).
Administration
A. | At least annually, the Funds Chief Compliance Officer shall obtain certification that each Fund, each investment adviser and principal underwriter, as applicable, has adopted procedures reasonably necessary to prevent Access Persons from violating this Code of Ethics or another code of ethics that satisfies Rule 17j-1 of the 1940 Act. |
B. | Any Access Person shall immediately report any potential violation of this Code of which he or she becomes aware to the Fund CCO or the Virtus Compliance Department |
C. | The Virtus Compliance Department will maintain a list of all Access Persons who are required to make reports under this Code of Ethics, and shall inform those Access Persons of their reporting obligations. The Virtus Compliance Department shall promptly notify any Access Person when any report has not been filed on a timely basis. |
Recordkeeping Requirements
Documents and records required to be made and maintained in connection with this Code of Ethics shall be made and maintained in accordance with the Funds Policy Regarding Books and Records.
Sanctions
Upon discovering a violation of this Code, the Virtus Compliance Department may impose such sanctions as it deems appropriate, including, among other things, a letter of censure, suspension of personal trading privileges for a period of time, or suspension or termination of employment; and the Virtus Compliance Department shall advise the Fund CCO accordingly.
Exceptions
The Virtus Compliance Department may, in consultation with the Funds Chief Legal Officer and/or Fund CCO as appropriate, grant written exceptions to provisions of the Code based on equitable considerations. The exceptions may be granted to individuals or classes of individuals with respect to particular transactions, classes of transactions or all transactions, and may apply to past as well as future transactions, provided, however, that no exception will be granted where the exceptions would result in a violation of Rule 17j-1. To the extent any such exception relates to an Access Person of a Fund, the exception will be reported to the Fund CCO for reporting to the Funds Board at its next regularly scheduled meeting.
CERTIFICATION:
By my signature below, I certify that I have received, read, and understood the foregoing policies of the Virtus Funds Code of Ethics, and will comply in all respects with such policies.
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VIRTUS CODE OF ETHICS
Amended and Restated April 1, 2023
A message from George Aylward, President and Chief Executive Officer
At Virtus Investment Partners, our goal is to be a distinctive and trusted provider of asset management products and services that is profitable, growing and consistently delivers value for our clients and shareholders. In this highly competitive industry, we need to distinguish Virtus through our products, our service approach, and our values in managing our company.
Foremost among those values is the expectation I have that each member of the Virtus team adhere to the highest standards of legal and ethical conduct in all of our business dealings.
By demonstrating Virtus is a company that our clients can trust with their assets, a company that our distribution partners respect, and a company that all of our stakeholders think of with admiration, we can accomplish our business goals.
George Aylward
President and Chief Executive Officer
Virtus Investment Partners, Inc.
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Introduction
Each wholly owned affiliated registered investment adviser and broker-dealer of Virtus Investment Partners, Inc. (Virtus) listed in Schedule A (each referred to herein as a Firm) has adopted this Code of Ethics (the Code) in accordance with applicable requirements of the Investment Advisers Act of 1940, as amended (the Advisers Act), and the Investment Company Act of 1940, as amended (the Investment Company Act). From time to time, Firms may attach an Appendix to this Code describing any unique provisions the Firm has made to provide additional requirements or modify requirements set forth by this Code. Modifications for one Firm in such Appendix will not be considered an amendment to any other Firms Code.
Employees are required to adhere to the letter and the spirit of this Code. Failure to adhere to this Code may result in disciplinary actions including fines, disgorgement of profits (or losses avoided), unwinding of securities transactions, curtailment of personal trading privileges, and/or termination of employment. In addition, certain violations of this Code may be considered violations of securities laws and regulations that could result in civil and/or criminal penalties.
1. | Standards of Conduct |
In providing investment services to registered investment companies, institutional accounts and other clients, the Firms are governed by legal and fiduciary duties that mandate adherence to the highest standards of ethical conduct and integrity. Because employees may have knowledge of present or future portfolio transactions in client accounts and, in some cases, the power to influence those portfolio transactions, it is possible that an employees personal interests could or could appear to conflict with those of the Firms clients if the employee engages in personal transactions in securities that are eligible for investment by the Firms clients.
The procedures set forth in this Code are designed to address potential conflicts of interest with respect to the personal investing activities of the Firms employees. When persons covered by the terms of this Code engage in personal securities transactions, they must adhere to the following general principles as well as to the Codes specific provisions:
| At all times, the interests of the Firms clients must be paramount; |
| Personal transactions must be conducted consistent with this Code in a manner that avoids or mitigates any actual or potential conflict of interest; |
| No inappropriate advantage should be taken of any position of trust or responsibility; |
| Non-public information regarding security holdings in client accounts must remain confidential; and |
| Compliance with all applicable federal securities laws must be maintained. |
In addition to the provisions of this Code, employees are responsible for compliance with other Virtus policies and procedures concerning personal conduct and conflicts of interest including, but not limited to: the Virtus Code of Conduct; Social Media Policy; Insider Trading Policy and Procedures; Acceptable Technology Use Policy; Political and PAC Contribution Policy and Procedures; and Gifts, Entertainment, Business Meals, Sponsorships, Business Building and Charitable Donations Policy.
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Irrespective of any investment transactions permitted under this Code and/or investment transactions approved by Compliance, this Code is subject to, and superseded by, federal securities laws, which prohibit trading, whether for personal or client accounts, while in possession of material non-public information. Likewise, material non-public information regarding Virtus or a Virtus affiliate may not be shared with other Virtus employees, other than Virtus Legal or Compliance. Under no circumstances may Virtus employees use material nonpublic information about client recommendations and transactions in their own personal trading.
2. | Persons Subject to the Code |
All employees of Virtus and its wholly owned subsidiaries, including the Firms listed on Schedule A, are subject to this Code and are deemed to be Supervised Persons of a particular investment adviser and/or broker-dealer subsidiary within the meaning of the Advisers Act and the Investment Company Act. This includes persons working at other subsidiaries that are not investment advisers or broker-dealers, such as Virtus Fund Services, LLC and Virtus Shared Services, LLC, as well as employees of certain departments such as Human Resources, Finance, Sales, Marketing, and Product Management, all of which are appropriately deemed by Compliance as Supervised Persons. Certain Supervised Persons are further classified as Access Persons or Advisory Persons, depending upon their access to client portfolio information and their role in managing client accounts.
Supervised Persons are further designated as Access Persons if:
| In connection with their job functions or duties they have access to timely, non-public information regarding a Firms investment management activities, client portfolio holdings and/or client trading activity or they are a director or officer of a Firm1. In general, employees with duties or responsibilities within Information Technology, Investment Operations, Investment Risk, Performance Analytics, Product Management, Fund Administration, Compliance, Legal, Audit or other areas determined by Compliance are designated as Access Persons. |
Supervised Persons are further designated as Advisory Persons if:
| In connection with their job functions or duties, they make, recommend or implement investment decisions on behalf of client accounts managed by a Firm. In general, portfolio managers, investment research analysts, traders and certain of their support personnel are designated as Advisory Persons. |
Employees who perform certain services for multiple Firms (i.e., shared services) or share office space with another Firm, may be designated by Compliance as Supervised, Access and/or Advisory Persons of multiple Firms.2 The above are general rules and Compliance may designate persons as Supervised, Access or Advisory for reasons other than indicated above, if determined to be consistent with the purpose of this Code.
1 | See the Virtus Directors and Officers List for each Firm on VirtusNet. |
2 | Reference: Rule 204A-1(a)(3) Section 202(a)(25) of the Advisers Act [15 U.S.C. 80b-2(a)(25)], which defines supervised person as an advisers partners, officers, directors (or other persons occupying a similar status or performing similar functions) and employees, as well as any other persons who provide advice on behalf of the adviser and are subject to the advisers supervision and control; Footnotes 23, 25 and 28 of Adopting Release of Final Rule 204A-1 (17 CFR Parts 270, 275 and 279) [Release Nos. IA-2256, IC-26492]; File No. S7-04-04. |
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The chart below provides a summary of requirements under this Code depending upon the employees designation as a Supervised, Access or Advisory Person and references the Section of this Code providing additional explanations of each requirement:
Summary of Code of Ethics Requirements by Employee Classification
REQUIREMENT / CODE SECTION |
SUPERVISED PERSONS |
ACCESS PERSONS |
ADVISORY PERSONS | |||
Section 1. STANDARDS OF CONDUCT |
✓ | ✓ | ✓ | |||
Section 2. PERSONS SUBJECT TO THE CODE |
✓ | ✓ | ✓ | |||
Section 3.1. ATTESTATION OF RECEIPT, UNDERSTANDING AND COMPLIANCE |
✓ | ✓ | ✓ | |||
Section 3.2. REPORTABLE SECURITIES AND REPORTABLE ACCOUNTS: |
||||||
DEFFINITION OF REPORTABLE SECURITIES AND REPORTABLE ACCOUNTS |
✓ | ✓ | ✓ | |||
NOTIFYING COMPLIANCE OF EXISTING REPORTABLE ACCOUNTS AND APPROVAL FOR NEW REPORTABLE ACCOUNTS |
✓ | ✓ | ✓ | |||
MANAGED ACCOUNTS (DEFINED) |
✓ | ✓ | ✓ | |||
Section 3.3. NOTIFYING COMPLIANCE OF EXISTING REPORTABLE ACCOUNTS AND APPROVAL FOR NEW REPORTABLE ACCOUNTS | ✓ | ✓ | ✓ | |||
Section 3.4. INITIAL AND ANNUAL HOLDINGS REPORTS | ✓ | ✓ | ✓ | |||
Section 3.5. QUARTERLY TRANSACTIONS REPORTS | ✓ | ✓ | ✓ | |||
Section 3.6. DUPLICATE TRADE CONFIRMATIONS AND PERSONAL BROKERAGE ACCOUNT STATEMENTS | ✓ | ✓ | ✓ | |||
Section 4.1. TRADE PRECLEARANCE REQUIREMENTS FOR NON-VIRTUS SECURITIES | ✓ | ✓ | ||||
Section 4.2. TRADE PRECLEARANCE REQUIREMENTS FOR VIRTUS SECURITIES | ✓ | ✓ | ✓ | |||
Section 5. TRADE BLACKOUT RULE | ✓ | |||||
Section 6. OTHER TRADING RESTRICTIONS | ✓ | ✓ | ||||
Section 7. HOLDING PERIOD RULE | ✓ | ✓ | ||||
Section 8. DUTY TO REPORT VIOLATIONS | ✓ | ✓ | ✓ | |||
Section 9. SANCTIONS FOR VIOLATIONS OF THE CODE | ✓ | ✓ | ✓ | |||
Section 10. WAIVERS, TEMPORARY EXEMPTION FROM CODE APPLICATION, AND EXTENSIONS | ✓ | ✓ | ✓ |
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3. | Reporting Requirements for Supervised, Access and Advisory Persons |
3.1 | Attestation of Receipt, Understanding and Compliance |
All employees will receive a copy of the Code upon hire and must certify their receipt, reading, understanding of, and compliance with the Code within ten (10) days of becoming subject to the Code and at least annually thereafter. Employees will also be required to certify the same with respect to amendments of the Code.
3.2 | Reportable Securities and Reportable Accounts |
Employees must disclose to Compliance all Reportable Securities positions as well as all Reportable Accounts (both brokerage and investment advisory accounts), as further defined and discussed below.
Reportable Securities are broadly defined and include transactions (both long and short) in the following:
| Shares of stocks, ADRs, and other equity securities (including any security convertible into equity securities); |
| Warrants; |
| Bonds and notes; |
| Shares of exchange traded funds (ETFs) and exchange traded notes (ETNs); |
| Shares of closed-end funds; |
| Options, futures and other derivatives; |
| Private placement securities3; |
| Shares of open-end mutual funds managed by a Virtus affiliate or managed by a non-affiliate as a subadviser to a Virtus affiliate4; |
| Securities acquired in an initial public offering (IPO) or a limited offering, or crowdfunding initiatives to raise capital; |
| Initial or limited coin offerings; and |
| Cryptocurrency or digital assets unless specifically exempted by Compliance (as indicated in Schedule B). |
The following are not considered Reportable Securities:
| Direct obligations of the U.S. Government; |
| Money market instruments and funds; |
| Bankers acceptances, certificates of deposit, commercial paper and other high quality short-term debt instruments; |
| Shares of open-end mutual funds that are not managed by a Virtus affiliate; |
3 | A private placement is an offering of securities that are exempt from registration under various laws and rules, such as the Securities Act of 1933 in the U.S. and the Listing Rules in the U.K. Private placements can include limited partnerships, certain cooperative investments in real estate, co-mingled investment vehicles such as hedge funds, and investments in privately held and family-owned businesses. For the purpose of this policy, time-shares and cooperative investments in real estate used as a primary or secondary residence are not considered to be private placements. |
4 | A list of open-end mutual funds managed by a Virtus affiliate or managed by a non-affiliate as a subadviser to a Virtus affiliate is available on VirtusNet. |
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| Holdings in 529 Plans (unless such holdings are a mutual fund managed by a Virtus affiliate or managed by a non-affiliate as a subadviser to a Virtus affiliate);5 and |
| Holdings in accounts maintained through Fidelity for the Virtus 401(k) Plan or similar Virtus-sponsored retirement or benefit plans identified by Compliance. |
Reportable Accounts are all securities accounts (brokerage and investment accounts) that an employee or members of their household have direct or indirect investment discretion over and that hold, or can hold, Reportable Securities. Reportable Accounts include investment accounts of certain related persons including an employees spouse, domestic partner, minor children and stepchildren, and certain other persons6 residing in the same household as the employee. Investment accounts meeting the above definition must be reported even if Reportable Securities are not currently held in the account.
Managed Accounts are Reportable Accounts from which an employee or a member of their household benefits financially, but over which neither the employee nor a member of their household exercise direct or indirect investment discretion. Usually, with a Managed Account, a third-party money manager or financial advisor is hired to make all investment decisions for the account and the employee does not discuss any specific transactions for the account with the manager. Designation of a Managed Account must be properly documented and approved in accordance with Compliance procedures. Once designated as such by Compliance, Managed Accounts are not subject to the requirements of Section 4.1. - Trade Preclearance Requirements for Non-Virtus Securities, Section 4.2. - Preclearance requirement for Virtus Securities, Section 5. - Blackout Rule for Advisory Persons, or Section 7. - Holding Period Rule for Access and Advisory Persons. However, brokerage statements and trade confirmations must be provided (see Section 3.6); purchasing IPOs is restricted (see Section 6); and private placement and limited offerings must be precleared, including those opportunities recommended by an outside financial advisor (see Section 6).
3.3 | Notifying Compliance of Existing Reportable Accounts and Approval for New Reportable Accounts |
Employees must notify Compliance of all existing Reportable Accounts within ten (10) days of hire. After hire, employees must obtain approval from Compliance in advance of opening any new Reportable Account and promptly provide Compliance with the account number and related details when they become available.
Note the following:
| Any Virtus 401(k) Plan Fidelity Account and activity therein will automatically be reported |
5 | A list of open-end mutual funds managed by a Virtus affiliate or managed by a non-affiliate as a subadviser to a Virtus affiliate is available on VirtusNet. |
6 | Compliance may determine certain persons (other than those specifically listed above) who reside at the same address are not part of the same household if they do not otherwise have any of the following: direct or indirect investment discretion over the persons brokerage account(s) or investment(s); transparency, influence or control over the persons financial affairs; nor provide or receive recommendations or advice from the person concerning investments. Employees are encouraged to be forthcoming and discuss such matters with Compliance promptly at the time of hire and/or upon the development of such situation. |
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to Compliance; however, employees must specifically notify Compliance of any new or existing Fidelity BrokerageLink account, Virtus/Fidelity Health Savings Account (HSA) or any other Fidelity account capable of holding Reportable Securities. |
| Other company 401(k) or 403(b) plan accounts or any IRA account maintained by the employee or members of their household need to be reported if such accounts have the capacity to invest in Reportable Securities7. |
| Fidelity accounts that hold Restricted Stock Units (RSUs) are not considered Reportable Accounts. The shares of Virtus common stock issued upon vesting of the RSUs become Reportable Securities. |
| Employees are required to promptly inform Compliance if Fidelity automatically opens a brokerage account when they become vested in Virtus RSUs, Virtus options or similar instruments. |
| An employees investments in Virtus open-end mutual funds that are made directly through the funds transfer agent will automatically be reported to Compliance. |
Only those broker-dealers providing Compliance with electronic feeds containing required information will automatically be approved. A listing of such broker-dealers is available on VirtusNet. Exceptions may be made in the sole discretion of Compliance.
Compliance reserves the right to require employees to close any Reportable Accounts with broker-dealers who do not provide required information on a reliable, timely or efficient basis.
Employees must promptly notify Compliance upon closing any Reportable Account.
3.4 | Initial and Annual Holdings Reports |
Employees must submit or confirm a report listing all personal holdings of Reportable Securities within ten (10) days of hire and annually thereafter. Information contained in the initial report must be current as of a date not more than forty-five (45) days prior to an employees hire date. Annual reports must be current as of December 31st of each year, submitted by the following January 31st, and shall include such information required by Compliance including a certification by the employee that they have read, understand and complied with the requirements of the Code. Reporting is normally initiated by Compliance and completed through the StarCompliance System or other formats designated by Compliance.
3.5 | Quarterly Transactions Reports |
Employees must complete a quarterly report of transactions in Reportable Securities within the timeframe specified by Compliance (generally fifteen (15) days after quarter-end). Reporting is generally completed through the StarCompliance System.
7 | Non-Virtus 401(k) plan and 403(b) plan accounts are not considered Reportable Accounts as long as they cannot hold shares of reportable securities or open-end mutual funds managed by a Virtus affiliate or managed by a non-affiliate as a subadviser to a Virtus affiliate. |
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3.6 | Duplicate Trade Confirmations and Personal Brokerage Account Statements |
Broker-dealers must promptly provide Compliance with the following:
| Duplicate copies of trade confirmations for Reportable Security transactions; and |
| Account statements for each Reportable Account at least quarterly. |
The above requirements may be satisfied by arrangements employees make through Compliance for broker-dealers to provide electronic feeds to the StarCompliance System or other designated location. In the event broker-dealers cannot provide electronic feeds, employees will be responsible to promptly upload necessary information into the StarCompliance System or other designated location.
4. | Trade Preclearance Requirements |
4.1 | Preclearance Requirements for non-Virtus Securities for Access and Advisory Persons |
Generally, subject to other provisions of this Code, Access and Advisory Persons may not purchase or sell a Reportable Security for their own account at times during which any client account has a buy or sell order pending for a security of the same issuer or when trading in the Reportable Security is otherwise restricted. Advisory Persons are subject to additional restrictions as described in Section 5. Blackout Rule for Advisory Persons.
| Access and Advisory Persons must obtain approval from Compliance prior to buying or selling Reportable Securities (preclearance) (unless the security type is indicated as not requiring preclearance further below). |
| Preclearance requests are generally initiated by submitting a request to Compliance through the StarCompliance System and awaiting a response for approval before placing an order for a Reportable Security. |
| When submitting requests for multiple transactions at one time, employees should carefully review the responses from Compliance, which will be provided separately for each request, as some may be approved but others may be denied. |
| Preclearance is also required for all investments in IPOs or private placements, so the terms of such offering can be reviewed and approved by Compliance in advance. |
| Unless otherwise indicated, preclearance approvals are valid until 5 pm (ET) of the next business day regardless of an employees specific geographic location, (with the exception of private placement transactions and limited offerings, which are determined on a case-by-case basis). An order, including limit orders, not executed within that time must be re-submitted for preclearance approval. |
Preclearance will be denied in the following circumstances:
| When the Firm(s) of which an employee is an Access or Advisory Person has a pending buy or sell order for any security of the same issuer for a client account; |
| When a security is restricted by any Firm(s) for which an employee is an Access or Advisory Person; or |
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| Other circumstances as may be determined by Compliance on a case-by-case basis consistent with the purposes of the Code. |
Where no other conflict is deemed present8, Compliance, in its discretion, may approve preclearance requests for Access Persons (but not Advisory Persons) up to the following de minimis transaction amounts9, irrespective of the Firms pending buy or sell order for the security for a client account:
| Up to (but not exceeding) 1,000 shares during a rolling 30-days (in the aggregate for all of an employees Reportable Accounts) in issuers with a market cap equivalent of $10 billion (USD) or more at the time of the transaction. |
| Up to (but not exceeding) 1,000 shares during a rolling 30-days (in the aggregate for all of an employees Reportable Accounts) in ETFs or ETNs that are not managed by a Virtus affiliate or managed by a non-affiliate as a subadviser to a Virtus affiliate.10 |
Access and Advisory Persons are not required to preclear transactions in the following types of securities:
| Direct obligations of the Government of the United States |
| Money market instruments such as commercial paper, repurchase agreements, bankers acceptances and bank certificates of deposit, and other high quality short-term debt instruments |
| Shares of money market funds |
| Cryptocurrency or digital assets that are not otherwise considered initial or limited coin offerings |
| Open-end mutual funds and unit investment trusts invested in open-end mutual funds |
| Purchases pursuant to an automatic investment or dividend reinvestment plan |
| Purchases upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent the rights were acquired from the issuer, and sales of such rights so acquired |
| Transactions under an employee stock purchase or incentive program unless otherwise restricted |
| Non-volitional transactions (such as stock splits, dividends, corporate actions, etc.) |
| Transactions in Managed Accounts, with the exception of IPOs and private placement transactions, provided that prior to the transaction Compliance has approved the classification of the account as a Managed Account |
8 | Trade preclearance requests in conflict with the Holding Period Rule (Section 7) and issuers listed on applicable restricted lists will generally be denied. |
9 | Transaction amounts means the number of shares sold plus the number of shares bought, i.e., sells do not offset buys. |
10 | A list of ETFs and ETNs managed by a Virtus affiliate or managed by a non-affiliate as a subadviser to a Virtus affiliate is available on VirtusNet. |
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4.2 | Preclearance requirement for Virtus Securities for Supervised, Access and Advisory Persons |
All Employees, including Supervised Persons, must preclear transactions in Virtus common shares (ticker: VRTS). Unless otherwise indicated, preclearance approvals are valid until 5 pm (ET) of the next business day, regardless of the employees specific geographic location. An order (including limit orders) not executed within that time must be re-submitted for preclearance approval. Once designated as an approved Managed Account by Compliance, transactions in VRTS common stock within such Managed Accounts are not subject to preclearance requirements; provided, however, Supervised Persons who are deemed Restricted Persons pursuant to the Virtus Insider Trading policy must continue to preclear any transactions in VRTS common stock, whether in an approved Managed Account or otherwise.
5. | Blackout Rule for Advisory Persons |
In addition to the preclearance requirements of Section 4. - Trade Preclearance Requirements, Advisory Persons may not transact in any Reportable Security on the same day as, or seven (7) calendar days before or after, a trade in securities of the same issuer that is also traded in any client account(s) associated with the Advisory Person. The Blackout Rule does not apply to transactions in Reportable Securities that are exempt from the preclearance requirements of Section 4.
6. | Other Restrictions for Access and Advisory Persons |
Access and Advisory Persons are at all times prohibited from engaging in any of the following:
| Purchasing or selling single-stock futures; |
| Purchasing or selling options on (referencing) a single name/issuer. Transactions and holdings of options referencing broad-based indices are allowed. A list of options referencing broad-based indices is available on VirtusNet and additions may be approved by Compliance; |
| Taking short positions other than on broad-based indices; |
| Purchasing or otherwise acquiring securities in an IPO, the substantial equivalent of an IPO, or in so-called initial coin (cryptocurrency) offerings, unless otherwise approved by Compliance; or |
| Using a derivative or synthetic instrument or using any other means to circumvent a restriction in the Code. |
In addition to the above, Advisory Persons are further prohibited from engaging in the following:
| Taking a short position on any index that is held long in a client account of a Firm the employee is an Advisory Person of; |
| Serving on the board of directors of any publicly traded company, absent the prior approval of an Executive Officer11 of Virtus and Compliance, based on a determination that such service will not conflict with the interests of any Firms or their clients; or |
| Purchasing a private placement or limited offering in client accounts where there exists a personal interest in the same issuer without preapproval from Compliance. |
11 | Includes the Virtus Executive Officers listed on www.virtus.com. |
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7. | Holding Period Rule for Access and Advisory Persons |
Unless an exception applies, Access and Advisory Persons must hold all Reportable Securities for no less than thirty (30) days, even if the purchase was exempt from preclearance (the Holding Period Rule). The Holding Period Rule prohibits the purchase or sale of options with an expiration date that is within thirty (30) days of the transaction date, as well as the sale of covered calls on securities held for less than thirty (30) days.
Compliance with the Holding Period Rule will be determined using a last in, first out methodology applied across all Reportable Accounts unless otherwise exempted, and Access and Advisory Persons may not sell any share(s) of a Reportable Security until a minimum of thirty (30) days have passed since the last purchase of the same security in any of their Reportable Accounts.
Exceptions: The Holding Period Rule does not apply to the following:
| Transactions in open-end mutual funds that are managed by any Firm (although market timing restrictions imposed by such funds must be observed); |
| Transactions in shares of VRTS received upon the vesting of RSU grants; |
| Exercising VRTS options and selling the shares, where such options have been provided as grants; |
| Transactions in approved Managed Accounts; and |
| Transactions in digital assets. |
8. | Duty to Report Violations |
Employees must promptly report any known violations of this Code to Compliance and should contact Compliance if they have reason to believe that a violation may have occurred or is reasonably likely to occur. Failure to report such matters is itself a violation of this Code. If the matter involves a member of Compliance, the report should be made directly to Virtus Global Chief Compliance Officer. In the event the reported event involves the Global Chief Compliance Officer, the report should be made directly to the Virtus Chief Legal Officer. Employees may also report such matters using the Virtus Whistleblower Hotline.12
9. | Sanctions for Violations of the Code |
In the event of a violation of the Code by any employee, Compliance may impose appropriate sanctions considering the following:
| The seriousness of the violation; |
| Whether the violation was willful or inadvertent; |
| Whether the violation was self-reported; |
| The employees job function and classification as a Supervised, Access or Advisory Person; |
| Prior violations of the Code; and/or |
| Any other factor(s) that Compliance may consider important under the specific circumstances. |
12 | Instructions for using the Virtus Whistleblower Hotline are available on VirtusNet. |
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Sanctions may include, but are not limited to, the following:
| Verbal and/or written admonishment; |
| Re-training on the requirements of the Code; |
| Notice to the persons manager and/or members of firm management; |
| Fines and/or reversal of trades, with the fines and disgorgement of profits (or losses avoided) donated to a charity designated by Compliance; |
| Partial or full restriction of personal trading for a period of time (which may be the remainder of the Persons employment); and/or |
| Suspension or termination of employment. |
10. | Waivers, Temporary Exemption from Code Application, and Extensions |
Compliance may, from time to time, grant waivers to provisions of this Code for equitable or other reasons. Compliance will maintain reasonable documentation of any such waivers. The waivers may be granted to individuals or classes of individuals with respect to particular transactions or classes of transactions and may apply to past as well as future transactions. No waiver will be granted if Compliance is aware or reasonably believes that doing so will result in a violation of applicable federal securities laws or the principles of this Code.
Employees on approved leaves of absence (e.g., leaves for medical, active military service, bereavement, FMLA, etc.) may be temporarily exempt from the pre-clearance and reporting provisions of the Code, provided that the following requirements are met:
| They do not participate in, obtain information with respect to, or make recommendations as to, the purchase or sale of securities on behalf of any client; |
| They do not have access to information regarding the day-to-day investment activities of the Firm including but not limited to IT systems and Firm email; |
| They do not devote significant time to the activities of the Firm; and |
| Compliance approves such temporary exemption in writing. |
Employees must complete quarterly transaction reports promptly upon their return to work after an approved leave of absence.
In addition to the above, Compliance may grant extensions to quarterly reporting deadlines in cases of hardship, illness, system unavailability or other circumstances provided that the timeframe, as extended, may not exceed thirty (30) days after quarter-end. Any such extension shall not be deemed a waiver of the Codes provisions.
11. | Responsibilities of Compliance |
In addition to those responsibilities described in the foregoing, Compliance is responsible for the following:
| Determining which employees are classified as Supervised, Access or Advisory Persons and notifying employees of their classification. In doing so, Compliance may determine |
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whether any temporary employees, consultants, interns or the equivalent should be treated as employees under this Code and, if so, whether they should be classified as Supervised, Access or Advisory Persons. |
| Maintaining records regarding the Code and its administration as required by Rule 204-2 of the Advisers Act and Rule 31a-2 of the Investment Company Act. Such records will be maintained in a readily accessible place for at least five (5) years, with the first two (2) years in a Firm office. Required records include the following for the past five (5) years: |
| A copy of each Code in effect; |
| Records of any violations of the Code and action taken in response thereto; |
| Records of employees written acknowledgements of the Code; |
| A list of all employees who have been required to make reports pursuant to the Code; |
| Records of decisions to approve transactions in private placements and the basis for such approvals; and |
| Copies of all reports made by the Chief Compliance Officer of each Firm and by the Chief Compliance Officer of the Virtus Funds regarding the administration of the Code as required by the Advisers Act or the Investment Company Act. |
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Appendix
Certain Firms may, from time to time, attach to this Code an Appendix describing any unique provisions the Firm has made to provide additional requirements or modify requirements set forth by this Code. Modifications appended will not be considered an amendment to any other Firms Code, other than the one to which the Appendix specifically applies.
| Kayne Anderson Rudnick Investment Management, LLC |
Section 4.1 Preclearance Requirements for non-Virtus Securities (applies to Access and Advisory Persons) is supplemented with the additional requirement that Access and Advisory Persons may not purchase or sell a Reportable Security for their own account at times in which any investment team is considering initiating a buy or sell program for a security of the same issuer.
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Schedule A
On April 1, 2023, the following entities adopted this Code of Ethics:
| Ceredex Value Advisors LLC |
| Duff & Phelps Investment Management Co. |
| Virtus Fixed Income Advisers, LLC divisions: |
| Newfleet Asset Management |
| Seix Investment Advisors |
| Stone Harbor Investment Partners |
| Kayne Anderson Rudnick Investment Management, LLC |
| NFJ Investment Group, LLC |
| Seix CLO Management LLC |
| Silvant Capital Management LLC |
| Virtus Alternative Investment Advisers, Inc. |
| Virtus ETF Advisers LLC |
| Virtus Fund Advisers, LLC |
| Virtus Investment Advisers, Inc. |
| VP Distributors, LLC |
| Westchester Capital Management, LLC |
| Westchester Capital Partners, LLC |
This Schedule will be updated from time to time without being considered an amendment to the Code of Ethics.
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Schedule B
This Schedule last updated: April 1, 2023
Digital Assets Exempted from the Code of Ethics Reporting Requirements
The following digital assets are specifically exempted from Code reporting requirements:
| Bitcoin currency code BTC and XBT |
This Schedule will be updated from time to time without being considered an amendment to the Code of Ethics.
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EX-FILING FEES
Calculation of Filing Fee Tables
FORM N-2
(Form Type)
VIRTUS STONE HARBOR EMERGING MARKETS INCOME FUND
(Exact Name of Registrant as Specified in its Charter)
Table 1: Newly Registered Securities
Security Type |
Security Class Title |
Fee Rule |
Amount Registered |
Proposed Maximum Offering Price Per Unit |
Maximum Aggregate Offering Price(1) |
Fee Rate | Amount of Registration Fee(1) |
Carry Forward Form Type |
Carry Forward File Number |
Carry Forward Initial effective date |
Filing Fee In | |||||||||||||
Newly Registered Securities | ||||||||||||||||||||||||
Fees to Be Paid |
Equity |
Common shares of beneficial interest, $0.001 par value per share |
Rule 457(o) | $1,000,000 |
0.00014760 |
$147.60 | ||||||||||||||||||
Fees Previously Paid |
||||||||||||||||||||||||
Carry Forward Securities | ||||||||||||||||||||||||
Total Offering Amounts | $1,000,000 | $147.60 | ||||||||||||||||||||||
Total Fees Previously Paid | ||||||||||||||||||||||||
Total Fee Offsets | ||||||||||||||||||||||||
Net Fee Due | $147.60 |
(1) | Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, solely for the purpose of determining the registration fee. |
POWER OF ATTORNEY
I, the undersigned member of the Board of Trustees of Virtus Stone Harbor Emerging Markets Income Fund (the Fund), hereby constitute and appoint George R. Aylward, Kathryn Santoro, Jennifer Fromm, and Daphne Chisolm, or any of them, as my true and lawful attorneys and agents with full power to sign for me in the capacity indicated below, on any or all Registration Statements, amendments thereto, including without limitation a Registration Statement on Form N-2, and such other filings as may be appropriate, with the Securities and Exchange Commission under the Securities Act of 1933 and/or the Investment Company Act of 1940 relating to the rights offering of the Fund and hereby ratify and confirm my signature as it may be signed by said attorneys and agents.
I hereby declare that a photostatic, xerographic or other similar copy of this original instrument shall be as effective as the original.
IN WITNESS WHEREOF, this 1st day of August, 2024.
/s/ George R. Aylward |
/s/ Donald C. Burke | |||
George R. Aylward, Trustee | Donald C. Burke, Trustee | |||
/s/ Sarah E. Cogan |
/s/ Deborah A. DeCotis | |||
Sarah E. Cogan, Trustee | Deborah A. DeCotis, Trustee | |||
/s/ F. Ford Drummond |
/s/ Sidney E. Harris | |||
F. Ford Drummond, Trustee | Sidney E. Harris, Trustee | |||
/s/ John R. Mallin |
/s/ Connie D. McDaniel | |||
John R. Mallin, Trustee | Connie D. McDaniel, Trustee | |||
/s/ Philip McLoughlin |
/s/ Geraldine M. McNamara | |||
Philip McLoughlin, Trustee | Geraldine M. McNamara, Trustee | |||
/s/ R. Keith Walton |
/s/ Brian T. Zino | |||
R. Keith Walton, Trustee | Brian T. Zino, Trustee |
Digital or electronic signatures are permitted, and all signatures need not appear on the same copy of this Power of Attorney.
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