Form N-CSRS - Certified Shareholder Report, Semi-Annual

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

Investment Company Act file number 811-05620 

      Virtus Total Return Fund Inc.   

(Exact name of registrant as specified in charter)

101 Munson Street

      Greenfield, MA 01301-9683      

(Address of principal executive offices) (Zip 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)

Registrant’s telephone number, including area code: [phone]

Date of fiscal year end: November 30

Date of reporting period: May 31, 2024

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

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Item 1. Reports to Stockholders.

(a) The Report to Shareholders is attached herewith.

 

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SEMIANNUAL REPORT

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May 31, 2024

Virtus Global Multi-Sector Income Fund

Virtus Stone Harbor Emerging Markets Income Fund

Virtus Total Return Fund Inc.

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Not FDIC Insured • No Bank Guarantee • May Lose Value

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FUND DISTRIBUTIONS AND MANAGED DISTRIBUTION PLAN

The Board of Directors (the “Board,” or the “Directors”) of Virtus Total Return Fund Inc. (the “Fund”) has adopted a Managed Distribution Plan (the “Plan”) which provides for the Fund to make a monthly distribution at the rate of $0.05 per share. Under the terms of the Plan, the Fund seeks to maintain a consistent distribution level that may be paid in part or in full from net investment income, realized capital gains, and a return of capital, or a combination thereof.

If the Fund estimates that it has distributed more than its income and capital gains in a particular period, a portion of your distribution may be a return of capital. A return of capital may occur, for example, when some or all of the money that you invested in the Fund is paid back to you. A return of capital distribution does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income.”

You should not draw any conclusions about the Fund’s investment performance from the amount of the Fund’s distributions or from the terms of the Fund’s Plan.

The amounts and sources of distributions reported in the Fund’s notices issued pursuant to Section 19(a) of the Investment Company Act of 1940 are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund’s investment results during its fiscal year and may be subject to changes based on tax regulations. The Fund will send shareholders a Form 1099-DIV for the calendar year that will tell you how to report distributions for federal income tax purposes.

The Board may amend, suspend or terminate the Plan at any time, without prior notice to shareholders, if it deems such action to be in the best interest of the Fund and its shareholders.

Information on the Fund is available through the closed-end fund section on the web at
www.Virtus.com. Section 19(a) notices are posted on the website at:

https://www.virtus.com/ZTR

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Table of Contents

Message to Shareholders	1
Manager’s Discussion of Fund Performance:
Virtus Global Multi-Sector Income Fund (“Global Multi-Sector Income Fund”)	2
Virtus Stone Harbor Emerging Markets Income Fund (“Stone Harbor Emerging Markets Income Fund”)	5
Virtus Total Return Fund Inc. (“Total Return Fund Inc.”)	9
Portfolio Holdings Summary Weightings	15
Key Investment Terms	17
Schedules of Investments
Global Multi-Sector Income Fund	21
Stone Harbor Emerging Markets Income Fund	41
Total Return Fund Inc.	51
Statements of Assets and Liabilities	75
Statements of Operations	77
Statements of Changes in Net Assets	79
Statements of Cash Flows	82
Financial Highlights	86
Notes to Financial Statements	90
Results of Annual Meeting of Shareholders	114

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Table of Contents

MESSAGE TO SHAREHOLDERS

To Virtus Closed-End Fund Shareholders:

I am pleased to present this semiannual report, which reviews the performance of your Fund for the six months ended May 31, 2024.

As the outlook for inflation and interest rates improved, financial markets showed strength in late 2023 and early 2024. Volatility increased in April 2024 as inflation appeared to persist, pushing back the timing of a potential interest rate cut by the Federal Reserve (“Fed”). Investor optimism about the possibilities for artificial intelligence helped markets move higher for the full six-month period.

Domestic and international equity indexes posted strong returns for the six months ended May 31, 2024. U.S. large-capitalization stocks returned 16.35%, as measured by the S&P 500^® Index, while small-cap stocks returned 15.23%, as measured by the Russell 2000^® Index. Within international equities, developed markets, as measured by the MSCI EAFE^® Index (net), returned 12.76%, while emerging markets, as measured by the MSCI Emerging Markets Index (net), were up 7.45%.

In fixed income markets, the yield on the 10-year Treasury rose to 4.51% on May 31, 2024, from 4.37% on November 30, 2023. The broader U.S. fixed income market, as represented by the Bloomberg U.S. Aggregate Bond Index, was up 2.12% for the six-month period, while non-investment grade bonds, as measured by the Bloomberg U.S. Corporate High Yield Bond Index, were up 5.41%.

For the six-month period, the three sectors of emerging markets (“EM”) debt returned 6.53% for hard currency sovereign debt, as represented by the JPMorgan EMBI Global Diversified Index, 0.46% for local currency sovereign debt, as represented by the JPMorgan GBI-EM Global Diversified Index, and 6.05% for corporate debt, as represented by the JPMorgan CEMBI Broad Diversified Index.

Please call our shareholder service team at 1-866-270-7788 if you have questions about your Fund or require assistance. We appreciate your business and remain committed to your long-term financial success.

Sincerely,

George R. Aylward
President, Chief Executive Officer, and Trustee/Director
Virtus Closed-End Funds
July 2024

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Refer to the Manager’s Discussion section for your Fund’s performance. Performance data quoted represents past results. Past performance is no guarantee of future results, and current performance may be higher or lower than the performance shown above. Investing involves risk, including the risk of loss of principal invested.

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Table of Contents

Global Multi-Sector Income Fund

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited)

May 31, 2024

About the Fund:

Virtus Global Multi-Sector Income Fund’s (NYSE: VGI) (the “Fund”) investment objective is to maximize current income while preserving capital. The Fund seeks to achieve its investment objective by applying extensive credit research to capitalize on opportunities across undervalued areas of the global bond markets. There is no guarantee that the Fund will achieve its investment objective.

The use of leverage allows the Fund to borrow at short-term rates with the expectation to invest at higher yields on its investments. As of May 31, 2024, the Fund’s leverage consisted of $43 million of borrowings made pursuant to margin financing, which represented approximately 31% of the Fund’s total assets.

Manager Comments – Newfleet Asset Management (“Newfleet”)

Newfleet’s multi-sector fixed income strategies team manages the Fund, leveraging the knowledge and skills of investment professionals with expertise in every sector of the bond market, including evolving, specialized, and out-of-favor sectors. The team employs active sector rotation and disciplined risk management for portfolio construction, avoiding interest rate bets and remaining duration neutral. The following commentary is provided by the respective portfolio team at Newfleet and covers the Fund’s portfolio for the six months ended May 31, 2024.

How did the markets perform during the six months ended May 31, 2024?

The six-month period ended May 31, 2024, was a period of U.S. exceptionalism in global economic terms. U.S. economic growth remained resilient, labor markets remained sound, and inflation remained above the central bank target. Considering these factors, the U.S. stood out among Group of Seven (“G7”) counterparts as of the end of the reporting period, a position that was reflected in current monetary policy at the end of the reporting period. Even with this backdrop, however, the economic data showed a high degree of variability during the period, which resulted in moments of financial market volatility.

While the Federal Reserve’s (“Fed”) monetary policy remained on hold during the period, other developed market central banks took the first steps to ease monetary policy since the global tightening cycle that characterized the post-Covid economic environment. The European Central Bank (“ECB”), as well as central banks in Switzerland, Sweden, and Canada, all began to ease policy during the period.

Few positive developments occurred in the parts of the world that remained plagued by conflict, and though the financial markets largely discounted day-to-day developments, investors continued to monitor for any further escalations that could disrupt the markets. Political activity accelerated during the period as India, Mexico, South Africa, the European Union, the UK, and the US prepared for important elections. Elections that were held during the period had a common theme of surprise outcomes that led to local financial market dislocations. The common theme during the period was one of surprise outcomes that led to local financial market dislocations.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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Global Multi-Sector Income Fund

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)

May 31, 2024

Most risk asset markets rejoiced at the Goldilocks environment of slowing inflation, low unemployment, resilient earnings, and economic growth, all of which outperformed expectations. However, markets remained highly sensitive to new data releases, and results were varied during the period. Fixed income sector performance was also variable, with interest rates higher during the period. Spread sectors, or investments other than risk-free government debt, outperformed U.S. Treasuries and spreads tightened. Spread refers to the additional yield over the yield of a risk-free government bond. Within spread sectors, risk asset classes outperformed. With the exception of the very front end, the U.S. Treasury yield curve shifted higher and overall the curve flattened. The 2-year Treasury yield increased by 0.19%, the 5-year Treasury yield increased by 0.24%, the 10-year Treasury yield increased by 0.17%, and the 30-year Treasury yield moved 0.15% higher.

What factors affected the Fund’s performance during the six-month period?

For the six months ended May 31, 2024, the Fund’s net asset value (NAV) returned 6.49%, while its market price returned 7.94%. The Bloomberg Global Aggregate Bond Index, which serves as the Fund’s benchmark, returned 0.72%.

The Fund’s underweight to U.S. Treasury securities had a positive impact on relative performance for the six-month period.

Allocation to and selection within investment grade corporate bonds and corporate high yield bonds had a positive impact on relative performance during the period.

The overweight to the emerging markets high yield sector had a negative impact during the period, however the overall effect was positive with strong issue selection relative to the benchmark.

Issue selection within bank loans and the Fund’s underweight to non-U.S. dollar-denominated debt were detractors during the period.

Level distribution practice 

The Fund has a practice of seeking to maintain a specified level of monthly distributions to shareholders, which may be changed at any time. As a result of this practice, the Fund may pay distributions in excess of the Fund’s taxable net investment income and net realized gains. During the most recent fiscal period, the practice did not have a material impact on the Fund’s investment strategy.

The preceding information is the opinion of portfolio management only through the end of the period of the report as stated on the cover. Any such opinions are subject to change at any time based upon market conditions and should not be relied upon as investment advice.

The Fund’s portfolio holdings are subject to change and may not be representative of the portfolio managers’ current or future investment decisions. The mention of individual securities held by the Fund is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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Table of Contents

Global Multi-Sector Income Fund

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)

May 31, 2024

Risk Considerations

Credit & Interest: Debt instruments are subject to various risks, including credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt instruments may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities.

Management: The Fund is subject to management risk because it is an actively managed investment portfolio. Judgments by the Fund’s subadviser about the attractiveness and potential appreciation of an investment may prove to be inaccurate and may not produce the desired results.

Foreign & Emerging Markets: Investing in foreign securities, especially in emerging markets, subjects the Fund to additional risks such as increased volatility, currency fluctuations, less liquidity, and political, regulatory, economic, and market risk.

Sanctions: The imposition of sanctions and other similar measures could cause a decline in the value and/or liquidity of securities issued by or tied to the sanctioned country and increase market volatility and disruption in a sanctioned country and throughout the world.  Sanctions and other similar measures could limit or prevent the Fund from buying and selling securities (in the sanctioned country and other markets), significantly delay or prevent the settlement of transactions, and negatively impact the Fund’s liquidity and performance.

High Yield Fixed Income Securities: There is a greater risk of issuer default, less liquidity, and increased price volatility related to high yield securities than investment grade securities.

Asset-Backed and Mortgage-Backed Securities: Changes in interest rates can cause both extension and prepayment risks for asset- and mortgage-backed securities. These securities are also subject to risks associated with the non-repayment of underlying collateral, including losses to the Fund.

Leveraged Loans: Leveraged loans may be unsecured or not fully collateralized, may be subject to restrictions on resale, may be less liquid and may trade infrequently on the secondary market. Leveraged loans settle on a delayed basis; thus, sale proceeds may not be available to meet redemptions for a substantial period of time after the sale of the loan.

Leverage: When the Fund leverages it portfolio, the Fund may be less liquid and/or may liquidate positions at an unfavorable time, and the value of the Fund’s shares will be more volatile and sensitive to market movements.

Market Volatility: The value of the securities in the Fund may go up or down in response to the prospects of individual companies and/or general economic conditions. Price changes may be short- or long-term. Local, regional or global events such as war or military conflict (e.g., Russia’s invasion of Ukraine), acts of terrorism, the spread of infectious illness (e.g., COVID-19 pandemic) or other public health issues, recessions, or other events could have a significant impact on the Fund and its investments, including hampering the ability of the Fund’s manager(s) to invest the Fund’s assets as intended.

Closed-End Funds: Closed-end funds may trade at a discount or premium from their net asset values, which may affect whether an investor will realize gains or losses. They may also employ leverage, which may increase volatility.

No Guarantee: There is no guarantee that the Fund will meet its objective.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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Table of Contents

STONE HARBOR EMERGING MARKETS INCOME FUND

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited)

May 31, 2024

About the Fund:

Virtus Stone Harbor Emerging Markets Income Fund’s (NYSE: EDF) (the “Fund”) investment objective is to maximize total return, which consists of income 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. There is no guarantee that the Fund will achieve its investment objective.

Effective December 15, 2023, the Virtus Stone Harbor Emerging Markets Total Income Fund was reorganized into Virtus Stone Harbor Emerging Markets Income Fund. The two funds had substantially similar investment objectives and strategies, and the same fund management. The merger resulted in a higher combined level of assets that may offer reduced costs, economies of scale, and increased efficiencies. 

The use of leverage currently enables the Fund to borrow at short-term rates with the expectation of investing at higher yields on its investments. During the period, the Fund utilized short-term reverse repurchase agreements through which it borrowed money by selling securities under the obligation to repurchase them at a later date at a fixed price. The Fund’s management team adjusted borrowing levels to reflect the team’s outlook on emerging markets risk, increasing borrowings when it felt opportunities had improved and reducing borrowings when, in the team’s judgment, macroeconomic risk had risen. At May 31, 2024, the Fund had borrowings of approximately $38 million, which represented about 22% of the Fund’s managed assets.

Manager Comments – Stone Harbor Investment Partners (“Stone Harbor”)

Stone Harbor is a global credit specialist with expertise in emerging and developed markets debt.  With three decades of informed experience allocating risk in complex areas of the fixed income markets, Stone Harbor manages global credit portfolios for institutional clients around the world. The following commentary is provided by the respective portfolio team at Stone Harbor and covers the Fund’s portfolio for the six months ended May 31, 2024.

How did the markets perform during the Fund’s six months ended May 31, 2024?

Central bank policy response to inflation data in developed and emerging countries remained a key focus for global credit markets during the six-month period ended May 31, 2024. Upside surprises to U.S. economic growth and inflation readings led to upward pressure on investment grade bond yields, as market participants scaled back expectations for the Federal Reserve (the Fed) to ease monetary policy over the balance of 2024.

However, despite higher investment grade bond yields, U.S. dollar-denominated debt returns in emerging markets (“EM”) remained positive, largely due to a continued compression in the risk premium, that is, the extra yield investors demand to hold the bond over U.S. Treasuries, for high yield EM sovereign and corporate issuers. EM fundamentals were supported by continued disinflation, together with ongoing monetary policy easing, which in turn supported an improvement in growth prospects. In terms of country-specific developments, several countries – including Argentina, Ecuador, and Egypt – reengaged with the International Monetary Fund (“IMF”) and made significant progress in stabilizing their economies. The period was also marked by accelerated political activity in India, Indonesia, Mexico, Panama, and South Africa.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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STONE HARBOR EMERGING MARKETS INCOME FUND

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)

May 31, 2024

Against this backdrop, the yield of the 10-year U.S. Treasury closed at 4.51% at the end of the reporting period after reaching a period high of 4.70% in late April amid uncertainty about U.S. interest rate policy. Total returns of indexes for emerging markets hard currency sovereign and corporate debt were 6.53% and 6.05%, as represented by the JPMorgan EMBI Global Diversified Index and the JPMorgan CEMBI Broad Diversified Index, respectively, for the six-month period. The average yield of local currency sovereign debt, as represented by the JPMorgan GBI-EM Global Diversified Index, climbed to 6.61%. Local currency sovereign debt underperformed, posting a total return of 0.46%, driven by foreign currency depreciation.

What factors affected the Fund’s performance during six-month period?

The Fund’s total return on net asset value (“NAV”) for the six months ended May 31, 2024 was 18.93%. For the same period, the Fund’s composite benchmark, which is composed of the three sectors of emerging markets debt, returned 4.32%. A key driver of the Fund’s performance was positive returns from country selection in hard currency sovereign debt.

At the country level, the largest contributors to performance were U.S. dollar-denominated sovereign debt in Argentina, Ecuador, and Egypt. U.S. dollar-denominated corporate debt in Mexico, Indonesia, and Colombia also enhanced performance. Other contributors to performance included local currency debt exposure in Mexico, Colombia, and Kazakhstan.

Among the top detractors from the Fund’s performance were allocations to U.S. dollar-denominated sovereign bonds in Ukraine, Ethiopia, and Oman. Local currency debt exposures in Brazil and Indonesia also detracted from performance.

The Fund uses various derivative instruments to implement its strategies. These derivatives are utilized to manage the Fund’s credit risk, interest rate risk, and foreign exchange risk, and to efficiently gain certain investment exposures. These derivative positions may increase or decrease the Fund’s exposure to these risks. For the reporting period, derivatives contributed 4.07% to Fund performance.

Level distribution practice

The Fund has a practice of seeking to maintain a specified level of monthly distributions to shareholders, which may be changed at any time. As a result of this practice, the Fund may pay distributions in excess of the Fund’s taxable net investment income and net realized gains. During the most recent fiscal period, the practice did not have a material impact on the Fund’s investment strategy.

The preceding information is the opinion of portfolio management only through the end of the period of the report as stated on the cover. Any such opinions are subject to change at any time based upon market conditions and should not be relied upon as investment advice.

The Fund’s portfolio holdings are subject to change and may not be representative of the portfolio managers’ current or future investment decisions. The mention of individual securities held by the Fund is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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Table of Contents

STONE HARBOR EMERGING MARKETS INCOME FUND

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)

May 31, 2024

Risk Considerations

Non-Diversified: The Fund is not diversified and may be more susceptible to factors negatively impacting its holdings to the extent the Fund invests more of its assets in the securities of fewer issuers than would a diversified portfolio.

Management: The Fund is subject to management risk because it is an actively managed investment portfolio.  Judgments by the Fund’s subadviser about the attractiveness and potential appreciation of an investment may prove to be inaccurate and may not produce the desired results.

Market Volatility: The value of the securities in the Fund may go up or down in response to the prospects of individual companies and/or general economic conditions. Price changes may be short- or long-term. Local, regional or global events such as war or military conflict (e.g.,Russia’s invasion of Ukraine), acts of terrorism, the spread of infectious illness (e.g., COVID-19 pandemic) or other public health issue, recessions, or other events could have a significant impact on the Fund and its investments, including hampering the ability of the Fund’s manager(s) to invest the Fund’s assets as intended.

Foreign Investing: Investing in foreign securities subjects the Fund to additional risks such as increased volatility; currency fluctuations; less liquidity; less publicly available information about the foreign investment; and political, regulatory, economic, and market risk.

Emerging Markets Investing: Emerging markets securities may be more volatile, or more greatly affected by negative conditions, than those of their counterparts in more established foreign markets. Such securities may also be subject to Sanctions Risk.

Sanctions: The imposition of sanctions and other similar measures could cause a decline in the value and/or liquidity of securities issued by or tied to the sanctioned country and increase market volatility and disruption in the sanctioned country and throughout the world. Sanctions and other similar measures could limit or prevent the Fund from buying and selling securities (in the sanctioned country and other markets), significantly delay or prevent the settlement of transactions, and negatively impact the Fund’s liquidity and performance.

Currency Rate: Fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect the value of the Fund’s shares.

Sovereign Debt Obligations: Certain emerging market countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment.  The issuer or governmental authority that controls the repayment of an emerging country’s debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt.

Credit & Interest: Debt instruments are subject to various risks, including credit and interest rate risk.  The issuer of a debt security may fail to make interest and/or principal payments.  Values of debt instruments may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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Table of Contents

STONE HARBOR EMERGING MARKETS INCOME FUND

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)

May 31, 2024

Derivatives: Derivatives may include, among other things, futures, options, forwards and swap agreements and may be used in order to hedge portfolio risks, create leverage, or attempt to increase returns.  Investments in derivatives may result in increased volatility and the Fund may incur a loss greater than its principal investment.

Reverse Repurchase Agreements: Reverse repurchase agreements subject the Fund to Leverage Risk and Counterparty Risk, and also to the risk that the market value of the securities that the Fund is obligated to repurchase under the agreements may decline below the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the agreement may be restricted pending determination by the other party, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities.

Counterparty: There is risk that a party upon whom the Fund relies to complete a transaction will default.

High Yield Fixed Income Securities: There is a greater risk of issuer default, less liquidity, and increased price volatility related to high yield securities than investment grade securities.

Leverage: When the Fund leverages its portfolio, the Fund may be less liquid and/or may liquidate positions at an unfavorable time, and the value of the Fund’s shares will be more volatile and sensitive to market movements.

Closed-End Funds: Closed-end funds may trade at a discount or premium from their net asset values, which may affect whether an investor will realize gains or losses.  They may also employ leverage, which may increase volatility.

No Guarantee: There is no guarantee that the Fund will meet its objective.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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TOTAL RETURN FUND INC.

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited)

May 31, 2024

About The Fund

Virtus Total Return Fund Inc. (NYSE: ZTR) (the “Fund”) has an investment objective of capital appreciation, with current income as a secondary objective. The Fund seeks to meet its objectives through a balance of equity and fixed income investments. There is no guarantee that the Fund will achieve its investment objectives.

The use of leverage currently enables the Fund to borrow at short-term rates with the expectation of investing at higher yields on its investments. As of May 31, 2024, the Fund’s leverage consisted of $168 million of borrowings made pursuant to margin financing, which represented approximately 30% of the Fund’s total assets.

For the fiscal period ended May 31, 2024, the Fund’s NAV returned 7.00%, including $0.30 in reinvested distributions, and its market price returned 7.02%.  For the same period, the Fund’s composite benchmark, which consists of 60% FTSE Developed Core Infrastructure 50/50 Index (net) (representing equities) and 40% Bloomberg U.S. Aggregate Bond Index (representing fixed income) returned 5.45%.

Manager Comments – Duff & Phelps Investment Management Co. (“DPIM”)

The equity portion of the Fund is invested globally in owners/operators of infrastructure in the communications, utility, energy, and transportation industries (also referred to as “essential services”). DPIM manages the equity portion of the Fund’s portfolio, utilizing its global infrastructure strategy that leverages the company’s in-depth fundamental research expertise in income-producing securities. The following commentary is provided by the portfolio management team at DPIM and covers the Fund’s equity portion for the fiscal six months ended May 31, 2024.

How did the equity markets perform during the six months ended May 31, 2024?

Global developed market equities rose 14.89%, as measured by the MSCI World Index (net), for the six months ended May 31, 2024. The strong gains were driven by a resilient U.S. economy and ongoing enthusiasm for artificial intelligence (“AI”). Stubbornly high inflation readings in the U.S. were a modest counterweight, reducing expectations for the Fed to cut interest rates, as a “higher-for-longer” narrative persisted. The ECB remained confident about disinflationary trends and signaled a June rate cut.

The benchmark for the equity portion of the Fund, the FTSE Developed Core Infrastructure 50/50 Index (net), rose 7.66% for the period, but significantly trailed the broader market. Energy infrastructure was the best-performing sector during the period. Global economies supported investors’ expectations for sustained demand growth for oil and gas, implying continued volume growth for the midstream energy companies. Companies with exposure to natural gas benefited from a constructive demand environment.

Utility stocks traded higher as a result of solid earnings results and news of increasing power demand driven by the computational and storage needs of data centers for the expanding uses of AI. Transportation stocks posted positive returns, although performance varied by subsector. European airport and toll road stocks performed well as traffic volumes remained solid. North American railroads were mixed, with some rails trading lower due to softer economic news. The communications sector declined and was the worst performer for the period. Higher interest rates were the culprit as tower stocks across Europe and the U.S. traded lower.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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TOTAL RETURN FUND INC.

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)

May 31, 2024

What factors affected the performance of the Fund’s equity portfolio during the six-month period?

For the six months ended May 31, 2024, the equity portion of the Fund, including the impact of leverage employed by the Fund, returned 8.48% (before fees and expenses), while the FTSE Developed Core Infrastructure 50/50 Index (net), which serves as the portfolio’s benchmark, returned 7.66%.

The equity portion of the Fund outperformed its equity benchmark for the six-month period. Overall, sector allocation and stock selection were both negative, but the impact of leverage was positive. Sector allocation was hurt by overweight positions in communications and transportation, as well as an underweight in utilities. An overweight position in energy infrastructure had a negligible allocation impact. Stock selection was positive for transportation and communications, but was more than offset by negative selection in utilities and energy.

At the security level, the largest contributors to performance were NextEra Energy, Aena, and Targa Resources. After a period of underperformance, NextEra rebounded due to strong earnings guidance, a robust renewables pipeline, and upside from growth in data center demand. Aena, the airport operator in Spain, continued to be supported by strong passenger traffic across Europe. Outperformance in Targa was due to management’s positive multi-year outlook, continued strong execution, and investor expectations of robust dividend growth and share repurchases.

The largest detractors from performance in the portfolio were Cheniere Energy, Crown Castle, and American Tower. Cheniere Energy is the leading producer and exporter of liquefied natural gas in the U.S. A warmer winter pressured global gas prices as inventories remained elevated above long-term averages. Although 2024 earnings guidance fell short of consensus expectations, we believe Cheniere enjoys a heavily contracted business model with visible future growth and therefore retained the security in the portfolio as of the end of the period.

Both Crown Castle and American Tower suffered from the unfavorable macroeconomic environment for wireless towers, particularly higher interest rates. While the pace of carrier upgrades slowed after the initial 5G deployment, the telecom industry is in the midst of a multi-year investment cycle to deploy new spectrum and accommodate wireless data growth. When interest rate headwinds begin to dissipate, we believe the attractive risk-reward profile for tower stocks supported by a solid business model and strong long-term fundamentals will become more apparent. We therefore retained these securities in the portfolio as of the end of the period.

Manager Comments – Newfleet

Newfleet manages the Fund’s fixed income portfolio, utilizing its multi-sector core plus strategy. The following commentary is provided by the portfolio management team at Newfleet, and it covers the Fund’s fixed income portfolio for the period ended May 31, 2024.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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TOTAL RETURN FUND INC.

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)

May 31, 2024

How did the fixed income markets perform during the six months ended May 31, 2024?

The six-month period ended May 31, 2024, was a period of U.S. exceptionalism in global terms. U.S. economic growth remained resilient, labor markets remained sound, and inflation remained above the central bank target. Considering these factors, the U.S. stood out among G7 counterparts as of the end of the reporting period, a position that was reflected in current monetary policy at the end of the reporting period. Even with this backdrop, however, the economic data showed a high degree of variability during the period, which resulted in moments of financial market volatility.

While the Fed remained on hold during the period, other developed market central banks took the first steps to ease monetary policy since the global tightening cycle that characterized the post-Covid economic environment. The ECB, as well as central banks in Switzerland, Sweden, and Canada, all began to ease policy during the period.

Few positive developments occurred in the parts of the world that remained plagued by conflict, and though the financial markets largely discounted day-to-day developments, investors continued to monitor for any further escalations that could disrupt the markets. Political activity accelerated as important elections were held in India, Mexico, South Africa, and the European Union, and are planned for the U.K. and the U.S. The common theme during the period was one of surprise outcomes that led to local financial market dislocations.

Most risk asset markets rejoiced at the Goldilocks environment of slowing inflation, low unemployment, resilient earnings, and economic growth, all of which outperformed expectations. However, markets remained highly sensitive to new data releases, and results were varied during the period. Fixed income sector performance was also variable, with interest rates higher during the period. Spread sectors, or investments other than risk-free government debt, outperformed U.S. Treasuries and spreads tightened. Spread refers to the additional yield over the yield of a risk-free government bond. Within spread sectors, risk asset classes outperformed. With the exception of the very front end, the U.S. Treasury yield curve shifted higher and overall the curve flattened. The 2-year Treasury yield increased by 0.19%, the 5-year Treasury yield increased by 0.24%, the 10-year Treasury yield increased by 0.17%, and the 30-year Treasury yield moved 0.15% higher.

What factors affected the performance of the Fund’s fixed income portfolio during the six-month period?

For the six months ended May 31, 2024, the fixed income portion of the Fund, including the impact of leverage employed by the Fund, returned 7.38% (before fees and expenses), while the Bloomberg U.S. Aggregate Bond Index, which serves as the portfolio’s benchmark, returned 2.12%.

The portfolio’s allocation to and selection within corporate high yield bonds had a positive impact on relative performance. Issue selection within investment grade corporate bonds and the Fund’s exposure to high yield bank loans and emerging markets high yield also positively impacted relative performance for the six-month period.

The portfolio’s underweight to U.S. Treasury securities had a positive impact during the period.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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TOTAL RETURN FUND INC.

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)

May 31, 2024

The portfolio’s underweight to investment grade corporates, as well as issue selection within loans and emerging markets high yield, were detractors during the period.

Managed Distribution Plan

As discussed on the inside cover of this Report, the Fund currently operates under a Managed Distribution Plan (the “Plan”) pursuant to which the Fund makes a monthly distribution at a rate of $0.05 per share.  As a result of execution on the Plan, the Fund may pay distributions in excess of the Fund’s taxable net investment income and net realized gains.  During the most recent fiscal period, the Plan did not have a material impact on the Fund’s investment strategy. 

The preceding information is the opinion of portfolio management only through the end of the period of the report as stated on the cover. Any such opinions are subject to change at any time based upon market conditions and should not be relied upon as investment advice.

The Fund’s portfolio holdings are subject to change and may not be representative of the portfolio managers’ current or future investment decisions. The mention of individual securities held by the Fund is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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TOTAL RETURN FUND INC.

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)

May 31, 2024

Risk Considerations

Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk.

Management: The Fund is subject to management risk because it is an actively managed investment portfolio. Judgments by the Fund’s subadvisers about the attractiveness and potential appreciation of an investment may prove to be inaccurate and may not produce the desired results.

Infrastructure: A Fund that focuses its investments in infrastructure-related companies will be more sensitive to conditions affecting their business or operations such as local economic and political conditions, regulatory changes, and environmental issues.

Foreign Investing: Investing in foreign securities subjects the Fund to additional risks such as increased volatility, currency fluctuations, less liquidity, less publicly available information about the foreign investment, and political, regulatory, economic, and market risk.

Utilities Sector Concentration: The equity portfolio’s investments are concentrated in the utilities sector and may present more risks than if the equity portion of the Fund were broadly diversified.

Leveraged Loans: Leveraged loans may be unsecured or not fully collateralized, may be subject to restrictions on resale, may be less liquid and may trade infrequently on the secondary market. Leveraged loans settle on a delayed basis; thus, sale proceeds may not be available to meet redemptions for a substantial period of time after the sale of the loan.

Credit & Interest: Debt instruments are subject to various risks, including credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt instruments may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities.

High Yield Fixed Income Securities: There is a greater risk of issuer default, less liquidity, and increased price volatility related to high yield securities than investment grade securities.

Asset-Backed and Mortgage-Backed Securities: Changes in interest rates can cause both extension and prepayment risks for asset- and mortgage-backed securities. These securities are also subject to risks associated with the non-repayment of underlying collateral, including losses to the Fund.

Leverage: When the Fund leverages its portfolio, the Fund may be less liquid and/or may liquidate positions at an unfavorable time, and the value of the Fund’s shares will be more volatile and sensitive to market movements.

Market Volatility: The value of the securities in the Fund may go up or down in response to the prospects of individual companies and/or general economic conditions. Price changes may be short- or long-term. Local, regional or global events such as war or military conflict (e.g., Russia’s invasion of Ukraine), acts of terrorism, the spread of infectious illness (e.g., COVID-19 pandemic) or other public health issue, recessions, or other events could have a significant impact on the Fund and its investments, including hampering the ability of the Fund’s manager(s) to invest the Fund’s assets as intended.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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TOTAL RETURN FUND INC.

MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)

May 31, 2024

Closed-End Funds: Closed-end funds may trade at a discount or premium from their net asset values, which may affect whether an investor will realize gains or losses. They may also employ leverage, which may increase the impact of volatility.

No Guarantee: There is no guarantee that the Fund will meet its objective.

For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 17.

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  PORTFOLIO HOLDINGS SUMMARY WEIGHTINGS (Unaudited)

May 31, 2024

The following tables present the portfolio holdings within certain industries/sectors or countries as a percentage of total investments (excluding reverse repurchase agreements and swap contracts) at May 31, 2024.

Asset Allocation

Global Multi-Sector Income Fund

Corporate Bonds and Notes		43%
Financials	14%
Energy	10
Utilities	4
All other Corporate Bonds and Notes	15
Foreign Government Securities		22
Leveraged Loans		12
Mortgage-Backed Securities		10
Asset-Backed Securities		9
U.S. Government Securities		3
Preferred Stocks		1
Total		100%

Stone Harbor Emerging Markets Income Fund

Foreign Government Securities		61%
Corporate Bonds and Notes		33
Exploration & Production	20%
Financial & Lease	4
Electric	4
Refining	2
All other Corporate Bonds and Notes	3
Short-Term Investment		3
Credit Linked Notes		3
Total		100%

 

Total Return Fund Inc.

Common Stocks		74%
Utilities	35%
Industrials	22
Energy	10
All Other Common Stocks	7
Corporate Bonds and Notes		10
Financials	3
Energy	2
Industrials	1
All Other Corporate Bonds and Notes	4
Mortgage-Backed Securities		5
Leveraged Loans		4
Asset-Backed Securities		4
Foreign Government Securities		2
U.S. Government Securities		1
Total		100%

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