UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-22473
Virtus Stone Harbor Emerging Markets Income Fund
(Exact name of registrant as specified in charter)
101 Munson Street
Greenfield, MA 01301-9683
(Address of principal executive offices) (Zip code)
Jennifer Fromm, Esq.
Vice President, Chief Legal Officer, Counsel and Secretary for Registrant
One Financial Plaza
Hartford, CT 06103-2608
(Name and address of agent for service)
Registrant’s telephone number, including area code: (866) 270-7788
Date of fiscal year end: November 30
Date of reporting period: May 31, 2023
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
(a) | The Report to Shareholders is attached herewith. |
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President, Chief Executive Officer, and Trustee
Virtus Stone Harbor Emerging Markets Income Fund
May 2023
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited)
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
PORTFOLIO HOLDINGS SUMMARY WEIGHTINGS (Unaudited)
Foreign Government Securities | 55% | |
Corporate Bonds and Notes | 41 | |
Exploration & Production | 26% | |
Financial & Lease | 6 | |
Electric | 3 | |
Metals, Mining & Steel | 2 | |
All other Corporate Bonds and Notes | 4 | |
Credit Linked Notes | 4 | |
Total | 100% | |
Mexico | 26% |
Argentina | 8 |
Indonesia | 7 |
Angola | 6 |
Colombia | 5 |
Kenya | 5 |
El Salvador | 5 |
Other | 38 |
Total | 100% |
May 31, 2023
Par Value(1) | Value | ||
Foreign Government Securities—70.8% | |||
Angola —7.9% | |||
Republic of Angola | |||
144A 8.250%, 5/9/28(2) | $ 478 | $ 425 | |
RegS 8.250%, 5/9/28(3) | 850 | 755 | |
Republic of Angola Via Avenir II B.V. | |||
(6 month LIBOR + 4.500%) RegS 9.687%, 12/7/23(3)(4)(5) | 346 | 344 | |
(6 month LIBOR + 7.500%) RegS 12.772%, 7/3/23(3)(4)(5) | 2,737 | 2,724 | |
Republic of Angola Via Avenir Issuer II Ireland DAC RegS 6.927%, 2/19/27(3)(4) | 1,269 | 1,180 | |
5,428 | |||
Argentina—9.7% | |||
Provincia De Buenos Aires RegS 5.250%, 9/1/37(3)(5) | 3,856 | 1,224 | |
Republic of Argentina 1.000%, 7/9/29 | 21,488 | 5,464 | |
6,688 | |||
Brazil—4.9% | |||
Brazil Notas do Tesouro Nacional | |||
Series F 10.000%, 1/1/27 | 14,800 BRL | 2,839 | |
Series F 10.000%, 1/1/31 | 2,800 BRL | 514 | |
3,353 | |||
Colombia—3.0% | |||
Colombian Titulos De Tesoreria 7.250%, 10/18/34 | 8,275,000 COP | 1,391 |
Par Value(1) | Value | ||
Colombia—continued | |||
Republic of Colombia 4.500%, 3/15/29(6) | $ 795 | $ 691 | |
2,082 | |||
Ecuador—6.1% | |||
Republic of Ecuador | |||
144A 5.500%, 7/31/30(2)(5)(6) | 6,667 | 3,209 | |
RegS 5.500%, 7/31/30(3)(5) | 2,010 | 967 | |
4,176 | |||
El Salvador—6.1% | |||
Republic of El Salvador | |||
RegS 5.875%, 1/30/25(3) | 718 | 612 | |
RegS 6.375%, 1/18/27(3)(6) | 4,498 | 2,850 | |
RegS 8.625%, 2/28/29(3) | 670 | 398 | |
RegS 8.250%, 4/10/32(3)(6) | 568 | 328 | |
4,188 | |||
Ethiopia—1.0% | |||
Federal Republic of Ethiopia 144A 6.625%, 12/11/24(2) | 986 | 666 | |
Gabon—4.3% | |||
Republic of Gabon | |||
144A 6.950%, 6/16/25(2)(6) | 2,702 | 2,572 | |
144A 7.000%, 11/24/31(2) | 135 | 105 | |
RegS 6.950%, 6/16/25(3) | 300 | 285 | |
2,962 | |||
Par Value(1) | Value | ||
Indonesia—4.6% | |||
Indonesia Government Bond 8.375%, 4/15/39 | 40,300,000 IDR | $ 3,123 | |
Ivory Coast—1.0% | |||
Ivory Coast Government International Bond | |||
RegS 5.250%, 3/22/30(3) | 489 EUR | 427 | |
RegS 5.875%, 10/17/31(3) | 330 EUR | 287 | |
714 | |||
Kenya—6.5% | |||
Republic of Kenya | |||
144A 6.875%, 6/24/24(2)(6) | $ 4,031 | 3,704 | |
RegS 8.250%, 2/28/48(3)(6) | 1,025 | 749 | |
4,453 | |||
Lebanon—0.8% | |||
Lebanese Republic | |||
6.375%, 3/9/20(7) | 148 | 8 | |
6.400%, 5/26/23(7) | 848 | 48 | |
RegS 8.250%, 4/12/21(3)(7) | 5,175 | 298 | |
RegS 6.100%, 10/4/22(3)(7) | 3,217 | 185 | |
RegS 7.000%, 4/22/31(3)(7) | 377 | 22 | |
561 | |||
Mongolia—0.2% | |||
Mongolia Government International Bond 144A 8.650%, 1/19/28(2) | 156 | 154 | |
Mozambique—1.6% | |||
Republic of Mozambique 144A 5.000%, 9/15/31(2)(5)(6) | 1,531 | 1,071 |
Par Value(1) | Value | ||
Nigeria—2.2% | |||
Republic of Nigeria | |||
144A 6.125%, 9/28/28(2) | $ 697 | $ 561 | |
144A 8.375%, 3/24/29(2) | 401 | 347 | |
144A 7.696%, 2/23/38(2)(6) | 860 | 593 | |
1,501 | |||
Pakistan—0.5% | |||
Islamic Republic of Pakistan RegS 8.250%, 4/15/24(3) | 700 | 368 | |
Papua New Guinea —1.2% | |||
Papua New Guinea Government International Bond RegS 8.375%, 10/4/28(3)(6) | 867 | 783 | |
Senegal—0.4% | |||
Republic of Senegal 144A 6.250%, 5/23/33(2) | 365 | 289 | |
South Africa—3.0% | |||
Republic of South Africa | |||
6.500%, 2/28/41 | 26,900 ZAR | 776 | |
8.750%, 2/28/48 | 36,800 ZAR | 1,310 | |
2,086 | |||
Tunisia—3.1% | |||
Tunisian Republic | |||
144A 6.750%, 10/31/23(2) | 360 EUR | 361 | |
RegS 5.625%, 2/17/24(3) | 2,040 EUR | 1,749 | |
2,110 | |||
Turkey—1.2% | |||
Republic of Turkey 9.875%, 1/15/28 | 804 | 801 |
Par Value(1) | Value | ||
Venezuela—0.2% | |||
Republic of Venezuela RegS 9.000%, 5/7/23(3)(7)(8) | $ 2,250 | $ 143 | |
Zambia—1.3% | |||
Republic of Zambia | |||
144A 5.375%, 9/20/23(2)(7) | 124 | 55 | |
144A 8.970%, 7/30/27(2)(6)(7) | 865 | 418 | |
RegS 8.970%, 7/30/27(3)(6)(7) | 900 | 434 | |
907 | |||
Total Foreign Government Securities (Identified Cost $56,624) | 48,607 | ||
Corporate Bonds and Notes—53.4% | |||
Brazil—0.6% | |||
MC Brazil Downstream Trading S.a.r.l. 144A 7.250%, 6/30/31(2)(6) | 550 | 402 | |
China—0.7% | |||
Wanda Properties International Co., Ltd. RegS 7.250%, 1/29/24(3) | 800 | 445 | |
Colombia—3.8% | |||
Empresas Publicas de Medellin ESP RegS 7.625%, 9/10/24(3) | 2,700,000 COP | 560 | |
Gran Tierra Energy International Holdings Ltd. 144A 6.250%, 2/15/25(2)(6) | 1,267 | 1,055 | |
Gran Tierra Energy, Inc. 144A 7.750%, 5/23/27(2)(6) | 1,410 | 1,020 | |
2,635 | |||
Par Value(1) | Value | ||
Ghana—1.9% | |||
Tullow Oil plc | |||
RegS 7.000%, 3/1/25(3) | $ 1,912 | $ 1,023 | |
RegS 10.250%, 5/15/26(3) | 368 | 272 | |
1,295 | |||
India—2.5% | |||
Adani Electricity Mumbai Ltd. RegS 3.949%, 2/12/30(3)(6) | 1,038 | 782 | |
Adani Green Energy Ltd. RegS 4.375%, 9/8/24(3) | 200 | 184 | |
Vedanta Resources Finance II plc 144A 8.950%, 3/11/25(2)(6) | 1,051 | 782 | |
1,748 | |||
Indonesia—4.3% | |||
Indika Energy Capital IV Pte Ltd. RegS 8.250%, 10/22/25(3)(6) | 1,085 | 1,069 | |
Theta Capital Pte Ltd. | |||
RegS 8.125%, 1/22/25(3)(6) | 935 | 763 | |
RegS 6.750%, 10/31/26(3)(6) | 1,550 | 1,093 | |
2,925 | |||
Kazakhstan—1.4% | |||
Development Bank of Kazakhstan JSC 144A 10.950%, 5/6/26(2) | 506,000 KZT | 933 | |
Macau—0.5% | |||
Studio City Finance Ltd. 144A 5.000%, 1/15/29(2) | 500 | 362 |
Par Value(1) | Value | ||
Mexico—33.5% | |||
Banco Mercantil del Norte S.A. | |||
144A 5.875%(2)(6)(9) | $ 1,268 | $ 1,078 | |
RegS 6.750%(3)(9) | 770 | 721 | |
Cemex SAB de C.V. 144A 9.125% (2)(6)(9) | 793 | 790 | |
Petroleos Mexicanos | |||
7.470%, 11/12/26 | 45,240 MXN | 2,188 | |
7.690%, 1/23/50(6) | 3,629 | 2,340 | |
RegS 7.190%, 9/12/24(3) | 63,700 MXN | 3,334 | |
RegS 6.700%, 2/16/32(3) | 171 | 129 | |
Poinsettia Finance Ltd. RegS 6.625%, 6/17/31(3) | 13,423 | 11,112 | |
Sixsigma Networks Mexico S.A. de C.V. 144A 7.500%, 5/2/25(2)(6) | 1,541 | 1,346 | |
23,038 | |||
Peru—0.5% | |||
Petroleos del Peru S.A. | |||
RegS 4.750%, 6/19/32(3) | 250 | 180 | |
RegS 5.625%, 6/19/47(3) | 225 | 136 | |
316 | |||
Turkey—0.8% | |||
Aydem Yenilenebilir Enerji AS 144A 7.750%, 2/2/27(2)(6) | 655 | 532 | |
Uzbekistan—1.6% | |||
Uzauto Motors AJ 144A 4.850%, 5/4/26(2) | 1,285 | 1,095 |
Par Value(1) | Value | ||
Venezuela—0.2% | |||
Petroleos de Venezuela S.A. | |||
RegS 6.000%, 11/15/26(3)(10) | $ 2,550 | $ 51 | |
RegS 9.750%, 5/17/35(3)(10) | 4,200 | 105 | |
156 | |||
Vietnam—1.1% | |||
Mong Duong Finance Holdings B.V. 144A 5.125%, 5/7/29(2)(6) | 890 | 772 | |
Total Corporate Bonds and Notes (Identified Cost $43,478) | 36,654 | ||
Credit Linked Notes—4.8% | |||
Iraq—4.8% | |||
Republic of Iraq | |||
(Counterparty: BOA) 3.154%, 1/1/28(5)(8) | 492,121 JPY | 3,138 | |
(Counterparty: BOA) 3.227%, 1/6/28(5)(8) | 27,258 JPY | 174 | |
Total Credit Linked Notes (Identified Cost $5,304) | 3,312 | ||
Total Long-Term Investments—129.0% (Identified Cost $105,406) | 88,573 | ||
TOTAL INVESTMENTS—129.0% (Identified Cost $105,406) | $ 88,573 | ||
Other assets and liabilities, net—(29.0)% | (19,899 ) | ||
NET ASSETS—100.0% | $ 68,674 |
Abbreviations: | |
CDS | Credit Default Swap |
DAC | Designated Activity Company |
JSC | Joint Stock Company |
LIBOR | London Interbank Offered Rate |
Footnote Legend: | |
(1) | Par Value disclosed in foreign currency is reported in thousands. |
(2) | Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2023, these securities amounted to a value of $24,697 or 36.0% of net assets. |
(3) | Regulation S security. Security is offered and sold outside of the United States; therefore, it is exempt from registration with the SEC under Rules 903 and 904 of the Securities Act of 1933. |
(4) | This Note was issued for the sole purpose of funding a leveraged loan between the issuer and the borrower. As the credit risk for this security lies solely with the borrower, the name represented here is that of the borrower. |
(5) | Variable rate security. Rate disclosed is as of May 31, 2023. Information in parenthesis represents benchmark and reference rate for each security. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions, or, for mortgage-backed securities, are impacted by the individual mortgages which are paying off over time. These securities do not indicate a reference rate and spread in their descriptions. |
(6) | All or a portion is segregated as collateral for reverse repurchase agreements. On May 31, 2023, securities valued at $30,826 were pledged as collateral for reverse repurchase agreements. |
(7) | Security in default; no interest payments are being received. |
(8) | The value of this security was determined using significant unobservable inputs and is reported as a Level 3 security in the Fair Value Hierarchy table located after the Schedule of Investments. |
(9) | No contractual maturity date. |
(10) | Security in default; no interest payments are being received during the bankruptcy proceedings. |
Counterparties: | |
BCLY | Barclays |
BOA | Bank of America |
JPM | JPMorgan Chase Bank N.A. |
MS | Morgan Stanley |
Foreign Currencies: | |
BRL | Brazilian Real |
COP | Colombian Peso |
EUR | Euro |
IDR | Indonesian Rupiah |
JPY | Japanese Yen |
KZT | Kazakhstani Tenge |
MXN | Mexican Peso |
ZAR | South African Rand |
Reverse Repurchase Agreements as of May 31, 2023 were as follows: | |||
Counterparty | Interest Rate | Acquisition Date* | Amount |
JPM | 5.25% | 05/04/23 | $ (890) |
JPM | 5.35 | 05/15/23 | (599) |
JPM | 5.40 | 05/04/23 | (950) |
JPM | 5.40 | 05/22/23 | (324) |
JPM | 5.40 | 05/22/23 | (659) |
JPM | 5.45 | 05/04/23 | (2,074) |
JPM | 5.50 | 05/04/23 | (1,786) |
JPM | 5.50 | 05/04/23 | (1,141) |
JPM | 5.50 | 05/04/23 | (354) |
Reverse Repurchase Agreements as of May 31, 2023 were as follows: | |||
Counterparty | Interest Rate | Acquisition Date* | Amount |
JPM | 5.55% | 05/04/23 | $ (423) |
JPM | 5.55 | 05/04/23 | (246) |
JPM | 5.55 | 05/04/23 | (527) |
JPM | 5.55 | 05/04/23 | (623) |
JPM | 5.55 | 05/04/23 | (2,218) |
JPM | 5.55 | 05/04/23 | (843) |
JPM | 5.55 | 05/04/23 | (855) |
JPM | 5.55 | 05/04/23 | (606) |
JPM | 5.55 | 05/04/23 | (646) |
JPM | 5.55 | 05/04/23 | (305) |
JPM | 5.55 | 05/04/23 | (829) |
JPM | 5.55 | 05/04/23 | (432) |
JPM | 5.55 | 05/04/23 | (294) |
JPM | 5.60 | 05/04/23 | (1,930) |
JPM | 5.60 | 05/04/23 | (575) |
JPM | 5.65 | 05/04/23 | (1,030) |
JPM | 5.65 | 05/04/23 | (652) |
JPM | 5.65 | 05/04/23 | (232) |
JPM | 5.65 | 05/04/23 | (1,052) |
JPM | 5.75 | 05/04/23 | (842) |
JPM | 5.85 | 05/04/23 | (830) |
Total | $(24,767) |
Footnote Legend: | |
* | All agreements can be terminated by either party on demand at value plus accrued interest. |
Centrally cleared credit default swaps - sell protection(1) outstanding as of May 31, 2023 was as follows: | ||||||||||||||
Reference Entity | Payment Frequency | Fixed Rate | Expiration Date | Notional Amount(2) | Value | Premiums Paid (Received) | Unrealized Appreciation | Unrealized Depreciation | ||||||
Republic of Argentina 4 Year CDS(3) | Quarterly | 5.000% | 6/20/25 | $7,000 | $(3,980) | $(1,307) | $— | $(2,673) | ||||||
Total | $(3,980) | $(1,307) | $— | $(2,673) |
Over-the-counter credit default swaps - sell protection(1) outstanding as of May 31, 2023 were as follows: | |||||||||||||
Reference Entity | Payment Frequency | Counterparty | Fixed Rate | Expiration Date | Notional Amount(2) | Value | Premiums Paid (Received) | Unrealized Appreciation | Unrealized Depreciation | ||||
Arab Republic of Egypt CDS | Quarterly | MS | 1.000% | 12/20/25 | $ 3,600 | $(1,224) | $ (647) | $ — | $ (577) | ||||
Eskom Holdings 5 Year CDS(4) | Quarterly | BCLY | 1.000% | 12/20/25 | 5,300 | (296) | (465) | 169 | — | ||||
Republic of Argentina 5 Year CDS(3) | Quarterly | BCLY | 5.000% | 12/20/25 | 11,200 | (7,114) | (1,803) | — | (5,311) | ||||
Total | $(8,634) | $(2,915) | $169 | $(5,888) |
Footnote Legend: | |
(1) | If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying investments comprising the referenced index or (ii) pay a net settlement amount in the form of cash or investments equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying investments comprising the referenced index. |
(2) | The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement. |
(3) | Based on Republic of Argentina Sovereign Debt Obligation, USD Denominated 1.00% fixed coupon, 7/09/2029 maturity. |
(4) | Based on Eskom Holdings SOC, Ltd. Corporate Debt Obligation, USD Denominated 6.35% fixed coupon, 8/10/2028 maturity. |
Total Value at May 31, 2023 | Level 2 Significant Observable Inputs | Level 3 Significant Unobservable Inputs | |||
Assets: | |||||
Debt Instruments: | |||||
Corporate Bonds and Notes | $ 36,654 | $ 36,654 | $ — | ||
Foreign Government Securities | 48,607 | 48,464 | 143 | ||
Credit Linked Notes | 3,312 | — | 3,312 | ||
Total Assets | 88,573 | 85,118 | 3,455 | ||
Liabilities: | |||||
Other Financial Instruments:(1) | |||||
Centrally Cleared Credit Default Swaps | (3,980) | (3,980) | — | ||
Over-the-Counter Credit Default Swaps | (8,634) | (8,634) | — | ||
Reverse Repurchase Agreements | (24,767) | (24,767) | — | ||
Total Liabilities | (37,381) | (37,381) | — | ||
Total Investments | $ 51,192 | $ 47,737 | $3,455 |
(1) | Other financial instruments are derivative instruments reflected in the Schedule of Investments. Swaps are reported at value. For liabilities arising from reverse repurchase agreements, the carrying amount approximates fair value due to the short-term maturity of these financial instruments. |
Total | Corporate Bonds And Notes | Foreign Government Securities | Credit Linked Notes | ||||
Investments in Securities | |||||||
Balance as of November 30, 2022: | $ 3,632 | $ 108(a) | $ — | $ 3,524 | |||
Accrued discount/(premium) | 39 | — | — | 39 | |||
Net realized gain (loss) | 58 | 193 | — | (135) | |||
Net change in unrealized appreciation (depreciation)(b) | 221 | (57) | — | 278 | |||
Purchases | — (c) | — (c) | — | — | |||
Sales (d) | (587) | (193) | — | (394) | |||
Transfers into Level 3(e) | 143 | — | 143 | — | |||
Transfers from Level 3(e) | (51) | (51) | — | — | |||
Balance as of May 31, 2023 | $ 3,455 | $ — | $ 143 | $ 3,312 |
May 31, 2023
Assets | |
Investment in securities at value (Identified cost $105,406) | $ 88,573 |
Foreign currency at value (cost $—(a)) | — (a) |
Cash | 281 |
Due from broker | 156 |
Cash pledged as collateral for reverse repurchase agreements | 275 |
Cash collateral pledged for swaps | 11,106 |
Receivables | |
Dividends and interest | 2,046 |
Tax reclaims | 3 |
Prepaid Trustees’ retainer | 4 |
Prepaid expenses and other assets (Note 4) | 12 |
Total assets | 102,456 |
Liabilities | |
Borrowings through reverse repurchase agreements (Note 8) | 24,767 |
Over-the-counter swaps at value (Swap premium $2,915) | 8,634 |
Payables | |
Interest on reverse repurchase agreements | 99 |
Professional fees | 96 |
Investment advisory fees (Note 4) | 78 |
Variation margin payable on cleared swaps | 42 |
Administration and accounting fees | 9 |
Trustee deferred compensation plan (Note 4) | 4 |
Other accrued expenses | 53 |
Total liabilities | 33,782 |
Net Assets | $ 68,674 |
Net Assets Consist of: | |
Common stock ($0.001 par value; unlimited shares authorized) | $ 17 |
Capital paid in on shares of beneficial interest | 225,430 |
Total distributable earnings (accumulated losses) | (156,773) |
Net Assets | $ 68,674 |
Common Shares Outstanding | 17,232,116 |
Net Asset Value Per Share(b) | $ 3.99 |
(a) | Amount is less than $500 (not in thousands). |
(b) | Net Asset Value Per Share is calculated using unrounded net assets. |
SIX MONTHS ENDED May 31, 2023
Investment Income | |
Interest | $ 5,242 |
Dividends | 34 |
Foreign taxes withheld | (28) |
Total investment income | 5,248 |
Expenses | |
Investment advisory fees | 465 |
Administration and accounting fees | 54 |
Professional fees | 105 |
Printing fees and expenses | 28 |
Trustees’ fees and expenses | 11 |
Transfer agent fees and expenses | 6 |
Custodian fees | 3 |
Miscellaneous expenses | 34 |
Total expenses before interest expense | 706 |
Interest expense on reverse repurchase agreements (Note 8) | 540 |
Total expenses after interest expense | 1,246 |
Net investment income (loss) | 4,002 |
Net Realized and Unrealized Gain (Loss) on Investments | |
Net realized gain (loss) from: | |
Investments | (7,305) |
Foreign currency transactions | (75) |
Foreign capital gains tax | (—) (1) |
Forward foreign currency exchange contracts | (300) |
Swaps | (2,629) |
Net change in unrealized appreciation (depreciation) on: | |
Investments | 6,094 |
Foreign currency transactions | (5) |
Forward foreign currency exchange contracts | 172 |
Swaps | 3,029 |
Net realized and unrealized gain (loss) on investments | (1,019) |
Net increase (decrease) in net assets resulting from operations | $ 2,983 |
(1) | Amount is less than $500 (not in thousands). |
Six Months Ended May 31, 2023 (Unaudited) | Year Ended November 30, 2022 | ||
Increase (Decrease) In Net Assets From Operations | |||
Net investment income (loss) | $ 4,002 | $ 8,808 | |
Net realized gain (loss) | (10,309) | (12,323) | |
Net change in unrealized appreciation (depreciation) | 9,290 | (19,311) | |
Increase (decrease) in net assets resulting from operations | 2,983 | (22,826) | |
From Dividends and Distributions to Shareholders | |||
Net investment income and net realized gains | (6,172) (1) | (1,512) | |
Return of capital | — | (10,711) | |
Dividends and Distributions to Shareholders | (6,172) | (12,223) | |
From Capital Share Transactions | |||
Reinvestment of distributions resulting in the issuance of common stock (129,837 and 241,484 shares, respectively) | 570 | 1,208 | |
Increase (decrease) in net assets from capital transactions | 570 | 1,208 | |
Net increase (decrease) in net assets | (2,619) | (33,841) | |
Net Assets | |||
Beginning of period | 71,293 | 105,134 | |
End of period | $ 68,674 | $ 71,293 |
(1) | Please note that the tax status of the Fund’s distributions is determined at the end of the taxable year. See Notes to Financial Statements. |
Increase (Decrease) in cash | |
Cash flows provided by (used for) operating activities: | |
Net increase (decrease) in net assets resulting from operations | $ 2,983 |
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used for) operating activities: | |
Proceeds from sales and paydowns of long-term investments | 33,038 |
(Increase) Decrease in investment securities sold receivable | 1,991 |
Purchases of long-term investments | (38,529) |
Increase (Decrease) in investment securities purchased payable | (778) |
Net (purchases) or sales of short-term investments | 10,256 |
Net change in unrealized (appreciation)/depreciation on investments | (6,094) |
Net change in unrealized (appreciation)/depreciation of forward foreign currency exchange contracts | (172) |
Net realized (gain)/loss on investments | 7,305 |
Net realized (gain)/loss on sales of investments from changes in the foreign exchange rates | 98 |
Amortization of premiums and inflation income and accretion of discounts on investments | (1,537) |
(Increase) Decrease in due from broker | (80) |
(Increase) Decrease in tax reclaims receivable | 3 |
(Increase) Decrease in dividends and interest receivable | (266) |
(Increase) Decrease in prepaid expenses and other assets | (8) |
(Increase) Decrease in prepaid Trustees’ retainer | 2 |
Increase (Decrease) in interest payable on reverse repurchase agreements | 3 |
Increase (Decrease) in over-the-counter swaps at value | (7,164) |
Increase (Decrease) in variation margin payable on swap contracts | 90 |
Increase (Decrease) in affiliated expenses payable | (1) |
Increase (Decrease) in non-affiliated expenses payable | (27) |
Cash provided by (used for) operating activities | 1,113 |
Cash provided (used for) financing activities: | |
Cash receipts from reverse repurchase agreements | 106,989 |
Cash payments for reverse repurchase agreements | (110,822) |
Cash distributions paid to shareholders | (5,602) |
Cash provided by (used for) financing activities | (9,435) |
Net increase (decrease) in cash | (8,322) |
Restricted and unrestricted cash at beginning of period | 19,984 |
Restricted and unrestricted cash at end of period | $ 11,662 |
Supplemental cash flow information: | |
Reinvestment of dividends and distributions | $ 570 |
Cash paid during the period for interest expense on reverse repurchase agreements | $ 537 |
Reconciliation of restricted and unrestricted cash at the end of period to the statement of assets and liabilities: | |
Cash and foreign currency at value | $ 281 |
Cash collateral pledged for swaps | 11,106 |
Cash pledged as collateral for reverse repurchase agreements | 275 |
$11,662 |
FINANCIAL HIGHLIGHTS
Six Months Ended May 31, 2023 (Unaudited) | Year Ended November 30, | ||||||||||
2022 | 2021 | 2020 | 2019 | 2018 | |||||||
PER SHARE DATA: | |||||||||||
Net asset value, beginning of period | $ 4.17 | $ 6.24 | $ 7.04 | $ 8.91 | $ 10.58 | $ 14.67 | |||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)(1) | 0.23 | 0.52 | 0.60 | 0.64 | 0.89 | 1.13 | |||||
Net realized and unrealized gain (loss) | (0.05) | (1.87) | (0.52) | (1.08) | (0.40) | (3.06) | |||||
Total from investment operations | 0.18 | (1.35) | 0.08 | (0.44) | 0.49 | (1.93) | |||||
Dividends and Distributions to Shareholders: | |||||||||||
Net investment income | (0.36) | (0.09) | (0.57) | (0.28) | (0.76) | (0.42) | |||||
Return of capital | — | (0.63) | (0.31) | (1.15) | (1.40) | (1.74) | |||||
Total dividends and distributions to shareholders | (0.36) | (0.72) | (0.88) | (1.43) | (2.16) | (2.16) | |||||
Net asset value, end of period | $ 3.99 | $ 4.17 | $ 6.24 | $ 7.04 | $ 8.91 | $ 10.58 | |||||
Market value, end of period | $ 4.00 | $ 4.24 | $ 6.65 | $ 7.40 | $ 13.18 | $ 12.05 | |||||
Total return, net asset value(2), (3) | 4.15% | (22.31)% | 0.36% | (3.32)% | 4.45% | (14.51)% | |||||
Total return, market value(2), (3) | 2.44% | (25.98)% | 0.66% | (32.92)% | 29.86% | (6.89)% | |||||
RATIOS/SUPPLEMENTAL DATA: | |||||||||||
Ratio of total expenses after interest expense to average net assets(4), (5) | 3.43% | 2.95% | 2.37% | 2.56% | 1.97% | 2.96% | |||||
Ratio of net investment income (loss) to average net assets(4) | 11.00% | 10.55% | 8.57% | 9.04% | 8.88% | 8.76% | |||||
Portfolio turnover rate(2) | 39% | 37% | 47% | 127% | 107% | 130% | |||||
Net assets, end of period (000’s) | $68,674 | $71,293 | $105,134 | $117,235 | $146,213 | $170,992 | |||||
Borrowings, end of period (000’s) | $24,767 | $28,600 | $ 45,481 | $ 46,000 | $ 8,976 | $ 85,000 | |||||
Asset coverage, per $1,000 of borrowings(6) | $ 3,773 | $ 3,493 | $ 3,312 | $ 3,545 | $ 17,290 | $ 3,019 |
(1) | Calculated using average shares outstanding. |
(2) | Not annualized for periods less than one year. |
(3) | Total return on market value is calculated assuming a purchase of common shares on the opening of the first day and sale on the closing of the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund’s Automatic Reinvestment and Cash Purchase Plan. Total return on market value is not annualized for periods of less than one year. Brokerage commissions that a shareholder may pay are not reflected. Total return on market value does not reflect the deduction of taxes that a shareholder may pay on fund distributions or the sale of fund shares. Total return on net asset value uses the same methodology, but with use of net asset value for the beginning, ending and reinvestment values. |
(4) | Annualized for periods less than one year. |
(5) | Ratio of total expenses before interest expense to average net assets was 1.94% for the six months ended May 31, 2023, and 2.03%, 1.96%, 1.99%, 1.59% and 1.88% for the years ended November 30, 2022, 2021, 2020, 2019 and 2018, respectively. |
(6) | Represents value of net assets plus the borrowings at the end of the period divided by the borrowings at the end of the period multiplied by $1,000. |
May 31, 2023
A. | Security Valuation |
The Fund’s Board of Trustees has designated the Investment Adviser as the valuation designee to perform fair valuations pursuant to Rule 2a-5 under the Investment Company Act of 1940. The Fund utilizes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The Fund’s policy is to recognize transfers into or out of Level 3 at the end of the reporting period. |
B. | Security Transactions and Investment Income |
Security transactions are recorded on the trade date. Realized gains and losses from the sale of securities are determined on the identified cost basis. Dividend income and capital gain distributions are recognized on the ex-dividend date or, in the case of certain foreign securities, as soon as the Fund is notified. Interest income is recorded on the accrual basis. The Fund amortizes premiums and accretes discounts using the effective interest method. Premiums on callable debt instruments are amortized to interest income to the earliest call date using the effective interest method. Conversion premium is not amortized. | |
Any distributions from underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds. | |
C. | Income Taxes |
It is the Fund’s intention to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) and to distribute substantially all of its taxable income and capital gains, if any, to its shareholders. Therefore, no provision for federal income taxes or excise taxes has been made. | |
The Fund may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. The Fund will accrue such taxes and recoveries as applicable based upon current interpretations of the tax rules and regulations that exist in the markets in which it invests. | |
Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. The Fund’s U.S. federal income tax return is generally subject to examination by the Internal Revenue Service for a period of three years after it is filed. State, local and/or non-U.S. tax returns and/or other filings may be subject to examination for different periods, depending upon the tax rules of each applicable jurisdiction. | |
D. | Distributions to Shareholders |
The Fund declares distributions on a monthly basis. Distributions are recorded by the Fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from U.S. GAAP. | |
Distributions may represent earnings from net investment income, realized capital gains, or, if necessary, return of capital. | |
E. | Foreign Currency Transactions |
Non-U.S. investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the foreign currency exchange rate effective at the end of the reporting period. Cost of investments is translated at the currency exchange rate effective at the trade date. The gain or loss resulting from a |
change in currency exchange rates between the trade and settlement date of a portfolio transaction is treated as a gain or loss on foreign currency. Likewise, the gain or loss resulting from a change in currency exchange rates between the date income is accrued and the date it is paid is treated as a gain or loss on foreign currency. The Fund bifurcates that portion of the results of operations arising from changes in foreign exchange rates on investments from the fluctuations arising from changes in the market prices of securities held and such fluctuations are included with the net realized and unrealized gain or loss on foreign currency transactions. | |
F. | Credit Linked Notes |
The Fund may invest in credit linked notes to obtain economic exposure to high yield, emerging markets or other securities. Investments in a credit linked note typically provide the holder with a return based on the return of an underlying reference instrument, such as an emerging market bond. Like an investment in a bond, investments in credit linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. In addition to the risks associated with the underlying reference instrument, an investment in a credit linked note is also subject to liquidity risk, market risk, interest rate risk and the risk that the counterparty will be unwilling or unable to meet its obligations under the note. | |
G. | Payment-In-Kind Securities |
The Fund may invest in payment-in-kind securities, which are debt or preferred stock securities that require or permit payment of interest in the form of additional securities. Payment-in-kind securities allow the issuer to avoid or delay the need to generate cash to meet current interest payments and, as a result, may involve greater risk than securities that pay interest currently or in cash. | |
H. | Leveraged Loans |
The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. Leveraged loans are generally non-investment grade and often involve borrowers that are highly leveraged. The Fund may invest in obligations of borrowers who are in bankruptcy proceedings. Leveraged loans are typically senior in the corporate capital structure of the borrower. A loan is often administered by a bank or other financial institution (the “lender”) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the leveraged loan. The Fund’s investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. When investing in loan participations, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan participation and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the leveraged loan with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the leveraged loan. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. | |
The Fund may invest in multiple series or tranches of a loan, which may have varying terms and carry different associated risks. Leveraged loans may involve foreign borrowers and investments may be denominated in foreign currencies. Direct |
indebtedness of emerging countries involves a risk that the government entities responsible for the repayment of the debt may be unable, or unwilling, to pay the principal and interest when due. | |
The leveraged loans have floating rate loan interests which generally pay interest at rates that are periodically determined by reference to a base lending rate plus a premium. The base lending rates are generally LIBOR, SOFR, the prime rate offered by one or more U.S. banks or the certificate of deposit rate. When a leveraged loan is purchased the Fund may pay an assignment fee. On an ongoing basis, the Fund may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a leveraged loan. Prepayment penalty fees are received upon the prepayment of a leveraged loan by a borrower. Prepayment penalty, facility, commitment, consent and amendment fees are recorded to income as earned or paid. | |
The Fund may invest in both secured loans and “covenant lite” loans which have few or no financial maintenance covenants that would require a borrower to maintain certain financial metrics. The lack of financial maintenance covenants in covenant lite loans increases the risk that the Fund will experience difficulty or delays in enforcing its rights on its holdings of such loans, which may result in losses, especially during a downturn in the credit cycle. | |
I. | Expenses |
Expenses incurred together by the Fund and other affiliated mutual funds are allocated in proportion to the net assets of each such fund, except where allocation of direct expenses to the fund and each such other fund, or an alternative allocation method, can be more appropriately used. | |
In addition to the net annual operating expenses that the Fund bears directly, the shareholders of the Fund indirectly bear the pro-rata expenses of any underlying mutual funds in which the Fund invests. | |
J. | Cash and Cash Equivalents |
Cash and cash equivalents include deposits held at financial institutions, and are inclusive of dollar denominated cash, foreign currency, cash collateral pledged for swaps, and deposits with brokers for reverse repurchase agreements. |
A. | Forward Foreign Currency Exchange Contracts |
A forward foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a future date. Forward foreign currency exchange contracts, when used by the Fund, help to manage the overall exposure to the currencies in which some of the investments held by the Fund are denominated. The contract is marked-to-market daily and the change in market value is recorded by the Fund as an unrealized appreciation or depreciation. When the contract |
is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The use of forward foreign currency exchange contracts involves the risk that the value of the contract changes unfavorably due to movements in the value of the referenced foreign currencies. Non-deliverable forward foreign currency exchange contracts are settled with the counterparty in U.S. dollars without the delivery of foreign currency. | |
During the six months ended May 31, 2023, the Fund entered into forward foreign currency exchange contracts as an economic hedge against either specific transactions or portfolio instruments or to obtain exposure to, or hedge exposure away from, foreign currencies (foreign currency exchange rate risk). Forward foreign currency contracts outstanding at period end, if any, are listed after the Fund’s Schedule of Investments. | |
B. | Swaps |
The Fund enters into swap agreements, in which the Fund and a counterparty agree either to make periodic net payments on a specified notional amount or a net payment upon termination. Swap agreements are negotiated in the OTC market and may be entered into as a bilateral contract (“OTC swaps”) or centrally cleared (“centrally cleared swaps”). The value of the swap is reflected on the Statement of Assets and Liabilities as “Swaps at value”. Swaps are marked-to-market daily and changes in value are recorded as “Net change in unrealized appreciation (depreciation) on swaps” in the Statement of Operations. | |
Any upfront premiums paid are recorded as assets and any upfront fees received are recorded as liabilities and are shown under “Swaps at value” in the Statement of Assets and Liabilities and are amortized over the term of the swap. When a swap is terminated, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund’s basis in the contract, if any. Generally, the basis of the contracts is the unamortized premium received or paid. Cash settlements between the Fund and the counterparty are recognized as “Net realized gain (loss) on swaps” in the Statement of Operations. Swap contracts outstanding at period end, if any, are listed after the Fund’s Schedule of Investments. | |
In a centrally cleared swap, immediately following execution of the swap agreement, the swap agreement is submitted to a central counterparty (the “CCP”) and the Fund’s counterparty on the swap agreement becomes the CCP. The Fund is required to interface with the CCP through a clearing broker. Upon entering into a centrally cleared swap, the Fund is required to deposit initial margin with the clearing broker in the form of cash or securities in an amount that varies depending on the size and risk profile of the particular swap. | |
Securities deposited as margin are designated on the Schedule of Investments and cash deposited is recorded on the Statement of Assets and Liabilities as “Cash collateral pledged for swaps.” | |
Swap transactions involve, to varying degrees, elements of interest rate, credit and market risk in excess of the amounts recognized in the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements, and |
that there may be unfavorable changes in interest rates and/or market values associated with these transactions. | |
Credit default swaps – The Fund may either buy or sell (write) credit default swaps on single-name issuers (corporate or sovereign), a combination or basket of single-name issuers or traded indexes. Credit default swaps on single-name issuers are agreements in which the buyer pays fixed periodic payments to the seller in consideration for a guarantee from the protection seller to make specific payment should a negative credit event take place with respect to the referenced entity (e.g., bankruptcy, failure to pay, obligation accelerators, repudiation, moratorium or restructuring). Credit default swaps on a combination or basket of single-name issuers are agreements in which the buyer pays fixed periodic payments to the seller in consideration for a guarantee from the protection seller to make specific payment should a negative credit event take place with respect to any of the referenced entities (e.g., bankruptcy, failure to pay, obligation accelerators, repudiation, moratorium or restructuring). Credit default swaps on traded indexes are agreements in which the buyer pays fixed periodic payments to the seller in consideration for a guarantee from the seller to make a specific payment should a write-down, principal or interest shortfall or default of all or individual underlying securities included in the index occurs. As a buyer, if an underlying credit event occurs, the Fund will either receive from the seller an amount equal to the notional amount of the swap and deliver the referenced security or underlying securities comprising the index or receive a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising the index. As a seller (writer), if an underlying credit event occurs, the Fund will either pay the buyer an amount equal to the notional amount of the swap and take delivery of the referenced security or underlying securities comprising the index or pay a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising the index. The Fund may enter into credit default swaps to manage their exposure to the market or certain sectors of the market, to reduce their risk exposure to defaults of corporate and/or sovereign issuers or to create exposure to corporate and/or sovereign issuers to which they are not otherwise exposed (credit risk). | |
During the six months ended May 31, 2023, the Fund utilized single name credit default swaps to short individual securities or to gain exposure to a credit or asset-backed index. | |
The following is a summary of derivative instruments categorized by primary risk exposure, and location as presented in the Statement of Assets and Liabilities as of May 31, 2023: |
Statement Line Description | Primary Risk | ||||
Asset Derivatives | |||||
Over-the-counter swaps at value(1) | Credit contracts | $ 169 | |||
Total | $ 169 | ||||
Liability Derivatives | |||||
Variation margin payable on cleared swaps(1) | Credit contracts | $(2,673) | |||
Over-the-counter swaps at value(1) | Credit contracts | (5,888) | |||
Total | $(8,561) |
(1) | Represents cumulative appreciation (depreciation) on swap contracts as reported in the Schedule of Investments. Only current day’s variation margin is shown in the Statement of Assets and Liabilities for centrally cleared swap contracts. For OTC swap contracts, the value (including premiums) at May 31, 2023 is shown in the Statement of Assets and Liabilities. |
Statement Line Description | Primary Risk | ||||
Net Realized Gain (Loss) from | |||||
Forward foreign currency exchange contracts | Foreign currency contracts | $ (300) | |||
Swaps | Credit contracts | (2,629) | |||
Total | $ (2,929) | ||||
Net Change in Unrealized Appreciation (Depreciation) on | |||||
Forward foreign currency exchange contracts | Foreign currency contracts | $ 172 | |||
Swaps | Credit contracts | 3,029 | |||
Total | $ 3,201 |
Forward Foreign Currency Exchange Purchase Contracts(1) | $ 830 |
Forward Foreign Currency Exchange Sale Contracts(1) | 2,361 |
Credit Default Swap Contracts - Sell Protection(1) | 38,753 |
(1) Average notional amount. |
C. | Derivative Risks |
A derivative contract may suffer a mark-to-market loss if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract. | |
The Fund’s risk of loss from counterparty credit risk on derivatives bought or sold OTC rather than traded on a securities exchange, is generally limited to the aggregate unrealized gain netted against any collateral held by the Fund. For OTC purchased options, the Fund bears the risk of loss of the amount of the premiums paid plus the positive change in market values net of any collateral held by such Fund should the counterparty fail to perform under the contracts. Options written by a Fund do not typically give rise to counterparty credit risk, as options written generally obligate the Fund, and not the counterparty to perform. | |
With exchange traded purchased options and futures and centrally cleared swaps generally speaking, there is less counterparty credit risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; |
therefore, credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or insolvency) of the clearing broker or clearinghouse. Additionally, credit risk exists in exchange traded futures and centrally cleared swaps with respect to initial and variation margin that is held in a clearing broker’s customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro-rata basis across all the clearing broker’s customers, potentially resulting in losses to the Fund. | |
In order to better define its contractual rights and to secure rights that will help the Fund mitigate its counterparty risk, the Fund may enter into an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement with its derivative contract counterparties. An ISDA Master Agreement is a bilateral agreement between the Fund and a counterparty that governs certain OTC derivatives and typically contains, among other things, collateral posting terms and netting provisions in the event of a default and/or termination event. Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to OTC derivatives to terminate derivative contracts prior to maturity in the event the Fund’s net assets decline by a stated percentage or the Fund fails to meet the terms of its ISDA Master Agreements, which would cause the Fund to accelerate payment of any net liability owed to the counterparty. | |
D. | Collateral Requirements and Master Netting Agreements (“MNA”) |
For derivatives traded under an ISDA Master Agreement, the collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of any collateral currently pledged by the Fund and the counterparty. | |
Cash collateral that has been pledged to cover obligations of the Fund and cash collateral received from the counterparty, if any, is reported separately on the Statement of Assets and Liabilities as cash pledged as collateral and cash received as collateral, respectively. Non-cash collateral pledged by the Fund, if any, is noted in the Schedule of Investments. Typically, the Fund and counterparties are not permitted to sell, re-pledge or use the collateral they receive. To the extent amounts due to the Fund from its counterparties are not fully collateralized, contractually or otherwise, the Fund bears the risk of loss from counterparty non-performance. The Fund attempts to mitigate counterparty risk by only entering into agreements with counterparties that it believes have the financial resources to honor its obligations and by monitoring the financial stability of those counterparties. |
For financial reporting purposes, the Fund does not offset derivative assets and liabilities that are subject to netting arrangements in the Statement of Assets and Liabilities. | |
The following table presents the Fund’s derivative assets and liabilities and reverse repurchase agreements by counterparty net of amounts available for offset under a MNA and net of the related collateral received/pledged by the Fund as of May 31, 2023: |
At May 31, 2023, the Fund’s derivative assets and liabilities (by type) are as follows: | |||||
Assets | Liabilities | ||||
Derivative Financial Instruments: | |||||
Centrally cleared swaps | $— | $ 42 | |||
OTC swaps | — | 8,634 | |||
Reverse repurchase agreements | — | 24,767 | |||
Total derivative assets and liabilities in the Statement of Assets and Liabilities | $— | $33,443 | |||
Derivatives not subject to a MNA or similar agreement | — | (42) | |||
Total assets and liabilities subject to a MNA | $— | $33,401 |
Counterparty | Derivatives Liabilities Subject to a MNA by Counterparty | Derivatives Available for Offset | Non-cash Collateral Pledged | Cash Collateral Pledged(1) | Net Amount of Derivative Liabilities(1) | |||||
Barclays | $ 7,410 | $— | $ — | $(7,410) | $— | |||||
JPMorgan Chase Bank N.A. | 24,767 | — | (24,767) | — | — | |||||
Morgan Stanley | 1,224 | — | — | (1,224) | — | |||||
Total | $33,401 | $— | $ 24,767 | $(8,634) | $— |
A. | Investment Adviser |
Virtus Alternative Investment Advisers, Inc. (the “Adviser”), an indirect, wholly-owned subsidiary of Virtus Investment Partners, Inc. (“Virtus”), is the investment adviser to the Fund. The Adviser manages the Fund’s investment program and general operations of the Fund, including oversight of the Fund’s subadviser. |
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 Fund’s total assets (including any assets attributable to any leverage used) minus the Fund’s accrued liabilities (other than the Fund liabilities incurred for any leverage) (“Managed Assets”) provided that the Adviser fee does not exceed 1.50% of the Fund’s net assets. | |
B. | Subadviser |
Stone Harbor Investment Partners, a division of Virtus Fixed Income Advisers, LLC, an indirect, wholly-owned subsidiary of Virtus, is the subadviser to the Fund. The subadviser manages the investments of the Fund, for which it is paid a fee by the Adviser. | |
C. | Expense Limitation |
The Adviser has contractually agreed to limit the Fund’s 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, 2024. Following the contractual period, the Adviser may discontinue these expense reimbursement arrangements 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). | |
D. | Expense Recapture |
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. | |
During the six months ended May 31, 2023, the Adviser did not recapture expenses. | |
E. | Administration Services |
Virtus Fund Services, LLC, an indirect, wholly-owned subsidiary of Virtus, serves as administrator to the Fund. For the services provided by the administrator under the Administration Agreement, the Fund pays the administrator an asset-based fee calculated on the Fund’s average daily Managed Assets. This fee is calculated daily and paid monthly. | |
For the six months ended May 31, 2023, the Fund incurred administration fees totaling $47 which are included in the Statement of Operations within the line item “Administration and accounting fees.” |
F. | Trustees’ Fees |
For the six months ended May 31, 2023, the Fund incurred Trustees’ fees totaling $11 which are included in the Statement of Operations within the line item “Trustees’ fees and expenses.” | |
G. | Investments with Affiliates |
The Fund is permitted to purchase assets from or sell assets to certain related affiliates under specified conditions outlined in procedures adopted by the Board. The procedures have been designed to ensure that any purchase or sale of assets by the Fund from or to another fund or portfolio that are, or could be, considered an affiliate by virtue of having a common investment adviser (or affiliated investment advisers), common Trustees and/or common officers comply with Rule 17a-7 under the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. | |
During the six months ended May 31, 2023, the Fund did not engage in any transactions pursuant to Rule 17a-7 under the 1940 Act. | |
H. | Trustees Deferred Compensation Plan |
The Fund provides a deferred compensation plan for its Trustees who receive compensation from the Fund. Under the deferred compensation plan, Trustees may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Fund, and then, to the extent permitted by the 1940 Act, in turn, may be invested in the shares of affiliated or unaffiliated mutual funds selected by the participating Trustees. Investments in such instruments are included in “Prepaid expenses and other assets” in the Statement of Assets and Liabilities at May 31, 2023. |
Purchases | Sales | |
$38,529 | $33,038 |
Federal Tax Cost | Unrealized Appreciation | Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | |||
$65,206 | $1,277 | $(15,291) | $(14,014) |
Short-Term | Long-Term | |
$56,960 | $71,860 |
Overnight & Continuous | Up to 30 days | 30-90 days | Greater than 90 days | Total | |||||||
Sovereign Debt Obligations | $13,842 | $— | $— | $— | $13,842 | ||||||
Corporate Bonds | 10,925 | — | — | — | 10,925 | ||||||
Total | $24,767 | $— | $— | $— | $24,767 | ||||||
Gross amount of unrecognized liabilites of reverse repurchase agreements | $24,767 |
Election of Trustees | Votes For | Votes Withheld |
F. Ford Drummond | 11,105,662.000 | 698,369.000 |
Sidney E. Harris | 11,088,732.000 | 715,299.000 |
Philip R. McLoughlin | 11,131,041.000 | 672,990.000 |
Geraldine M. McNamara | 11,156,890.000 | 647,141.000 |
Votes For | Votes Withheld | Abstain | |
Approval of the issuance of additional common shares of beneficial interest of the Fund in connection with the Reorganization | 4,717,990.000 | 806,962.000 | 245,344.000 |
Shareholder Services | 1-866-270-7788 |
Website | www.Virtus.com |
The Securities and Exchange Commission has modified mailing regulations for semiannual and annual shareholder fund reports to allow mutual fund companies to send a single copy of these reports to shareholders who share the same mailing address. If you would like additional copies, please call Mutual Fund Services at 1-866-270-7788.
Virtus Closed-End Funds, please
contact us at 1-866-270-7788
or closedendfunds@virtus.com
or visit Virtus.com.
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8469 | 07-23 |
(b) | Not applicable. |
Item 2. Code of Ethics.
Response not required for semi-annual report.
Item 3. Audit Committee Financial Expert.
Response not required for semi-annual report.
Item 4. Principal Accountant Fees and Services.
Response not required for semi-annual report.
Item 5. Audit Committee of Listed Registrants.
Response not required for semi-annual report.
Item 6. Investments.
(a) | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1(a) of this form. |
(b) | Not applicable. |
Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
Response not required for semi-annual report.
Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
(a) | Response not required for semi-annual report. |
(b) | William Perry, who was identified as a portfolio manager in response to paragraph (a)(1) of this Item in the registrant’s most recently filed annual report on Form N-CSR, retired on March 31, 2023, and therefore is no longer a portfolio manager of the registrant. |
Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
Not applicable.
Item 10. | Submission of Matters to a Vote of Security Holders. |
There have been no material changes to the procedures by which the shareholders may recommend nominees to the Registrant’s Board of Trustees that were implemented after the Registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.
Item 11. | Controls and Procedures. |
(a) | The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
(b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
Item 12. | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies. |
Not applicable.
Item 13. | Exhibits. |
(a)(1) | Not applicable. |
(a)(2)(1) | Not applicable. |
(a)(2)(2) | Not applicable. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Virtus Stone Harbor Emerging Markets Income Fund |
By (Signature and Title)* /s/ George R. Aylward | ||
George R. Aylward, President and Chief Executive Officer | ||
(principal executive officer) |
Date 8/4/23 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title)* /s/ George R. Aylward | ||
George R. Aylward, President and Chief Executive Officer | ||
(principal executive officer) |
Date 8/4/23 |
By (Signature and Title)* /s/ W. Patrick Bradley | ||
W. Patrick Bradley, Executive Vice President, | ||
Chief Financial Officer, and Treasurer | ||
(principal financial officer) |
Date 8/4/23 |
* | Print the name and title of each signing officer under his or her signature. |