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 811-22608
Virtus Global Multi-Sector Income Fund
(Exact name of registrant as specified in charter)
101 Munson Street
Greenfield, MA 01301-9683
(Address of principal executive offices) (Zip code)
William Renahan, Esq
Vice President, Chief Legal Officer and Secretary for Registrant
100 Pearl Street
Hartford, CT 06103-4506
(Name and address of agent for service)
Registrant’s telephone number, including area code: (866) 270-7788
Date of fiscal year end: December 31
Date of reporting period: June 30, 2015
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, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
| Item 1. | Reports to Stockholders. |
The Report to Shareholders is attached herewith.
SEMIANNUAL REPORT
Virtus Global Multi-Sector Income Fund
| Not FDIC Insured No Bank Guarantee May Lose Value |
June 30, 2015 |
FUND DISTRIBUTIONS AND MANAGED DISTRIBUTION PLAN
In March 2015, the Board of Directors of the Virtus Global Multi-Sector Income Fund (“the Fund”) voted to adopt a Managed Distribution Plan (the “Plan”) and set the monthly distribution rate at $0.156 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. The Fund is undertaking this action to enhance shareholder value by providing a more attractive distribution rate. You should not draw any conclusions about the Fund’s investment performance from the amount of the distributions or from the terms of the Fund’s Managed Distribution Plan.
The Fund estimates that it has distributed more than its income and net realized capital gains in the fiscal year to date; therefore, a portion of your distributions 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.”
The amounts and sources of distributions reported in Section 19(a) notices of the 1940 Act 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 experience during the remainder of 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 Managed Distribution 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 Virtus Global Multi-Sector Income 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/our-products/closed-end-fund-details/VGI.
1
Dear Virtus Global Multi-Sector Income Fund Shareholder:
I am pleased to share with you the semiannual report for the Virtus Global Multi-Sector Income Fund for the six months ended June 30, 2015. The report contains commentary from the portfolio management team at Newfleet Asset Management, LLC on how the fixed income markets and the fund performed during the period, including the contribution of the options overlay strategy.
For the six months ended June 30, 2015, the fund’s NAV gained 5.53%, including $1.108 in reinvested distributions. For the same period, the fund’s benchmark, the Barclays Global Aggregated Bond Index, declined 3.08%, including reinvested dividends.
On behalf of Newfleet Asset Management, LLC and Virtus Investment Partners, Inc., I welcome all new investors, and thank all of our shareholders for entrusting your assets to us. Should you have any questions or require support, the Virtus customer service team is ready to assist you at 1-866-270-7788 or through the closed-end fund sections of our website, www.virtus.com.
Sincerely,
George R. Aylward
President and Trustee
Virtus Global Multi-Sector Income Fund
July 2015
This information does not represent an offer, or the solicitation of an offer, to buy or sell securities of the Fund.
Performance data quoted represents past results. Past performance is no guarantee of future results and current performance may be higher or lower than performance shown.
2
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
JUNE 30, 2015 (Unaudited)
MANAGER’S DISCUSSION OF FUND PERFORMANCE
3
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
JUNE 30, 2015 (Unaudited)
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Continued)
4
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
JUNE 30, 2015 (Unaudited)
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Continued)
5
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
JUNE 30, 2015
(Unaudited)
The following tables present the portfolio holdings within certain sectors or countries and as a percentage of total investments net of written options at June 30, 2015.
| Asset Allocation |
||||||||
| Corporate Bonds and Notes | 66 | % | ||||||
| Financials |
24 | % | ||||||
| Energy |
15 | |||||||
| Materials |
7 | |||||||
| Total of all others |
20 | |||||||
| Loan Agreements |
9 | |||||||
| Foreign Government Securities |
8 | |||||||
| Mortgage-Backed Securities |
7 | |||||||
| Asset-Backed Securities |
4 | |||||||
| Preferred Stock |
3 | |||||||
| Other (includes short-term investment) |
3 | |||||||
|
|
|
|||||||
| 100 | % | |||||||
|
|
|
|||||||
| Country Weightings | ||||
| United States | 52 | % | ||
| Chile |
4 | |||
| Mexico |
4 | |||
| Cayman Islands |
3 | |||
| Luxembourg |
3 | |||
| Brazil |
2 | |||
| Netherlands |
2 | |||
| Other |
30 | |||
|
|
|
|||
| Total |
100 | % | ||
|
|
|
|||
The accompanying notes are an integral part of these financial statements.
6
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
JUNE 30, 2015
(Unaudited)
KEY INVESTMENT TERMS
American Depositary Receipt (ADR)
Represents shares of foreign companies traded in U.S. dollars on U.S. exchanges that are held by a U.S. bank or a trust. Foreign companies use ADRs in order to make it easier for Americans to buy their shares.
Barclays Global Aggregate Bond Index
The Barclays Global Aggregate Bond Index is a market-weighted index of global government, government-related agencies, corporate and securitized fixed income investments.
The index is calculated on a total return basis. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and it is not available for direct investment.
Brent Crude
Roughly two-thirds of all crude contracts around the world reference Brent Blend, making it the most widely used marker of all. These days, “Brent” actually refers to oil from four different fields in the North Sea: Brent, Forties, Oseberg and Ekofisk. Crude from this region is light and sweet, making them ideal for the refining of diesel fuel, gasoline and other high-demand products. And because the supply is water-borne, it’s easy to transport to a distant locations.
Chicago Board Options Exchange (CBOE) Volatility Index, (‘VIX – CBOE’)
The Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge.”
European Central Bank (“ECB”)
The European Central Bank (ECB) is responsible for conducting monetary policy for the eurozone. The ECB was established as the core of the Eurosystem and the European System of Central Banks (ESCB). The ESCB comprises the ECB and the national central banks (NCBs) of all 17 European Union Member States whether they have adopted the Euro or not.
Exchange-Traded Funds (ETF)
An open-end fund that is traded on a stock exchange. Most ETFs have a portfolio of stocks or bonds that track a specific market index.
Federal Reserve (the “Fed”)
The Central bank of the United States, responsible for controlling the money supply, interest rates and credit with the goal of keeping the U.S. economy and currency stable. Governed by a seven-member board, the system includes 12 regional Federal Reserve Banks, 25 branches and all national and state banks that are part of the system.
Gross Domestic Product (GDP)
The market value of all officially recognized final goods and services produced within a country in a given period.
International Monetary Fund (IMF)
The IMF is an organization of 188 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
7
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
JUNE 30, 2015
(Unaudited)
KEY INVESTMENT TERMS (Continued)
Quantitative Easing
A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
S&P 500® Index
The S&P 500® Index is a free-float market capitalization-weighted index of 500 of the largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and it is not available for direct investment.
World Bank
The World Bank is an international organization dedicated to providing financing, advice and research to developing nations to aid their economic advancement.
Yield Curve
A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates.
8
9
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
10
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
11
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
12
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
13
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
14
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
15
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
16
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
17
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
18
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
19
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
20
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
21
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
The following table provides a summary of inputs used to value the Fund’s investments as of June 30, 2015 (See Security Valuation Note 2A in the Notes to Financial Statements):
| Total Value at June 30, 2015 |
Level 1 Quoted Prices |
Level 2 Significant Observable Inputs |
||||||||||
| Debt Securities: |
||||||||||||
| Asset-Backed Securities |
$ | 10,668 | $ | — | $ | 10,668 | ||||||
| Corporate Bonds and Notes |
180,058 | — | 180,058 | |||||||||
| Foreign Government Securities |
22,719 | — | 22,719 | |||||||||
| Loan Agreements |
25,122 | — | 25,122 | |||||||||
| Mortgage-Backed Securities |
18,140 | — | 18,140 | |||||||||
| Municipal Bonds |
2,134 | — | 2,134 | |||||||||
| U.S. Government Securities |
3,044 | — | 3,044 | |||||||||
| Equity Securities: |
||||||||||||
| Preferred Stock |
7,816 | 2,154 | 5,662 | |||||||||
| Purchased Options |
432 | 431 | 1 | |||||||||
| Short-Term Investments |
3,855 | 3,855 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Investments before Written Options |
$ | 273,988 | $ | 6,440 | $ | 267,548 | ||||||
|
|
|
|
|
|
|
|||||||
| Written Options |
(1,327 | ) | (1,327 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Total Investments Net of Written Options |
$ | 272,661 | $ | 5,113 | $ | 267,548 | ||||||
|
|
|
|
|
|
|
|||||||
There are no Level 3 (significant unobservable inputs) priced securities.
There were no transfers between Level 1 and Level 2 related to securities held at June 30, 2015.
See Notes to Financial Statements
22
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2015 (Unaudited)
($ reported in thousands)
The following is a reconciliation of assets of the Fund for Level 3 investments for which significant unobservable inputs were used to determine fair value.
| Loan Agreements |
||||
| Investments in Securities Balance as of December 31, 2014: |
$ | 395 | ||
| Accrued discount (premium) |
— | (c) | ||
| Realized gain (loss) |
— | |||
| Change in unrealized appreciation/(depreciation)(d) |
40 | |||
| Purchases |
— | |||
| Sales(b) |
— | |||
| Transfers into Level 3(a) |
— | |||
| Transfers from Level 3(a) |
(435 | ) | ||
|
|
|
|||
| Balance as of June 30, 2015 |
$ | — | (e) | |
|
|
|
|||
| (a) | “Transfers into and/or from” represent the ending value as of June 30, 2015, for any investment security where a change in pricing level occurred from the beginning to the end of the period. |
| (b) | Includes paydowns on securities. |
| (c) | Amount is less than $500. |
| (d) | Included in the related net change in unrealized appreciation (depreciation) on investments in the Statement of Operations. |
| (e) | The Fund’s investments that are categorized as Level 3 were valued utilizing third party pricing information without adjustment. Such valuations are based on unobservable inputs. A significant change in third party information inputs could result in a significantly lower or higher value of Level 3 investments. |
None of the securities in this table are internally fair valued.
See Notes to Financial Statements
23
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2015 (Unaudited)
(Reported in thousands except shares and per share amounts)
| Assets | ||||
| Investment in securities at value (Identified cost $284,731) |
$ | 273,988 | ||
| Foreign currency at value (Identified cost $3) |
3 | |||
| Cash |
170 | |||
| Deposits with prime broker |
3,421 | |||
| Receivables | ||||
| Dividends and interest |
3,689 | |||
| Tax reclaims |
64 | |||
| Prepaid expenses |
13 | |||
| Prepaid trustee retainer |
22 | |||
|
|
|
|||
| Total assets |
281,370 | |||
|
|
|
|||
| Liabilities | ||||
| Written options at value (Premiums received $824)(Note 3) |
1,327 | |||
| Payables | ||||
| Borrowings (Note 8) |
76,000 | |||
| Investment securities purchased |
2,299 | |||
| Investment advisory fees |
218 | |||
| Administration fees |
23 | |||
| Professional fees |
17 | |||
| Interest payable on borrowings |
2 | |||
| Other accrued expenses |
39 | |||
|
|
|
|||
| Total liabilities |
79,925 | |||
|
|
|
|||
| Net Assets | $ | 201,445 | ||
|
|
|
|||
| Net Assets Consist of: | ||||
| Capital paid in on shares of beneficial interest |
$ | 214,529 | ||
| Accumulated undistributed net investment income (loss) |
(4,089 | ) | ||
| Accumulated undistributed net realized gain (loss) |
2,262 | |||
| Net unrealized appreciation (depreciation) |
(11,257 | ) | ||
|
|
|
|||
| Net Assets | $ | 201,445 | ||
|
|
|
|||
| Net Asset Value Per Share |
$ | 17.90 | ||
|
|
|
|||
See Notes to Financial Statements
24
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SIX MONTHS ENDED JUNE 30, 2015 (Unaudited)
($ reported in thousands)
| Investment Income | ||||
| Interest |
$ | 7,637 | ||
| Dividends |
73 | |||
| Foreign taxes withheld |
(5 | ) | ||
|
|
|
|||
| Total investment income |
7,705 | |||
|
|
|
|||
| Expenses | ||||
| Investment advisory fees |
1,319 | |||
| Administration and accounting fees |
183 | |||
| Printing fees and expenses |
53 | |||
| Trustees’ fees and expenses |
52 | |||
| Professional fees |
33 | |||
| Registration fees |
12 | |||
| Transfer agent fees and expenses |
7 | |||
| Custodian fees |
6 | |||
| Miscellaneous |
23 | |||
|
|
|
|||
| Total expenses before interest expense |
1,688 | |||
| Interest expense |
374 | |||
|
|
|
|||
| Total expenses after interest expense |
2,062 | |||
|
|
|
|||
| Net investment income (loss) | 5,643 | |||
|
|
|
|||
| Net Realized and Unrealized Gain (Loss) on Investments | ||||
| Net realized gain (loss) on investments |
(9,822 | ) | ||
| Net realized gain (loss) on foreign currency transactions |
(41 | ) | ||
| Net realized gain (loss) on written options |
10,242 | |||
| Net increase from payments by affiliates(1) |
4 | |||
| Net change in unrealized appreciation (depreciation) on investments |
3,864 | |||
| Net change in unrealized appreciation (depreciation) on foreign currency translations |
11 | |||
| Net change in unrealized appreciation (depreciation) on written options |
(209 | ) | ||
|
|
|
|||
| Net realized and unrealized gain (loss) on investments | 4,049 | |||
|
|
|
|||
| Net increase (decrease) in net assets resulting from operations | $ | 9,692 | ||
|
|
|
| (1) | See Note 4E in the Notes to Financial Statements. |
See Notes to Financial Statements
25
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
($ reported in thousands)
| Six Months Ended June 30, 2015 (Unaudited) |
Year Ended December 31, 2014 |
|||||||
| INCREASE/(DECREASE) IN NET ASSETS | ||||||||
| From Operations | ||||||||
| Net investment income (loss) |
$ | 5,643 | $ | 13,793 | ||||
| Net realized gain (loss) |
379 | 5,451 | ||||||
| Net increase in payments by affiliates |
4 | — | ||||||
| Net change in unrealized appreciation (depreciation) |
3,666 | (10,961 | ) | |||||
|
|
|
|
|
|||||
| Increase (decrease) in net assets resulting from operations | 9,692 | 8,283 | ||||||
|
|
|
|
|
|||||
| From Distributions to Shareholders | ||||||||
| Net investment income |
(9,657 | )(1) | (13,105 | ) | ||||
| Net realized short-term gains |
— | (4,003 | ) | |||||
| Net realized long-term gains |
(2,814 | ) | (1,148 | ) | ||||
|
|
|
|
|
|||||
| Decrease in net assets from distributions to shareholders | (12,471 | ) | (18,256 | ) | ||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets | (2,779 | ) | (9,973 | ) | ||||
| Net Assets | ||||||||
| Beginning of period |
204,224 | 214,197 | ||||||
|
|
|
|
|
|||||
| End of period | $ | 201,445 | $ | 204,224 | ||||
|
|
|
|
|
|||||
| Accumulated undistributed net investment income (loss) at end of period |
$ | (4,089 | ) | $ | (75 | ) | ||
| (1) | Please note that the tax status of our distributions is determined at the end of the tax year. However, based on interim data as of June 30, 2015, we estimate 41% of the distributions will represent net investment income, 3% will represent short-term gains, 18% will represent long-term gains, and 38% will represent tax return of capital. |
See Notes to Financial Statements
26
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 (Unaudited)
($ reported in thousands)
| Increase (decrease) in cash | ||||
| Cash Flows Provided by (Used for) Operating Activities: | ||||
| Net increase (decrease) in net assets resulting from operations |
$ | 9,692 | ||
|
|
|
|||
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided/(used) by operating activities: |
||||
| Proceeds from sales and paydowns of long-term investments |
90,222 | |||
| (Increase) Decrease in investment securities sold receivable |
993 | |||
| Purchases of long-term investments |
(88,923 | ) | ||
| Increase (Decrease) in investment securities purchased payable |
2,069 | |||
| Net (purchases) or sales of short-term securities |
(241 | ) | ||
| Net (purchases) or sales in purchased options |
(4,087 | ) | ||
| Net purchases or (sales) in written options |
10,173 | |||
| Net change in unrealized (appreciation)/depreciation on long-term investments |
(3,864 | ) | ||
| Net change in unrealized (appreciation)/depreciation written options |
209 | |||
| Net realized (gains)/loss from sales of long-term investments |
9,822 | |||
| Net realized (gains)/loss from written options |
(10,242 | ) | ||
| Net increase in payment from affiliate |
(4 | ) | ||
| Amortization of premium and accretion of discounts on investments |
355 | |||
| (Increase) Decrease in deposit with prime broker |
(130 | ) | ||
| (Increase) Decrease in tax reclaims receivable |
2 | |||
| (Increase) Decrease in dividends and interest receivable |
377 | |||
| (Increase) Decrease in prepaid expenses |
(4 | ) | ||
| (Increase) Decrease in prepaid retainer |
(22 | ) | ||
| Increase (Decrease) in interest on borrowings |
— | |||
| Increase (Decrease) in investment advisory fees payable |
(12 | ) | ||
| Increase (Decrease) in other affiliates payable |
(1 | ) | ||
| Increase (Decrease) in Trustees’ fees payable |
— | |||
| Increase (Decrease) in other accrued expenses payable |
(24 | ) | ||
|
|
|
|||
| Cash provided by (used for) operating activities |
16,360 | |||
|
|
|
|||
| Cash provided by (used for) financing activities: | ||||
| Cash payments from borrowings |
(4,000 | ) | ||
| Cash dividends paid to shareholders |
(12,471 | ) | ||
| Capital contribution from Advisor |
4 | |||
|
|
|
|||
| Cash provided by (used for) financing activities: |
(16,467 | ) | ||
|
|
|
|||
| Net increase (decrease) in cash | (107 | ) | ||
|
|
|
|||
| Cash: | ||||
| Cash and foreign currency at beginning of period |
280 | |||
|
|
|
|||
| Cash and foreign currency at end of period |
$ | 173 | ||
|
|
|
|||
| Cash flow information: | ||||
| Cash paid during the period for interest |
$ | 374 | ||
See Notes to Financial Statements
27
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
(Selected per share data and ratios for a share outstanding throughout each period)
| Six Months Ended June 30, 2015 (Unaudited) |
Year Ended December 31, | From Inception1 to December 31, 2012 |
||||||||||||||
| 2014 | 2013 | |||||||||||||||
| PER SHARE OPERATING DATA: | ||||||||||||||||
| Net Asset Value, Beginning of Period |
$ | 18.14 | $ | 19.03 | $ | 20.32 | $ | 19.10 | (1) | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income from investment operations: | ||||||||||||||||
| Net Investment Income/(Loss)(2) |
0.50 | 1.23 | 1.34 | 1.08 | ||||||||||||
| Net Realized and Unrealized Gain/(Loss) |
0.37 | (0.50 | ) | (1.10 | ) | 1.19 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total from Investment Operations |
0.87 | 0.73 | 0.24 | 2.27 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Dividends and/or Distributions to Shareholders: | ||||||||||||||||
| Dividends from Net Investment Income |
(0.86 | )(10) | (1.16 | ) | (1.29 | ) | (0.93 | ) | ||||||||
| Dividends from Net Realized Gains |
(0.25 | ) | (0.46 | ) | (0.24 | ) | (0.12 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Dividends and Distributions to Shareholders |
(1.11 | ) | (1.62 | ) | (1.53 | ) | (1.05 | ) | ||||||||
| Payment from affiliate |
— | (9) | — | — | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Asset Value, End of Period |
$ | 17.90 | $ | 18.14 | $ | 19.03 | $ | 20.32 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Market Price, End of Period(3) |
$ | 15.68 | $ | 15.85 | $ | 16.92 | $ | 18.90 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Return on Net Asset Value(4) |
5.53 | %(7) | 4.81 | % | 1.89 | % | 12.61 | %(7) | ||||||||
| Total Return on Market Value(5) |
5.86 | %(7) | 2.94 | % | (2.55 | )% | (0.02 | )%(7) | ||||||||
| Net Assets, End of Period (000’s) |
$ | 201,445 | $ | 204,224 | $ | 214,197 | $ | 228,749 | ||||||||
| RATIOS/SUPPLEMENTAL DATA: | ||||||||||||||||
| Ratio of Total Expenses After Interest Expense to Average Net Assets(6) |
2.04 | %(8) | 2.13 | % | 2.16 | % | 2.19 | %(8) | ||||||||
| Ratio of Net Investment Income/(Loss) to Average Net Assets |
5.58 | %(8) | 6.37 | % | 6.87 | % | 6.65 | %(8) | ||||||||
| Portfolio Turnover Rate |
33 | %(7) | 45 | % | 48 | % | 46 | %(7) | ||||||||
| Bank Borrowings: | ||||||||||||||||
| Loan Outstanding, End of Period (000’s) |
$ | 76,000 | $ | 80,000 | $ | 93,000 | $ | 93,000 | ||||||||
| Asset Coverage for Loan Outstanding |
367 | % | 357 | % | 330 | % | 346 | % | ||||||||
See Notes to Financial Statements
28
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
FINANCIAL HIGHLIGHTS (Continued)
(Selected per share data and ratios for a share outstanding throughout each period)
| (1) | Fund commenced operations on February 23, 2012, the date which its initial public offering shares were issued. |
| (2) | Based on average number of shares of common stock outstanding. |
| (3) | Closing price – New York Stock Exchange (“NYSE”) |
| (4) | Total Return on NAV is calculated using the Net Asset Value of common stock on the first business day and the closing Net Asset Value on the last business day of the period. Dividends and distributions, if any, are assumed for the purpose of this calculation, to be reinvested at prices obtained under the Fund’s Automatic Reinvestment and Cash Purchase Plan. |
| (5) | Total investment return is calculated assuming a purchase of common shares of 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 investment return is not annualized for periods of less than one year. Brokerage commissions that a shareholder may pay are not reflected. Total return does not reflect the deduction of taxes that a shareholder may pay on fund distributions or the sale of fund shares. |
| (6) | Ratio of operating expenses, excluding interest expense on the line of credit, was 1.67% for the six months ended June 30, 2015, and 1.74%, 1.73% for the years ended December 31, 2014, 2013, respectively, and 1.74% for the period ended December 31, 2012. |
| (7) | Not annualized |
| (8) | Annualized |
| (9) | Amount less than $0.005 |
| (10) | Please note that the tax status of our distributions are determined at the end of the tax year. |
See Notes to Financial Statements
29
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
JUNE 30, 2015 (Unaudited)
Note 1. Organization
The Fund was incorporated as a statutory trust under the laws of the State of Delaware on November 9, 2011. The Fund commenced operations on February 23, 2012, as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s investment objective is to maximize current income while preserving capital.
Note 2. Significant Accounting Policies
The significant accounting policies consistently followed by the Fund in the preparation of its financial statements are summarized below and for derivatives, included in Note 3 below. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates, and those differences could be significant.
| A. | Security Valuation |
Security valuation procedures for the Fund, which include nightly price variance, as well as back-testing such as bi-weekly unchanged price, monthly secondary source and transaction analysis, have been approved by the Board of Trustees (the “Board”, or the “Trustees”). All internally fair valued securities are approved by a valuation committee (the “Valuation Committee”) appointed by the Board. The Valuation Committee is comprised of certain members of management as identified to the Board and convenes independently from portfolio management. All internally fair valued securities are updated daily and reviewed in detail by the Valuation Committee monthly unless changes occur within the period. The Valuation Committee reviews the validity of the model inputs and any changes to the model. Quarterly fair valuations are reviewed by the Board.
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 between levels at the end of the reporting period.
| • Level 1 – | quoted prices in active markets for identical securities (security types generally include listed equities). |
| • Level 2 – | prices determined using other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). |
| • Level 3 – | prices determined using significant unobservable inputs (including the Valuation Committee’s own assumptions in determining the fair value of investments). |
A description of the valuation techniques applied to the Fund’s major categories of assets and liabilities measured at fair value on a recurring basis is as follows:
Equity securities are valued at the official closing price (typically last sale) on the exchange on which the securities are primarily traded or, if no closing price is available, at the last bid price and are categorized as Level 1 in the hierarchy. Restricted equity
30
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015 (Unaudited)
securities and private placements that are not widely traded, are illiquid, or are internally fair valued by the Valuation Committee, are generally categorized as Level 3 in the hierarchy.
Certain non-U.S. securities may be fair valued in cases where closing prices are not readily available or are deemed not reflective of readily available market prices. For example, significant events (such as movement in the U.S. securities market, or other regional and local developments) may occur between the time that non-U.S. markets close (where the security is principally traded) and the time that the Fund calculates its net asset value (“NAV”) (at the close of regular trading on the New York Stock Exchange (“NYSE”), generally 4 p.m. Eastern time) that may impact the value of securities traded in these non-U.S. markets. In such cases the Fund fair values non-U.S. securities using an independent pricing service which considers the correlation of the trading patterns of the non-U.S. security to the intraday trading in the U.S. markets for investments such as ADRs, financial futures, ETFs, and certain indexes, as well as prices for similar securities. Such fair valuations are categorized as Level 2 in the hierarchy. Because the frequency of significant events is not predictable, fair valuation of certain non-U.S. common stocks may occur on a frequent basis.
Debt securities, including restricted securities, are valued based on evaluated quotations received from independent pricing services or from dealers who make markets in such securities. For most bond types, the pricing service utilizes matrix pricing that considers one or more of the following factors: yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type, and current day trade information, as well as dealer supplied prices. These valuations are generally categorized as Level 2 in the hierarchy. Structured debt instruments, such as mortgage-backed and asset-backed securities, may also incorporate collateral analysis and utilize cash flow models for valuation and are generally categorized as Level 2 in the hierarchy. Pricing services do not provide pricing for all securities and therefore indicative bids from dealers are utilized which are based on pricing models used by market makers in the security and are generally categorized as Level 2 in the hierarchy. Debt securities that are not widely traded, are illiquid, or are internally fair valued by the Valuation Committee, are generally categorized as Level 3 in the hierarchy.
Listed derivatives, such as options, that are actively traded are valued based on quoted prices from the exchange and are categorized as Level 1 in the hierarchy. Over-the-counter derivative contracts, which include forward currency contracts and equity-linked instruments, do not require material subjectivity as pricing inputs are observed from actively quoted markets and are categorized as Level 2 in the hierarchy.
Investments in open-end mutual funds are valued at NAV. Investments in closed-end funds are valued as of the close of regular trading on the NYSE each business day. Both are categorized as Level 1 in the hierarchy.
A summary of the inputs used to value the Fund’s net assets by each major security type is disclosed at the end of the Schedule of Investments for the Fund. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
| B. | Security Transactions and Investment Income |
Security transactions are recorded on the trade date. Realized gains and losses from sales of securities are determined on the identified cost basis. Dividend income is
31
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015 (Unaudited)
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.
| C. | Income Taxes |
The Fund is treated as a separate taxable entity. It is the Fund’s intention to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all of its taxable income 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. As of June 30, 2015, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the year 2012 (inception of the Fund) forward (with limited exceptions).
| D. | Distributions to Shareholders |
Distributions are recorded by the Fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations that may differ from accounting principles generally accepted in the United States of America. These differences may include the treatment of non-taxable dividends, market premium and discount, non-deductible expenses, expiring capital loss carryovers, foreign currency gain or loss, operating losses and losses deferred due to wash sales. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital paid in on shares of beneficial interest.
| E. | Foreign Currency Translation |
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 does not isolate 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. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
| F. | When-issued Purchases and Forward Commitments (Delayed-Delivery) |
The Fund may engage in when-issued or forward commitment transactions. Securities purchased on a when-issued or forward commitment basis are also known as delayed delivery transactions. Delayed delivery transactions involve a commitment by the Fund to purchase or sell a security at a future date (ordinarily up to 90 days later). When-issued or
32
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015 (Unaudited)
forward commitments enable the Fund to lock in what is believed to be an attractive price or yield on a particular security for a period of time, regardless of future changes in interest rates. The Fund records when-issued and delayed delivery securities on the trade date. The Fund maintains collateral for the securities purchased. Securities purchased on a when-issued or delayed delivery basis begin earning interest on the settlement date.
| G. | Loan Agreements |
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. Loan Agreements 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. Loan agreements 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 loan agreement. 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 loan agreement 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 loan agreement. 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. Loan agreements 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 loan agreements 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 (London Interbank Offered Rate), the prime rate offered by one or more U.S. banks or the certificate of deposit rate. When a loan agreement 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 loan agreement. Prepayment penalty fees are received upon the prepayment of a loan agreement by a borrower. Prepayment penalty, facility, commitment, consent and amendment fees are recorded to income as earned or paid.
At June 30, 2015, all loan agreements held by the Fund are assignment loans.
| H. | 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 expense to each fund or an alternative allocation method can be more appropriately used.
33
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015 (Unaudited)
In addition to the net annual operating expenses that the Fund bears directly, the shareholders of the Fund indirectly bear the Fund’s pro-rata expenses of any underlying mutual funds in which the Fund invests.
Note 3. Derivative Financial Instruments and Transactions
($’s reported in thousands)
Disclosures about derivative instruments and hedging activities are intended to enable investors to understand how and why the Fund uses derivatives, how derivatives are accounted for, and how derivative instruments affect the Fund’s results of operations and financial position. Summarized below is a specific type of derivative instrument used by the Fund.
| A. | Options contracts |
An options contract provides the purchaser with the right, but not the obligation, to buy (call option) or sell (put option) a financial instrument at an agreed upon price. The Fund pursues an option income strategy whereby it purchases and sells out-of-the money puts and calls, creating an options spread designed to generate a consistent level of option cash flow which should result in additional yield. The Fund is subject to equity price risk in the normal course of pursuing its investment objectives.
When the Fund purchases an option, it pays a premium and an amount equal to that premium is recorded as an asset. When the Fund writes an option, it receives a premium and an amount equal to that premium is recorded as a liability. The asset or liability is adjusted daily to reflect the current market value of the option. Holdings of the Fund designated to cover outstanding written options are noted in the Schedule of Investments. Purchased options are reported as an asset within “Investment in securities at value” in the Statement of Assets and Liabilities. Options written are reported as a liability within “Written options outstanding at value”. Changes in value of the purchased option is included in “Net change in unrealized appreciation (depreciation) on investments” in the Statement of Operations. Changes in value of written options is included in “Net change in unrealized appreciation (depreciation) on written options”.
If an option expires unexercised, the Fund realizes a gain or loss to the extent of the premium received or paid. If an option is exercised, the premium received or paid is recorded as an adjustment to the proceeds from the sale or the cost basis of the purchase. The difference between the premium and the amount received or paid on effecting a closing purchase or sale transaction is also treated as a realized gain or loss. Gain or loss on purchased options is included in “Net realized gain (loss) on investments” in the Statement of Operations. Gain or loss on written options is presented separately as “Net realized gain (loss) on written options” in the Statement of Operations.
The risk in writing covered put options is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying options is that the Fund pays a premium whether or not the option is exercised. The use of such instruments may involve certain additional risks as a result of unanticipated movements in the market. Writers (sellers) of options are normally subject to unlimited risk of loss, as the seller will be obligated to deliver or take delivery of the security at a predetermined price which may, upon exercise of the option, be significantly different
34
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015 (Unaudited)
from the then-market value. However, the Fund may limit its risk of loss when writing an option by purchasing an option similar to the one that is sold, except for the fact it is further “out of the money”.
The Fund invested in derivative instruments during the fiscal period in the form of writing put/call options and buying put/call options on the S&P 500® Index. The primary risk associated with these derivative instruments is equity risk. For additional information on the options in which the Fund was invested during the reporting period, refer to the Schedule of Investments.
The Fund had transactions in written options for the period ended June 30, 2015, as follows:
| Calls | Puts | |||||||||||||||
| Number of Contracts |
Premiums received |
Number of Contracts |
Premiums received |
|||||||||||||
| Written Options outstanding at December 31, 2014 | 2,265 | $ | 116 | 2,265 | $ | 777 | ||||||||||
| Options written | 25,749 | 841 | 25,749 | 9,593 | ||||||||||||
| Options closed | (19,775 | ) | (671 | ) | (19,775 | ) | (7,076 | ) | ||||||||
| Options expired | (6,297 | ) | (239 | ) | (6,297 | ) | (2,517 | ) | ||||||||
| Options exercised | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Written Options outstanding at June 30, 2015 | 1,942 | $ | 47 | 1,942 | $ | 777 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following is a summary of the Fund’s options contracts which have a primary risk exposure to equity contracts as of June 30, 2015:
| Statement of Assets and Liabilities | ||||
| Assets: Purchased options at value | $ | 432 | (1) | |
| Liabilities: Written options at value | (1,327 | ) | ||
|
|
|
|||
| Net asset (liability) balance | $ | (895 | ) | |
|
|
|
|||
| Statement of Operations | ||||
| Net realized gain (loss) on purchased options | $ | (4,236 | )(2) | |
| Net realized gain (loss) on written options | 10,242 | |||
| Net change in unrealized appreciation (depreciation) on purchased options | (89 | )(3) | ||
| Net change in unrealized appreciation (depreciation) on written options | (209 | ) | ||
|
|
|
|||
| Total realized and unrealized gain (loss) on purchased and written options | $ | 5,708 | ||
|
|
|
|||
| (1) | Amount included in Investment securities at value. |
| (2) | Amount included in Net realized gain (loss) on investments. |
| (3) | Amount included in Net change in unrealized appreciation (depreciation) on investments. |
35
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015 (Unaudited)
For the period ended June 30, 2015, the average daily premiums paid by the Fund for purchased options was $248 and the average daily premiums received by the Fund from written options was $(628).
Note 4. Investment Advisory Fees and Related Party Transactions
($ reported in thousands)
| A. | Adviser |
Virtus Investment Advisers, Inc. (the “Adviser”), an indirect wholly-owned subsidiary of Virtus Investment Partners, Inc. (“Virtus”), is the 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 will receive a monthly fee at an annual rate of 0.95% as a percentage of the average daily managed assets which is defined as the value of the total assets of the Fund minus the sum of all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings or other indebtedness, constituting financial leverage).
| B. | Subadviser |
Newfleet Asset Management, LLC (“Newfleet”), an indirect, wholly-owned subsidiary of Virtus, is the subadviser for the Fund. The subadviser manages the investments of the Fund for which they are paid a fee by the Adviser.
| C. | Administrator |
Virtus Fund Services, LLC (“VFS”), an indirect wholly-owned subsidiary of Virtus, serves as administrator to the Fund.
For the six months ended June 30, 2015, the Fund incurred administration fees totaling $139 which are included in the Statement of Operations.
| D. | Trustees |
For the six months ended June 30, 2015, the Fund incurred Trustees fees totaling $41 which are included in the Statement of Operations.
| E. | Payment from Affiliate |
During the period, the Adviser reimbursed the Fund for certain losses in the amount of $4.
Note 5. Purchases and Sales of Securities
($ reported in thousands)
Purchases and sales of securities (excluding U.S. Government and agency securities and short-term investments) during the six months ended June 30, 2015 were as follows:
| Purchases | Sales | |||||||
| $ | 63,562 | $ | 68,894 | |||||
36
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015 (Unaudited)
The purchases and sales of long term U.S. Government and agency securities for the six months ended June 30, 2015, were as follows:
| Purchases | Sales | |||||||
| $ | 25,361 | $ | 21,328 | |||||
Note 6. Illiquid and Restricted Securities
Investments generally are considered illiquid if they cannot be disposed of within seven days in the ordinary course of business at the approximate amount at which such securities have been valued by the Fund. Additionally, the following information is also considered in determining liquidity: the frequency of trades and quotes for the investment, whether the investment is listed for trading on a recognized domestic exchange and/or whether two or more brokers are willing to purchase or sell the security at a comparable price, the extent of market making activity in the investment and the nature of the market for investment. Illiquid securities are footnoted as such at the end of the Fund’s Schedule of Investments, where applicable. However, a portion of such footnoted securities could be liquid where it is determined that some, though not all, of the position could be disposed of within seven days in the ordinary course of business at the approximate amount at which such securities have been valued by the Fund.
Restricted securities are illiquid securities, as defined above, not registered under the Securities Act of 1933, as amended (the “1933 Act”). Generally, 144A securities are excluded from this category, except where defined as illiquid.
The Fund will bear any costs, including those involved in registration under the 1933 Act, in connection with the disposition of such securities.
At June 30, 2015, the Fund did not hold any securities that are both illiquid and restricted.
Note 7. Credit Risk and Asset Concentrations
In countries with limited or developing markets, investments may present greater risks than in more developed markets and the prices of such investments may be volatile. The consequences of political, social or economic changes in these markets may have disruptive effects on the market prices of these investments and the income they generate, as well as the Fund’s ability to repatriate such amounts.
High-yield/high risk securities typically entail greater price volatility and/or principal and interest rate risk. There is a greater chance that an issuer will not be able to make principal and interest payments on time. Analysis of the creditworthiness of issuers of high-yield/high-risk securities may be complex, and as a result, it may be more difficult for the Adviser and/or subadviser to accurately predict risk.
The Fund may invest a high percentage of its assets in specific sectors of the market in the pursuit of its investment objective. Fluctuations in these sectors of concentration may have a greater impact on the Fund, positive or negative, than if the Fund did not concentrate its investments in such sectors. At June 30, 2015, the Fund held 27% of its total investments net of written options in securities within the financials sectors.
The Fund borrows through its line of credit for the purpose of leveraging. While leverage presents opportunities for increasing the Fund’s total return, it also has the effect of potentially increasing losses. Accordingly, any event which adversely affects the value of an investment held by the Fund would be magnified to the extent the Fund is leveraged.
37
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015 (Unaudited)
Note 8. Borrowings
($ reported in thousands)
The Fund has entered into a Credit Agreement (the “Agreement”) with a commercial bank (the “Bank”) that allows the Fund to borrow cash from the Bank, up to a limit of $125,000, which may be increased to $150,000 under certain circumstances (“Commitment Amount”). Borrowings under the Agreement are collateralized by investments of the Fund. The Agreement results in the Fund being subject to certain covenants including asset coverage and portfolio composition (among others). If the Fund fails to meet or maintain certain covenants as required under the Agreement, the Fund may be required to repay immediately, in part or in full, the loan balance outstanding under the credit agreement, necessitating the sale of securities at potentially inopportune times. Interest is charged at LIBOR (London Interbank Offered Rate) plus an additional percentage rate on the amount borrowed. Commitment fees are charged on the undrawn balance, if less than 50% of the Commitment Amount is outstanding as a loan to the Fund. There were no commitment fees paid or accrued for the period ended June 30, 2015. The Agreement is renewable by the Fund with the Bank’s consent. The Agreement can also be converted to a 364 day fixed term facility, one time at the Fund’s option. The Bank has the ability to require repayment of outstanding borrowings under the Agreement upon certain circumstances such as an event of default. From January 1, 2015 – June 30, 2015, the average daily borrowings under the Agreement and the weighted daily average interest rate were $76,177 and 0.977%, respectively. At June 30, 2015, the amount of such outstanding borrowings was as follows:
| Outstanding Borrowings |
Interest Rate |
|||||||
| $ | 76,000 | 0.987 | % | |||||
Note 9. Indemnifications
Under the Fund’s organizational documents, its Trustees and officers are indemnified against certain liabilities arising out of the performance of their duties to the Fund. Each Trustee has also entered into an indemnification agreement with the Fund. In addition, in the normal course of business, the Fund enters into contracts that provide a variety of indemnifications to other parties. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund and that have not occurred. However, the Fund has not had prior claims or losses pursuant to such arrangements and expects the risk of loss to be remote.
Note 10. Capital Transactions
At June 30, 2015, the Fund had one class of common stock, no par value shares, of which unlimited shares are authorized and 11,255,236 shares are outstanding. Registered shareholders may elect to have all distributions paid by check mailed directly to the shareholder by Computershare as dividend paying agent. Pursuant to the Automatic Reinvestment and Cash Purchase Plan (the “Plan”), shareholders not making such election will have all such amounts automatically reinvested by Computershare, as the Plan agent, in whole or fractional shares of the Fund, as the case may be. During the periods ended June 30, 2015 and December 31, 2014, there were no shares issued pursuant to the Plan.
On June 10, 2015, the Fund announced a distribution of $0.156 to shareholders of record on July 13, 2015. This distribution has an ex-dividend date of July 9, 2015, and is payable on July 20, 2015.
38
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015 (Unaudited)
Note 11. Regulatory Matters and Litigation
From time to time, the Fund’s investment adviser and/or its affiliates and/or subadvisers may be involved in litigation and arbitration as well as examinations and investigations by various regulatory bodies, including the SEC, involving compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting their products and other activities. At this time, the Fund’s investment adviser believes that the outcomes of such matters are not likely, either individually or in the aggregate, to be material to these financial statements.
As part of an SEC non-public, confidential investigation of a matter entitled – In the Matter of F-Squared Investments, Inc., the SEC staff informed the Funds’ investment adviser that it was inquiring into whether it had violated securities laws or regulations with respect to circumstances related to that matter.
Note 12. Federal Income Tax Information
($ reported in thousands)
At June 30, 2015, federal tax cost and aggregate gross unrealized appreciation (depreciation) of securities held by the Fund were as follows:
| Federal |
Unrealized |
Unrealized |
Net Unrealized |
|||||||||||||
| Investments (including purchased options) | 285,050 | 4,394 | (15,456 | ) | (11,062 | ) | ||||||||||
| Written Options | (824 | ) | 109 | (612 | ) | (503 | ) | |||||||||
The differences between book basis cost and tax basis cost were attributable primarily to the tax deferral of losses on wash sales.
Note 13. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there are no subsequent events requiring recognition or disclosure in these financial statements.
39
CERTIFICATION
In accordance with the requirements of the Sarbanes-Oxley Act, the Fund’s CEO (the President of the Fund) and CFO (the Treasurer of the Fund) have filed the required “Section 302” certifications with the Securities and Exchange Commission (the “SEC”) on Form N-CSR.
In accordance with Section 303A of the NYSE listed company manual, the CEO certification has been filed with the NYSE.
Virtus Global Multi-Sector Income Fund Shareholder Relations: 1-866-270-7788
For general information and literature, as well as updates on net asset value, share price, major industry groups and other key information
REINVESTMENT PLAN
The Reinvestment Plan (the “Plan”) offers shareholders a convenient way to acquire additional shares of the Fund. Registered holders will be automatically placed in the Plan. If shares are held at a brokerage firm, contact your broker about participation in the Plan.
REPURCHASE OF SECURITIES
Notice is hereby given in accordance with Section 23(c) of the 1940 Act that the Fund may from time to time purchase its shares of common stock in the open market when Fund shares are trading at a discount from their net asset value.
PROXY VOTING INFORMATION (FORM N-PX)
The Adviser and subadviser vote proxies relating to portfolio securities in accordance with procedures that have been approved by the Fund’s Board. You may obtain a description of these procedures, along with information regarding how the Fund voted proxies during the most recent 12-month period ended June 30, free of charge, by calling toll-free 1-866-270-7788. This information is also available through the SEC’s website at http://www.sec.gov.
FORM N-Q INFORMATION
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC’s website at http://www.sec.gov. Form N-Q may be reviewed and copied at the SEC’s Public Reference Room. Information on the operation of the SEC’s Public Reference Room can be obtained by calling toll-free 1-800-SEC-0330.
40
Report on Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Virtus Global Multi-Sector Income Fund was held on June 4, 2015. The meeting was held for purposes of electing two (2) nominees to the Board of Trustees.
The results were as follows:
| Election of Trustees |
Votes For |
Votes Withheld |
||||||
| George R. Aylward |
9,917,833 | 162,510 | ||||||
| Philip R. McLoughlin |
9,912,370 | 167,273 | ||||||
Based on the foregoing, George R. Aylward and Philip R. McLoughlin were re-elected as Trustees. The Fund’s other Trustees who continue in office are Thomas F. Mann, William R. Moyer, and James M. Oates.
41
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
101 Munson Street
Greenfield, MA 01301-9668
Important Notice to Shareholders
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.
| Item 2. | Code of Ethics. |
Not applicable.
| Item 3. | Audit Committee Financial Expert. |
Not applicable.
| Item 4. | Principal Accountant Fees and Services. |
Not applicable.
| Item 5. | Audit Committee of Listed Registrants. |
Not applicable.
| 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 of this form. |
| (b) | Not applicable. |
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
Not applicable.
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
There has been no change, as of the date of this filing, in any of the portfolio managers identified in response to paragraph (a)(1) of this Item in the registrant’s most recently filed annual report on Form N-CSR.
| 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 registrant’s second fiscal quarter of 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. | Exhibits. |
| (a)(1) | Not applicable. | |
| (a)(2) | Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. | |
| (a)(3) | Not applicable. | |
| (b) | Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. | |
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 Global Multi-Sector Income Fund |
|||
| By (Signature and Title)* | /s/ George R. Aylward |
|||
| George R. Aylward, President (principal executive officer) |
||||
Date 9/4/15
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 (principal executive officer) |
Date 9/4/15
| By (Signature and Title)* | /s/ W. Patrick Bradley |
|||
| W. Patrick Bradley, Senior Vice President, | ||||
| Chief Financial Officer, and Treasurer (principal financial officer) |
Date 9/4/15
| * | Print the name and title of each signing officer under his or her signature. |