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: (860) 270-7788
Date of fiscal year end: December 31
Date of reporting period: June 30, 2014
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, 2014 |
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, 2014. The report contains commentary from the portfolio management team at Newfleet Asset Management on how the fixed income markets and the fund performed during the period.
For the six months ended June 30, 2014, the fund’s NAV gained 9.76%, including $0.872 in reinvested distributions. For the same period, the fund’s benchmark, the Barclays Global Aggregate Bond Index, returned 4.93%, including reinvested dividends.
On behalf of Newfleet Asset Management and Virtus Investment Partners, I welcome all investors to the fund and thank you 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 section of our website, www.virtus.com.
Sincerely,
George R. Aylward
President and Trustee
Virtus Global Multi-Sector Income Fund
July 2014
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.
1
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
June 30, 2014 (Unaudited)
Managers Discussion of Fund Performance
2
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
June 30, 2014 (Unaudited)
Managers Discussion of Fund Performance (Continued)
3
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
June 30, 2014 (Unaudited)
Managers Discussion of Fund Performance (Continued)
4
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
JUNE 30, 2014
(Unaudited)
The following tables presents the portfolio holdings within certain sectors or countries and as a percentage of total investments net of written options at June 30, 2014.
| Asset Allocation |
||||||||
| Corporate Bonds and Notes | 69 | % | ||||||
| Financials |
30 | % | ||||||
| Energy |
15 | |||||||
| Materials |
7 | |||||||
| Total of all others |
17 | |||||||
| Foreign Government Securities |
12 | |||||||
| Loan Agreements |
11 | |||||||
| Preferred Stock |
3 | |||||||
| Asset-Backed Securities |
2 | |||||||
| Mortgage-Backed Securities |
2 | |||||||
| Other (includes short-term investment) |
1 | |||||||
|
|
|
|||||||
| 100 | % | |||||||
|
|
|
|||||||
| Country Weightings | ||||
| United States | 41 | % | ||
| Brazil |
5 | |||
| Mexico |
5 | |||
| Luxembourg |
4 | |||
| Cayman Islands |
3 | |||
| Chile |
3 | |||
| Venezuela |
3 | |||
| Other |
36 | |||
|
|
|
|||
| Total |
100 | % | ||
|
|
|
|||
The accompanying notes are an integral part of these financial statements.
5
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
JUNE 30, 2014
(Unaudited)
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.
Exchange-Traded Funds (ETF)
Portfolios 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.
Payment-in-Kind (PIK)
A bond that pays interest in the form of additional bonds, or preferred stock which pays dividends in the form of additional preferred stock.
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.
6
7
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
8
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
9
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
10
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
11
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
12
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
13
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
14
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
15
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
16
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
17
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
See Notes to Financial Statements
18
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SCHEDULE OF INVESTMENTS (Continued)
JUNE 30, 2014 (Unaudited)
($ reported in thousands)
The following table provides a summary of inputs used to value the Fund’s investments as of June 30, 2014 (See Security Valuation Note 2A in the Notes to Financial Statements):
| Total Value at June 30, 2014 |
Level 1 Quoted Prices |
Level 2 Significant Observable Inputs |
||||||||||
| Debt Securities: |
||||||||||||
| Asset-Backed Securities |
$ | 7,525 | $ | — | $ | 7,525 | ||||||
| Corporate Bonds |
208,341 | — | 208,341 | |||||||||
| Foreign Government Securities |
36,654 | — | 36,654 | |||||||||
| Loan Agreements |
32,047 | — | 32,047 | |||||||||
| Mortgage-Backed Securities |
5,558 | — | 5,558 | |||||||||
| Municipal Bonds |
3,234 | — | 3,234 | |||||||||
| Equity Securities: |
||||||||||||
| Preferred Stock |
8,213 | 2,989 | 5,224 | |||||||||
| Purchased Options |
197 | 197 | — | |||||||||
| Short-Term Investments |
1,557 | 1,557 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Investments before Written Options |
$ | 303,326 | $ | 4,743 | $ | 298,583 | ||||||
|
|
|
|
|
|
|
|||||||
| Written Options |
$ | (454 | ) | $ | (454 | ) | $ | — | ||||
|
|
|
|
|
|
|
|||||||
| Total Investments Net of Written Options |
$ | 302,872 | $ | 4,289 | $ | 298,583 | ||||||
|
|
|
|
|
|
|
|||||||
There are no Level 3 (significant unobservable inputs) priced securities.
There were no transfers between Level 1 and Level 2 for the period.
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.
| Asset-Backed Securities |
||||
| Investments in Securities Balance as of December 31, 2013: |
||||
| Accrued discount (premium) |
$474 | |||
| Realized gain (loss) |
— | (c) | ||
| Change in unrealized appreciation/(depreciation) |
9 | |||
| Purchases |
2 | |||
| Sales(b) |
(485 | ) | ||
| Transfers into Level 3(a) |
— | |||
| Transfers from Level 3(a) |
— | |||
|
|
|
|||
| Balance as of June 30, 2014 |
$— | |||
|
|
|
|||
| (a) | “Transfers into and/or from” represent the ending value as of June 30, 2014, 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 |
See Notes to Financial Statements
19
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2014 (Unaudited)
(Reported in thousands except shares and per share amounts)
| Assets | ||||
| Investment in securities at value (Identified Cost $296,569) |
$ | 303,326 | ||
| Cash |
266 | |||
| Deposits with prime broker |
530 | |||
| Receivables | ||||
| Investment securities sold |
1,324 | |||
| Dividends and interest |
4,212 | |||
| Tax reclaims |
75 | |||
| Prepaid expenses |
18 | |||
| Prepaid trustee retainer |
17 | |||
|
|
|
|||
| Total assets |
309,768 | |||
|
|
|
|||
| Liabilities | ||||
| Written options at value (Premiums received $882) (Note 5) |
454 | |||
| Payables | ||||
| Borrowings (Note 8) |
84,000 | |||
| Investment securities purchased |
1,526 | |||
| Investment advisory fee |
246 | |||
| Administration fees |
26 | |||
| Professional fees |
27 | |||
| Interest payable on line of credit |
2 | |||
| Transfer agent fees and expenses |
1 | |||
|
|
|
|||
| Total liabilities |
86,282 | |||
|
|
|
|||
| Net Assets | $ | 223,486 | ||
|
|
|
|||
| Net Assets Consist of: | ||||
| Capital paid in on shares of beneficial interest |
$ | 214,525 | ||
| Accumulated undistributed net investment income (loss) |
186 | |||
| Accumulated undistributed net realized gain (loss) |
1,581 | |||
| Net unrealized appreciation (depreciation) |
7,194 | |||
|
|
|
|||
| Net Assets | $ | 223,486 | ||
|
|
|
|||
| Net Asset Value Per Share |
$ | 19.86 | ||
|
|
|
|||
See Notes to Financial Statements
20
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)
(Reported in thousands)
| Investment Income | ||||
| Interest |
$ | 9,335 | ||
| Dividends |
135 | |||
| Foreign taxes withheld |
(45 | ) | ||
|
|
|
|||
| Total investment income |
9,425 | |||
|
|
|
|||
| Expenses | ||||
| Investment advisory fees |
1,458 | |||
| Administration and accounting fees |
202 | |||
| Trustees’ fees and expenses |
115 | |||
| Printing fees and expenses |
23 | |||
| Professional fees |
64 | |||
| Registration fees |
12 | |||
| Transfer agent fees and expenses |
8 | |||
| Custodian fees |
6 | |||
| Miscellaneous |
29 | |||
|
|
|
|||
| Total expenses before interest expense |
1,917 | |||
| Interest expense |
447 | |||
|
|
|
|||
| Total expenses after interest expense |
2,364 | |||
|
|
|
|||
| Net investment income | 7,061 | |||
|
|
|
|||
| Net Realized and Unrealized Gain (Loss) on Investments | ||||
| Net realized gain (loss) on investments |
980 | |||
| Net realized gain (loss) on foreign currency transactions |
(92 | ) | ||
| Net change in unrealized appreciation (depreciation) on investments |
10,718 | |||
| Net change in unrealized appreciation (depreciation) on foreign currency translations |
9 | |||
| Net change in unrealized appreciation (depreciation) on written options |
428 | |||
|
|
|
|||
| Net realized and unrealized gain (loss) on investments | 12,043 | |||
|
|
|
|||
| Net increase (decrease) in net assets resulting from operations | $ | 19,104 | ||
|
|
|
See Notes to Financial Statements
21
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
(Reported in thousands)
| Six Months Ended June 30, 2014 (Unaudited) |
Year Ended December 31, 2013 |
|||||||
| INCREASE/(DECREASE) IN NET ASSETS | ||||||||
| From Operations | ||||||||
| Net investment income (loss) |
$ | 7,061 | $ | 15,135 | ||||
| Net realized gain (loss) |
888 | 3,257 | ||||||
| Net change in unrealized appreciation (depreciation) |
11,155 | (15,746 | ) | |||||
|
|
|
|
|
|||||
| Increase (decrease) in net assets resulting from operations | 19,104 | 2,646 | ||||||
|
|
|
|
|
|||||
| From Distributions to Shareholders | ||||||||
| Net investment income |
(8,104 | ) | (14,560 | ) | ||||
| Net realized short-term gains |
(1,598 | ) | (2,638 | ) | ||||
| Net realized long-term gains |
(113 | ) | — | |||||
|
|
|
|
|
|||||
| Decrease in net assets from distributions to shareholders | (9,815 | ) | (17,198 | ) | ||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets | 9,289 | (14,552 | ) | |||||
| Net Assets | ||||||||
| Beginning of period |
214,197 | 228,749 | ||||||
|
|
|
|
|
|||||
| End of period | $ | 223,486 | $ | 214,197 | ||||
|
|
|
|
|
|||||
| Accumulated undistributed net investment income (loss) at end of period |
$ | 186 | $ | 1,229 | ||||
See Notes to Financial Statements
22
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)
($ reported in thousands)
| Cash Flows Provided by (used) for Operating Activities: | ||||
| Net increase (decrease) in net assets resulting from operations |
$ | 19,104 | ||
|
|
|
|||
| 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 |
87,788 | |||
| (Increase) Decrease in securities sold receivable |
(1,324 | ) | ||
| Purchase of long-term investments |
(76,782 | ) | ||
| Premiums paid for purchased options |
(351 | ) | ||
| Increase (Decrease) in purchase payables |
(1,377 | ) | ||
| Net (purchases) or sales of sales of short-term securities |
2,844 | |||
| Premiums paid for written options |
882 | |||
| Net change in unrealized (appreciation)/depreciation |
(11,155 | ) | ||
| Net realized (gains)/loss from sales of long-term investments and foreign currency |
(888 | ) | ||
| Net amortization of premium/(discount) |
(822 | ) | ||
| (Increase) Decrease in deposit with prime broker for options contracts |
(530 | ) | ||
| (Increase) Decrease in tax reclaims receivable |
(39 | ) | ||
| (Increase) Decrease in dividends and interest receivable |
460 | |||
| (Increase) Decrease in prepaid expenses |
(4 | ) | ||
| (Increase) Decrease in Trustee retainer |
(17 | ) | ||
| Increase (Decrease) in interest expense payable |
(1 | ) | ||
| Increase (Decrease) in investment advisory fees payable |
(2 | ) | ||
| Increase (Decrease) in other affiliates payable |
— | (1) | ||
| Increase (Decrease) in other accrued expenses payable |
(48 | ) | ||
|
|
|
|||
| Cash provided by (used) for operating activities |
17,738 | |||
|
|
|
|||
| Cash provided by (used) for financing activities: | ||||
| Cash payments from borrowings |
(9,000 | ) | ||
| Cash dividends paid to shareholders |
(9,815 | ) | ||
|
|
|
|||
| Cash provided by (used) for financing activities: |
(18,815 | ) | ||
|
|
|
|||
| Net increase (decrease) in cash |
(1,077 | ) | ||
|
|
|
|||
| Cash: | ||||
| Cash and foreign currency at beginning of period |
1,343 | |||
|
|
|
|||
| Cash and foreign currency at end of period |
$ | 266 | ||
|
|
|
|||
| Cash flow information: | ||||
| Cash paid during the period for interest |
$ | 448 |
| (1) | Amount less than $500. |
See Notes to Financial Statements
23
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
(Selected per share data and ratios for a share outstanding throughout each period)
| Six Months Ended June 30, 2014 (Unaudited) |
Year Ended December 31, 2013 |
From Inception1 to December 31, 2012 |
||||||||||
| PER SHARE OPERATING DATA: | ||||||||||||
| Net asset value, beginning of period |
$ | 19.03 | $ | 20.32 | $ | 19.10 | (1) | |||||
|
|
|
|
|
|
|
|||||||
| Income from investment operations: | ||||||||||||
| Net investment income/(loss)(2) |
0.63 | 1.34 | 1.08 | |||||||||
| Net realized and unrealized gain/(loss) |
1.07 | (1.10 | ) | 1.19 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total from investment operations |
1.70 | 0.24 | 2.27 | |||||||||
|
|
|
|
|
|
|
|||||||
| Dividends and/or Distributions to Shareholders: | ||||||||||||
| Dividends from net investment income |
(0.72 | ) | (1.29 | ) | (0.93 | ) | ||||||
| Dividends from net realized gains |
(0.15 | ) | (0.24 | ) | (0.12 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total Dividends and Distributions to Shareholders |
(0.87 | ) | (1.53 | ) | (1.05 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net Asset Value, End of Period |
$ | 19.86 | $ | 19.03 | $ | 20.32 | ||||||
|
|
|
|
|
|
|
|||||||
| Market Price, End of Period(3) |
$ | 17.86 | $ | 16.92 | $ | 18.90 | ||||||
|
|
|
|
|
|
|
|||||||
| Total Return on Net Asset Value(4) |
9.76 | %(7) | 1.89 | % | 12.61 | %(7) | ||||||
| Total Return on Market Value(5) |
11.02 | %(7) | (2.55 | )% | (0.02 | )%(7) | ||||||
| Net Assets, End of Period (000’s) |
$ | 223,486 | $ | 214,197 | $ | 228,749 | ||||||
| RATIOS/SUPPLEMENTAL DATA: | ||||||||||||
| Ratio of Total Expenses to Average Net Assets(6) |
2.20 | %(8) | 2.16 | % | 2.19 | %(8) | ||||||
| Ratio of Net Investment Income/(Loss) to Average Net Assets |
6.58 | %(8) | 6.87 | % | 6.65 | %(8) | ||||||
| Portfolio Turnover Rate |
25 | %(7) | 48 | % | 46 | %(7) | ||||||
| Bank Borrowings: | ||||||||||||
| Loan Outstanding, End of Period (000’s) |
$ | 84,000 | $ | 93,000 | $ | 93,000 | ||||||
| Asset Coverage for Loan Outstanding |
337 | % | 330 | % | 346 | % | ||||||
| (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 – 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 return on market value is calculated assuming a purchase of a share of the Fund’s common stock at the opening New York Stock Exchange (“NYSE”) share price on the first business day and a sale at the closing NYSE share price 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. |
| (6) | Ratio of operating expenses, excluding interest expense on the line of credit, was 1.79%, 1.73%, and 1.74% for the periods ended June 30, 2014, December 31, 2013, and December 31, 2012, respectively. |
| (7) | Not annualized |
| (8) | Annualized |
See Notes to Financial Statements
24
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
JUNE 30, 2014 (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 primary investment objective is to maximize current income while preserving capital.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principals 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 amount of increases and decreases in net assets 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 (“Valuation Committee”) appointed by the Board. The Valuation Committee is comprised of certain members of management as identified by 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 any model inputs and any changes to the model. Fair valuations are reviewed by the Board at least quarterly.
The Fund utilizes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
| Ÿ Level 1 – | quoted prices in active markets for identical securities |
| Ÿ Level 2 – | prices determined using other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) |
| Ÿ 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 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.
25
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2014 (Unaudited)
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”) (generally, 4 p.m. Eastern time the close of the New York Stock Exchange (“NYSE”)) that may impact the value of securities traded in these non-U.S. markets. In such cases the Fund fair values non-U.S. securities using an independent pricing service which considers the correlation of the trading patterns of the non-U.S. security to the intraday trading in the U.S. markets for investments such as ADRs, financial futures, exchange traded funds (“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 (“OTC”) 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.
Short-term notes having a maturity date of 60 days or less are valued at amortized cost which approximates market and are generally categorized as Level 2 within the hierarchy.
Investments in open-end mutual funds are valued at NAV. Investment in close-end mutual funds are valued as of the close of regular trading on the NYSE, generally 4 pm Eastern time, each business day. Both are categorized as Level 1 in the hierarchy.
A summary of the inputs used to value the Fund’s major categories of assets and liabilities, which primarily include investments of the Fund, 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.
26
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2014 (Unaudited)
| 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 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 on securities using the effective interest method.
| C. | Federal Income Taxes |
The Fund is treated as a separate taxable entity. It is the intention of the Fund 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.
The Fund has adopted the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Fund to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Management of the Fund has determined that there was no effect on the financial statements from the adoption of this authoritative guidance. The Fund files tax returns as prescribed by the tax laws of the jurisdictions in which they operate. In the normal course of business, the Fund is subject to examination by federal, state and local jurisdictions, where applicable.
| 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 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
27
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2014 (Unaudited)
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 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. A 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 Funds 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.
28
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2014 (Unaudited)
At June 30, 2014, the Fund only held assignment loans.
| H. | Derivative Financial Instruments |
Enhanced disclosures about derivatives instruments and hedging activities are intended to improve financial reporting for derivative instruments by better enabling investors to understand how and why a Fund uses derivatives, how derivatives are accounted for, and how derivative instruments affect a fund’s results of operations and financial position. Summarized below is a specific type of derivative instrument used by the Fund.
| 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 call options is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. The risk in writing 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 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 from the then-market value.
29
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2014 (Unaudited)
| I. | Expenses |
Expenses incurred together by the Fund and other affiliated mutual funds are allocated in proportion to the net assets of such fund, except where allocation of direct expense to each 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 Fund’s pro-rata expenses of any underlying mutual funds in which the Fund invests.
Note 3. Investment Advisory Fees and Related Party Transactions
| A. | Adviser |
($ reported in thousands)
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 supervises 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 sum of all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings or other indebtness, constituting financial leverage).
| B. | Subadviser |
The subadviser manages the investments of the Fund for which they are paid a fee by the Adviser. Newfleet Asset Management, LLC (“Newfleet”), an indirect, wholly-owned subsidiary of Virtus, is the subadviser for the Fund.
| C. | Administrator |
Virtus Fund Services, LLC, (“VFS”) an indirect wholly-owned subsidiary of Virtus, serves as Administrator to the Fund.
For the period ended June 30, 2014, the Fund incurred administration fees totaling $153 which are included in the Statement of Operations.
| D. | Trustees |
For the period ended June 30, 2014, the Fund incurred trustee fees totaling $101 which are included in the Statement of Operations.
Note 4. Purchases and Sales of Securities
($ reported in thousands)
Purchases and sales of securities (excluding U.S. Government and agency securities and short-term investments) during the period ended June 30, 2014 were as follows:
| Purchases | Sales | |||||||
| $ | 76,782 | $ | 87,788 | |||||
There were no purchases or sales of long-term U.S. Government and agency securities for the period ended June 30, 2014.
30
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2014 (Unaudited)
Note 5. Derivative Transactions
($ reported in thousands)
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 and Note 2H.
| Calls | Puts | |||||||||||||||
| Number of Contracts |
Premiums received |
Number of Contracts |
Premiums received |
|||||||||||||
| Written Options outstanding at December 31, 2013 | — | $ | — | — | $ | — | ||||||||||
| Options written | 2,294 | 153 | 2,294 | 729 | ||||||||||||
| Options closed | — | — | — | — | ||||||||||||
| Options expired | — | — | — | — | ||||||||||||
| Options exercised | — | — | — | — | ||||||||||||
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| Written Options outstanding at June 30, 2014 | 2,294 | $ | 153 | 2,294 | $ | 729 | ||||||||||
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The following is a summary of the Funds’ derivative instrument holdings categorized by primary risk exposure (equity contracts) in the financial statements as of June 30, 2014:
| Statement of Assets and Liabilities | ||||
| Assets: | $ | — | ||
| Liabilities: Written options at value | (454 | ) | ||
|
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| Net asset (liability) balance | $ | (454 | ) | |
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| Statement of Operations | ||||
| Net realized gain (loss) on written options | $ | — | ||
| Net change in unrealized appreciation (depreciation) on written options | 428 | |||
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| Total realized and unrealized gain (loss) on written options | $ | 428 | ||
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The average volume of derivative activities may not be indicative of actual activity. The Fund began investing in written options during June 2014.
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
31
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2014 (Unaudited)
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 the Subadviser determines 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, 2014, 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 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 its pursuit of a greater investment return. 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, 2014, the Fund held 33% of its total investments in securities within the financials sector.
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. 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 six months ended June 30, 2014. The Agreement is renewable by the Fund with the Bank’s consent. The Agreement may 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, 2014 – June 30, 2014, the
32
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2014 (Unaudited)
average daily borrowings under the Agreement and the weighted daily average interest rate were $92,950 and 0.956%, respectively. At June 30, 2014, the amount of such outstanding borrowings was as follows:
| Outstanding |
Interest | |
| $84,000 | 0.950% |
Note 9. Indemnifications
Under the Fund’s organizational documents, its officers and trustees 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, 2014, 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, 2014 and December 31, 2013, there were no shares issued pursuant to the plan.
On May 23, 2014 Fund announced a distribution of $0.12 shareholders of record on July 11, 2014. This distribution has an ex-dividend date of July 9, 2014 and is payable on July 18, 2014.
Note 11. Regulatory Exams
Federal and state regulatory authorities from time to time make inquiries and conduct examinations regarding compliance by Virtus and its subsidiaries (collectively “the Company”) with securities and other laws and regulations affecting their registered products.
There are currently no such matters which the Company believes will be material to these financial statements.
Note 12. Federal Income Tax Information
($ reported in thousands)
At June 30, 2014, federal tax cost and aggregate gross unrealized appreciation (depreciation) of securities held by the Fund were as follows:
| Federal |
Unrealized |
Unrealized |
Net Unrealized |
|||||||||||||
| Investments | $296,574 | $ | 11,094 | $ | (4,342 | ) | $ | 6,752 | ||||||||
| Written options | (882 | ) | 428 | — | 428 | |||||||||||
33
VIRTUS GLOBAL MULTI-SECTOR INCOME FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2014 (Unaudited)
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.
34
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 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
Many of you have questions about our reinvestment plan. We urge shareholders who want to take advantage of this plan and whose shares are held in “Street Name,” to consult your broker as soon as possible to determine if you must change registration into your own name to participate.
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 Securities and Exchange Commission’s website at http://www.sec.gov.
FORM N-Q INFORMATION
The Fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission (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.
35
CONSIDERATION OF ADVISORY AND SUBADVISORY AGREEMENTS
BY THE BOARD OF TRUSTEES
The Board of Trustees (the “Board”) of Virtus Global Multi Sector Income Fund (the “Fund”) is responsible for determining whether to approve the continuation of the investment advisory agreement (the “Advisory Agreement”) between the Fund and Virtus Investment Advisers, Inc. (“VIA”) and of the subadvisory agreement with Newfleet Asset Management, LLC (“Newfleet”) (the “Subadvisory Agreement”) (together with the Advisory Agreement, the “Agreements”). At an in-person meeting held on December 6, 2013, the Board, including a majority of the Trustees who are not interested persons of the Fund as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended (the “Independent Trustees”), considered and approved the continuation of each Agreement due for renewal, as further discussed below.
In connection with the approval of the Agreements, the Board requested and evaluated information provided by VIA and Newfleet (the “Subadviser”) which, in the Board’s view, constituted information necessary for the Board to form a judgment as to whether the renewal of each of the Agreements would be in the best interests of the Fund and its shareholders. The Board also considered information furnished throughout the year at regular Board meetings with respect to the services provided by VIA and the Subadviser, including quarterly performance reports prepared by management containing reviews of investment results and periodic presentations from the Subadviser with respect to the Fund. The Board noted the affiliation of the Subadviser with VIA and potential conflicts of interest.
The Board was separately advised by independent legal counsel throughout the process. For each Agreement, the Board considered all the criteria separately with respect to the Fund and its shareholders. In their deliberations, the Board considered various factors, including those discussed below, none of which were controlling, and each Trustee may have attributed different weights to the various factors. The Board also discussed the proposed approval of the Agreements in private sessions with their independent legal counsel at which no representatives of management were present.
In considering whether to approve the renewal of the Agreements with respect to the Fund, the Board reviewed and analyzed the factors it deemed relevant, including: (1) the nature, extent and quality of the services to be provided to the Fund by VIA and the Subadviser; (2) the performance of the Fund as compared to an appropriate peer group and an appropriate index; (3) the level and method of computing the Fund’s advisory and subadvisory fees, and comparisons of the Fund’s advisory fee rates with those of a group of funds with similar investment objectives; (4) the profitability of VIA under the Advisory Agreement; (5) any “fall-out” benefits to VIA, the Subadviser and their affiliates (i.e., ancillary benefits realized by VIA, the Subadviser or their affiliates from VIA’s or the Subadviser’s relationship with the Fund); (6) the anticipated effect of growth in size on the Fund’s performance and expenses; (7) fees paid to VIA and the Subadviser by comparable accounts, as applicable; (8) possible conflicts of interest; and (9) the terms of the Agreements.
Nature, Extent and Quality of Services
The Trustees received in advance of the meeting information in the form of questionnaires completed by VIA and the Subadviser, each concerning a number of topics, including such company’s investment philosophy, resources, operations and compliance structure. The Trustees also received a presentation by VIA’s senior management personnel, during which among other items, VIA’s investment process, investment strategies, personnel, compliance procedures and the firm’s overall performance were reviewed and discussed. In considering the Agreement with VIA, the Board considered VIA’s process for supervising and managing the Fund’s subadviser, including (a) VIA’s ability to select and monitor the subadviser; (b) VIA’s
36
CONSIDERATION OF ADVISORY AND SUBADVISORY AGREEMENTS
BY THE BOARD OF TRUSTEES (Continued)
ability to provide the services necessary to monitor the subadviser’s compliance with the Fund’s investment objectives, policies and restrictions as well as provide other oversight activities; and (c) VIA’s ability and willingness to identify instances in which the subadviser should be replaced and to carry out the required changes. The Trustees also considered: (a) the experience and capability of VIA’s management and other personnel; (b) the financial condition of VIA, and whether it had the financial wherewithal to provide a high level and quality of services to the Fund; (c) the quality of VIA’s own regulatory and legal compliance policies, procedures and systems; (d) the nature, extent and quality of administrative and other services provided by VIA and its affiliates to the Fund; (e) VIA’s supervision of the Fund’s other service providers; and (f) VIA’s risk management processes. It was noted that an affiliate of VIA serves as administrator to the Fund. The Board also took into account its knowledge of VIA’s management and the quality of the performance of VIA’s duties through Board meetings, discussions and reports during the preceding year, as well as information from the Fund’s Chief Compliance Officer regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the Investment Company Act of 1940, as amdended (“1940 Act”).
With respect to the services provided by the Subadviser, the Board considered information provided to the Board by the Subadviser, including the Subadviser’s Form ADV, as well as information provided throughout the past year. With respect to the Subadvisory Agreement, the Board noted that the Subadviser provided portfolio management, compliance with the Fund’s investment policies and procedures, compliance with applicable securities laws and assurances thereof. The Board also noted that VIA’s and the Subadviser’s management of the Fund is subject to the oversight of the Board and must be carried out in accordance with the investment objectives, policies and restrictions set forth in the Fund’s prospectus and statement of additional information. In considering the renewal of the Subadvisory Agreement, the Board also considered the Subadviser’s investment management process, including (a) the experience and capability of the Subadviser’s management and other personnel committed by the Subadviser to the Fund; (b) the quality of the Subadviser’s regulatory and legal compliance policies, procedures and systems; and (c) the Subadviser’s brokerage and trading practices, including with respect to best execution and soft dollars. The Board also took into account the Subadviser’s risk assessment and monitoring process. The Board noted the Subadviser’s regulatory history, including the fact that the Subadviser was not currently involved in any regulatory actions, investigations or material litigation.
After considering all of the information provided to them, the Trustees concluded that the nature, extent and quality of the services provided by VIA and the Subadviser were satisfactory and that there was a reasonable basis on which to conclude that each would continue to provide a high quality of investment services to the Fund.
Investment Performance
The Board considered performance reports and discussions at Board meetings throughout the year, as well as a report (the “Lipper Report”) for the Fund prepared by Lipper Inc. (“Lipper”), an independent third party provider of investment company data, furnished in connection with the contract renewal process. The Lipper Report presented the Fund’s performance relative to a peer group of other mutual funds (the “Performance Universe”) and relevant indexes, as selected by Lipper. The Board also considered performance information presented by management and took into account management’s discussion of the same, including the effect of market conditions on the Fund’s performance. The Board noted that it also reviews on a quarterly basis detailed information about both the Fund’s performance results and portfolio composition, as well as the Subadviser’s investment strategies. The Board noted VIA’s expertise
37
CONSIDERATION OF ADVISORY AND SUBADVISORY AGREEMENTS
BY THE BOARD OF TRUSTEES (Continued)
and resources in monitoring the performance, investment style and risk-adjusted performance of the Subadviser. The Board also took into account its discussions with management regarding factors that contributed to the performance of the Fund.
The Board considered, among other performance data, that the Fund performed at the median of its Performance Universe for the 1-year period, and that the Fund outperformed its benchmark for the 1-year period ended September 30, 2013.
After reviewing these and related factors, the Board concluded that the Fund’s overall performance was satisfactory.
Management Fees and Total Expenses
The Board considered the fees charged to the Fund for advisory services as well as the total expense levels of the Fund. This information included comparisons of the Fund’s net management fee and total expense level to those of its peer group (the “Expense Group”). In comparing the Fund’s net management fee to that of comparable funds, the Board noted that such fee includes both advisory and administrative fees. The Board also noted that the subadvisory fee was paid by VIA out of its management fees rather than paid separately by the Fund. In this regard, the Board took into account management’s discussion with respect to the advisory/subadvisory fee structure, including the amount of the advisory fee retained by VIA after payment of the subadvisory fee. The Board also took into account the size of the Fund and the impact on expenses.
In addition to the foregoing, the Board considered, among other data, the information set forth below with respect to the Fund’s fees and expenses. In each case, the Board took into account management’s discussion of the Fund’s expenses, including the type and size of the Fund relative to the other funds in its Expense Group.
The Board noted that the Fund’s net management and net total expenses were above the median of the Expense Group.
Based on the level and type of services provided, the Board determined that the Fund’s fees and expenses were reasonable. The Board concluded that the advisory and subadvisory fees for the Fund were fair and reasonable in light of the usual and customary charges made for services of the same nature and quality and the other factors considered.
Profitability
The Board also considered certain information relating to profitability that had been provided by VIA. In this regard, the Board considered information regarding the overall profitability of VIA for its management of the Fund, as well as its profits and those of its affiliates for managing and providing other services to the Fund, such as administrative services provided to the Fund by a VIA affiliate. In addition to the fees paid to VIA and its affiliates, including the Subadviser, the Board considered other benefits derived by VIA or its affiliates from their relationship with the Fund. The Board reviewed the methodology used to allocate costs to the Fund, taking into account the fact that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. The Board concluded that the profitability to VIA and its affiliates from the Fund was reasonable in light of the quality of the services rendered to the Fund by VIA and its affiliates.
In considering the profitability to the Subadviser in connection with its relationship to the Fund, the Board noted that the fees under the Subadvisory Agreement are paid by VIA out of the fees that VIA receives under the Advisory Agreement, so that Fund shareholders are not directly
38
CONSIDERATION OF ADVISORY AND SUBADVISORY AGREEMENTS
BY THE BOARD OF TRUSTEES (Continued)
impacted by those fees. In considering the reasonableness of the fees payable by VIA to the affiliated Subadviser, the Board noted that, because the Subadviser is an affiliate of VIA, such profitability might be directly or indirectly shared by VIA, and therefore the board considered the profitability of VIA and the Subadviser together. For each of the above reasons, the Board concluded that the profitability to the Subadviser and its affiliates from their relationship with the Fund was not a material factor in approval of the Subadvisory Agreement.
Economies of Scale
The Board received and discussed information concerning whether VIA realizes economies of scale as the Fund’s assets grow. The Board noted that due to the closed-end structure of the Fund, assets under management were unlikely to be able to grow through sales of the Fund’s shares. The Board also took into account management’s discussion of the Fund’s management fee and subadvisory fee structure. The Board also took into account the current size of the Fund. The Board concluded that no changes to the advisory fee structure of the Fund were necessary at this time. The Board noted that VIA and the Fund may realize certain economies of scale if the assets of the Fund were to increase, particularly in relationship to certain fixed costs, and that shareholders of the Fund would have an opportunity to benefit from these economies of scale.
For similar reasons as stated above with respect to the Subadviser’s profitability, and based upon the current size of the Fund managed by the Subadviser, the Board concluded that the potential for economies of scale in the Subadviser’s management of the Fund was not a material factor in the approval of the Subadvisory Agreement at this time.
Other Factors
The Board considered other benefits that may be realized by VIA and the Subadviser and their respective affiliates from their relationships with the Fund. The Board noted that an affiliate of VIA also provides administrative services to the Fund. The Board noted management’s discussion of the fact that, while the Subadviser is an affiliate of VIA, there are no other direct benefits to the Subadviser or VIA in providing investment advisory services to the Fund, other than the fee to be earned under the Subadvisory Agreement. There may be certain indirect benefits gained, including to the extent that serving the Fund could provide the opportunity to provide advisory services to additional portfolios affiliated with the Fund or certain reputational benefits.
Conclusion
Based on all of the foregoing considerations, the Board, comprised wholly of Independent Trustees, determined that approval of each Agreement was in the best interests of the Fund and its shareholders. Accordingly, the Board, and the Independent Trustees voting separately, approved the Agreements with respect to the Fund.
39
Report on Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Virtus Global Multi-Sector Income Fund was held on May 20, 2014. 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 |
||||||
| William R. Moyer |
9,315,162 | 162,875 | ||||||
| James M. Oates |
9,314,444 | 163,593 | ||||||
Based on the foregoing, William R. Moyer and James M. Oates were re-elected as Trustees. The Fund’s other Trustees who continue in office are George R, Aylward, Phillip R. McLoughlin, and Thomas F. Mann.
40
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 were no material changes to the procedures by which 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 09/05/14
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 09/05/14
| By (Signature and Title)* |
/s/ W. Patrick Bradley | |
|
W. Patrick Bradley, Senior Vice President, Chief Financial Officer, and Treasurer | ||
| (principal financial officer) |
Date 09/05/14
* Print the name and title of each signing officer under his or her signature.