Form N-CSRS - Certified Shareholder Report, Semi-Annual
07 Août 2023 - 7:45PM
Edgar (US Regulatory)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-22473
Virtus Stone Harbor Emerging Markets Income
Fund
(Exact name of registrant as
specified in charter)
101 Munson Street
Greenfield, MA
01301-9683
(Address of principal executive offices) (Zip code)
Jennifer Fromm, Esq.
Vice
President, Chief Legal Officer, Counsel and Secretary for Registrant
One Financial Plaza
Hartford, CT
06103-2608
(Name and address of agent for service)
Registrant’s telephone number, including area code: (866) 270-7788
Date of fiscal year end: November 30
Date of reporting period: May 31, 2023
Form N-CSR is to be used by management investment companies to file reports with the Commission not
later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will
make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget
(“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
| |
(a) |
The Report to Shareholders is attached herewith. |
Virtus Stone Harbor Emerging Markets Income Fund
Not FDIC Insured • No Bank Guarantee • May Lose
Value
Table of Contents
Virtus Stone Harbor Emerging Markets Income
Fund
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2
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6
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7
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9
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18
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19
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20
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42
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To Virtus Stone
Harbor Emerging Markets Income Fund Shareholders:
I am pleased to present this semiannual report, which reviews
the performance of your Fund for the six months ended May 31, 2023.
The proposed reorganization of the Virtus Stone Harbor Emerging
Markets Total Income Fund with and into your Fund, which was scheduled to occur on or about August 4, 2023 subject to certain closing conditions, will be delayed pending regulatory approval related to the transfer or sale of certain foreign assets.
An update on the timing of the reorganization will be provided at a later date.
During the fiscal six-month period, the market made an initial
recovery from the volatility that characterized much of 2022. But several bank failures in March, as well as contentious debt ceiling negotiations in the U.S., led to renewed volatility. For the six months ended May 31, 2023, the Fund’s net
asset value (NAV) returned 4.15%, and its market price returned 2.44%. For the same period, the Fund’s composite benchmark, which is composed of the three sectors of emerging markets (EM) debt, returned 4.31%. The performance of the underlying
sectors was 2.14% for hard currency sovereign debt, as represented by the JPMorgan EMBI Global Diversified Index, 6.64% for local currency sovereign debt, as represented by the JPMorgan GBI-EM Global Diversified Index, and 4.12% for corporate debt,
as represented by the JPMorgan CEMBI Broad Diversified Index.
While markets may be unpredictable in the short term, we
believe most investors are best served by focusing on the long term. Please call our customer service team at 866-270-7788 if you have questions about your account or require assistance.
Sincerely,
George R.
Aylward
President, Chief Executive Officer, and Trustee
Virtus Stone Harbor Emerging Markets Income Fund
May 2023
Refer to the Manager’s Discussion section for your
Fund’s performance. Performance data quoted represents past results. Past performance is no guarantee of future results, and current performance may be higher or lower than the performance shown above. Investing involves risk, including the
risk of loss of principal invested.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited)
May 31, 2023
About the
Fund:
Virtus Stone Harbor Emerging
Markets Income Fund’s (NYSE: EDF) (the “Fund”) investment objective is to maximize total return, which consists of income on its investments and capital appreciation. The Fund normally will invest at least 80% of its net assets
(plus any borrowings for investment purposes) in emerging markets securities. There is no guarantee that the Fund will achieve its investment objective.
The use of leverage currently enables the
Fund to borrow at short-term rates with the expectation of investing at higher yields on its investments. During the period, the Fund utilized short-term reverse repurchase agreements through which it borrowed money by selling securities under the
obligation to repurchase them at a later date at a fixed price. The Fund’s management team adjusted borrowing levels to reflect the team’s outlook on emerging markets risk, increasing borrowings when it felt opportunities had improved
and reducing borrowings when, in the team’s judgment, macroeconomic risk had risen. At May 31, 2023, the Fund had borrowings of approximately $24.8 million, which represented about 27% of the Fund’s managed assets.
Manager Comments – Stone Harbor Investment Partners (Stone
Harbor)
Stone Harbor is a global credit
specialist with expertise in emerging and developed markets debt. With three decades of informed experience allocating risk in complex areas of the fixed income markets, Stone Harbor manages global credit portfolios for institutional clients
around the world. The following commentary is provided by the respective portfolio team at Stone Harbor and covers the Fund’s portfolio for the six-months ended May 31, 2023.
How did the markets perform during the Fund’s fiscal
six-month period ended May 31, 2023?
At
the start of the review period, tentative signs of easing inflation in the U.S. prompted cautious optimism about the global inflation outlook and hopes for less aggressive monetary tightening going forward. However, several developments since the
beginning of 2023 contributed to a volatile market environment. Global credit market concerns ranged from stubbornly high inflation levels in developed and emerging markets, to banking sector stress stemming from four high profile bank runs in the
U.S. and Europe, to uncertainty around the outcome of the U.S. debt ceiling debate. As central banks continued to focus on the latest economic data, market participants watched closely for potential changes in policy rate direction, particularly by
the U.S. Federal Reserve (the Fed). In terms of the banking sector turmoil, while headlines induced fears of a spillover contagion, those concerns did not materialize, which helped improve market sentiment. Finally, the resolution of the U.S. debt
ceiling debate with the announcement of a bipartisan bill allowed the U.S. to avert a credit default.
For information regarding the indexes and certain key investment terms, see
Key Investment Terms starting on page 7.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
May 31, 2023
Against this backdrop, the yield on the U.S.
10-year Treasury declined to 3.64% at the end of the reporting period after reaching a period high of 4.08% in early March as the Fed continued its aggressive rate hikes. The decline in U.S. Treasury yields helped generate positive returns from many
fixed income assets. Total returns of indexes comprising emerging markets hard currency sovereign and corporate debt were 2.14% and 4.12%, as represented by the JPMorgan EMBI Global Diversified Index and the JPMorgan CEMBI Broad Diversified Index,
respectively. As yields fell globally, the average yield of local currency debt represented by the JPMorgan GBI-EM Global Diversified Index declined 0.42%, to 6.45%. Local currency debt outperformed, posting a total return of 6.64%, comprising
foreign currency exchange returns of 1.74% and returns from interest rates of 4.82%. The U.S. dollar appreciated against the euro.
What factors affected the Fund’s performance during the
fiscal six-month period?
The
Fund’s total return on net asset value (NAV) for the six months ended May 31, 2023 was 4.15%. For the same period, the Fund’s composite benchmark, which is composed of the three sectors of emerging markets debt, returned 4.31%. A key
driver of the Fund’s performance was positive returns from local currency debt and currencies.
At the country level, the largest positive
contributors to performance were U.S. dollar-denominated sovereign debt in El Salvador, as well as issue selection in sovereign bonds from South Africa and Angola. Other positive contributors to performance included local currency debt in Indonesia,
Mexico, and Brazil, and U.S. dollar-denominated corporate debt in Brazil and Indonesia.
The top detractors from Fund performance were
allocations to U.S. dollar-denominated corporate bonds in China, Ghana, and Colombia. Hard currency debt exposures in Ecuador, Egypt, and Venezuela also detracted from performance. Local currency debt exposures in Poland, Hungary, and Czech Republic
also detracted from performance.
The
Fund has a practice of seeking to maintain a specified level of monthly distributions to shareholders, which may be changed at any time. As a result of this practice, the Fund may pay distributions in excess of the Fund’s taxable net
investment income and net realized gains. During the most recent fiscal period, the practice did not have a material impact on the Fund’s investment strategy.
The preceding information is the opinion of
portfolio management only through the end of the period of the report as stated on the cover. Any such opinions are subject to change at any time based upon market conditions and should not be relied upon as investment advice.
The Fund’s portfolio holdings are
subject to change and may not be representative of the portfolio managers’ current or future investment decisions. The mention of individual securities held by the Fund is for informational purposes only and should not be construed as a
recommendation to purchase or sell any securities. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional.
For
information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 7.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
May 31, 2023
Risk
Considerations:
Non-Diversified: The Fund is not diversified and may be more susceptible to factors negatively impacting its holdings to the extent the Fund invests more of its assets in the securities of fewer issuers than would a diversified
portfolio.
Management: The Fund is subject to management risk because it is an actively managed investment portfolio. Judgments by the Fund’s subadviser about the attractiveness and potential appreciation of an investment
may prove to be inaccurate and may not produce the desired results.
Market Volatility: The value of the securities in the Fund may go up or down in response to the prospects of individual companies and/or general economic conditions. Local, regional, or global events such as war or military
conflict, terrorism, pandemic, or recession could impact the Fund, including hampering the ability of the Fund’s manager(s) to invest its assets as intended.
Foreign Investing: Investing in foreign securities subjects the Fund to additional risks such as increased volatility; currency fluctuations; less liquidity; less publicly available information about the foreign investment; and political,
regulatory, economic, and market risk.
Emerging Markets Investing: Emerging markets securities may be more volatile, or more greatly affected by negative conditions, than those of their counterparts in more established foreign markets. Such securities may also be subject to Sanctions
Risk.
Sanctions: The imposition of sanctions and other similar measures could cause a decline in the value and/or liquidity of securities issued by or tied to the sanctioned country and increase market volatility and disruption in the
sanctioned country and throughout the world. Sanctions and other similar measures could limit or prevent the Fund from buying and selling securities (in the sanctioned country and other markets), significantly delay or prevent the settlement of
transactions, and negatively impact the Fund’s liquidity and performance.
Currency
Rate: Fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect the value of the Fund’s shares.
Sovereign Debt Obligations: Certain emerging market countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of
payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the repayment of an emerging country’s debt may not be able or willing to repay the principal and/or interest when
due in accordance with the terms of such debt.
Credit & Interest: Debt instruments are subject to various risks, including credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt instruments may
rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities.
Derivatives:
Derivatives may include, among other things, futures, options, forwards and swap agreements and may be used in order to hedge portfolio risks, create leverage, or attempt to increase returns. Investments in derivatives may result in
increased volatility and the Fund may incur a loss greater than its principal investment.
For information regarding the indexes and certain key investment terms, see
Key Investment Terms starting on page 7.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
May 31, 2023
Reverse Repurchase Agreements: Reverse repurchase agreements subject the Fund to Leverage Risk and Counterparty Risk, and also to the risk that the market value of the securities that the Fund is obligated to repurchase under the agreements may
decline below the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the agreement may be restricted pending determination by
the other party, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities.
Counterparty:
There is risk that a party upon whom the Fund relies to complete a transaction will default.
High Yield Fixed Income Securities: There is a greater risk of issuer default, less liquidity, and increased price volatility related to high yield securities than investment grade securities.
Leverage:
When the Fund leverages its portfolio, the Fund may be less liquid and/or may liquidate positions at an unfavorable time, and the value of the Fund’s shares will be more volatile and sensitive to market movements.
Closed-End Funds: Closed-end funds may trade at a discount or premium from their net asset values, which may affect whether an investor will realize gains or losses. They may also employ leverage, which may increase
volatility.
No Guarantee: There is no guarantee that the Fund will meet its objective.
For information regarding the indexes and certain key investment terms, see
Key Investment Terms starting on page 7.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
PORTFOLIO HOLDINGS SUMMARY WEIGHTINGS (Unaudited)
May 31, 2023
The
following tables present the portfolio holdings within certain industry or countries as a
percentage of total investments (excluding reverse repurchase agreements and
swaps contracts) at May 31, 2023.
Asset
Allocations
| Foreign
Government Securities |
|
55%
|
| Corporate
Bonds and Notes |
|
41
|
| Exploration
& Production |
26%
|
|
| Financial
& Lease |
6
|
|
| Electric
|
3
|
|
| Metals,
Mining & Steel |
2
|
|
| All
other Corporate Bonds and Notes |
4
|
|
| Credit
Linked Notes |
|
4
|
| Total
|
|
100%
|
|
|
|
|
Country
Weightings
| Mexico
|
26%
|
| Argentina
|
8
|
| Indonesia
|
7
|
| Angola
|
6
|
| Colombia
|
5
|
| Kenya
|
5
|
| El
Salvador |
5
|
| Other
|
38
|
| Total
|
100%
|
|
|
|
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
KEY INVESTMENT TERMS (Unaudited)
May 31, 2023
Composite Index: 33% J.P. Morgan EMBI Global Diversified / 33%
J.P. Morgan CEMBI Broad Diversified / 33% J.P. Morgan GBI-EM Global Diversified
The composite index consists of 33.33% J.P. Morgan EMBI Global
Diversified Index, 33.33% J.P. Morgan CEMBI Broad Diversified Index and 33.33% J.P. Morgan GBI-EM Global Diversified Index. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and it is not available for direct
investment.
Federal Reserve (the
“Fed”)
The central bank of the U.S.,
responsible for controlling 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.
Hard
Currency
Hard currency refers to a currency that is
generally issued by developed countries, globally traded, and seen as politically and economically stable. Generally, when a fund invests in hard currency sovereign debt, that debt is denominated in U.S. Dollars.
J.P. Morgan CEMBI Broad Diversified Index
The J.P. Morgan CEMBI Broad Diversified Index tracks total
returns of U.S. dollar-denominated debt instruments issued by corporate entities in emerging market countries and consists of an investable universe of corporate bonds. The minimum amount outstanding required is $300 million for the J.P. Morgan
CEMBI Broad Diversified. The J.P. Morgan CEMBI Broad Diversified limits the weights of those index countries with larger corporate debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt
outstanding. 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.
J.P. Morgan EMBI Global Diversified Index
The J.P. Morgan EMBI Global Diversified Index (EMBI Global
Diversified) tracks total returns for U.S. dollar-denominated debt instruments issued by emerging markets sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. The index limits the weights of those index countries with larger
debt stocks by only including specified portions of these countries’ eligible current face amounts outstanding. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and it is not available for direct
investment.
J.P. Morgan GBI-EM Global Diversified
Index
The J.P. Morgan GBI-EM Global Diversified Index
consists of regularly traded, liquid fixed-rate, domestic currency government bonds to which international investors can gain exposure. The weightings among the countries are more evenly distributed within this index. 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.
Joint Stock Company (“JSC”)
A joint-stock company is a business entity in which shares of
the company’s stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares (certificates of ownership). Shareholders are able to transfer their shares to others without any effects
to the continued existence of the company.
London
Interbank Offered Rate (“LIBOR”)
A benchmark
rate that some of the world’s leading banks charge each other for short-term loans and that serves as the first step to calculating interest rates on various loans throughout the world.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
KEY INVESTMENT TERMS (Unaudited)
(Continued)
May 31, 2023
Secured Overnight Financing Rate (“SOFR”)
A broad measure of the cost of borrowing cash overnight
collateralized by U.S. Treasury securities.
Virtus Stone Harbor
Emerging Markets Income Fund
SCHEDULE OF INVESTMENTS (Unaudited)
May 31, 2023
($ reported in
thousands)
| |
Par
Value(1) |
|
Value
|
| Foreign
Government Securities—70.8% |
| Angola
—7.9% |
|
|
| Republic
of Angola |
|
|
|
144A
8.250%, 5/9/28(2) |
$ 478
|
|
$ 425
|
RegS
8.250%, 5/9/28(3) |
850
|
|
755
|
| Republic
of Angola Via Avenir II B.V. |
|
|
|
(6
month LIBOR + 4.500%) RegS
9.687%, 12/7/23(3)(4)(5) |
346
|
|
344
|
(6
month LIBOR + 7.500%) RegS
12.772%, 7/3/23(3)(4)(5) |
2,737
|
|
2,724
|
Republic
of Angola Via Avenir Issuer II Ireland DAC RegS
6.927%, 2/19/27(3)(4) |
1,269
|
|
1,180
|
| |
|
|
5,428
|
| |
|
|
|
| |
| Argentina—9.7%
|
|
|
Provincia
De Buenos Aires RegS
5.250%, 9/1/37(3)(5) |
3,856
|
|
1,224
|
Republic
of Argentina
1.000%, 7/9/29 |
21,488
|
|
5,464
|
| |
|
|
6,688
|
| |
|
|
|
| |
| Brazil—4.9%
|
|
|
| Brazil
Notas do Tesouro Nacional |
|
|
|
Series
F
10.000%, 1/1/27 |
14,800
BRL |
|
2,839
|
Series
F
10.000%, 1/1/31 |
2,800
BRL |
|
514
|
| |
|
|
3,353
|
| |
|
|
|
| |
| Colombia—3.0%
|
|
|
Colombian
Titulos De Tesoreria
7.250%, 10/18/34 |
8,275,000
COP |
|
1,391
|
| |
Par
Value(1) |
|
Value
|
| |
|
|
|
| Colombia—continued
|
|
|
Republic
of Colombia
4.500%, 3/15/29(6) |
$ 795
|
|
$ 691
|
| |
|
|
2,082
|
| |
|
|
|
| |
| Ecuador—6.1%
|
|
|
| Republic
of Ecuador |
|
|
|
144A
5.500%, 7/31/30(2)(5)(6) |
6,667
|
|
3,209
|
RegS
5.500%, 7/31/30(3)(5) |
2,010
|
|
967
|
| |
|
|
4,176
|
| |
|
|
|
| |
| El
Salvador—6.1% |
|
|
| Republic
of El Salvador |
|
|
|
RegS
5.875%, 1/30/25(3) |
718
|
|
612
|
RegS
6.375%, 1/18/27(3)(6) |
4,498
|
|
2,850
|
RegS
8.625%, 2/28/29(3) |
670
|
|
398
|
RegS
8.250%, 4/10/32(3)(6) |
568
|
|
328
|
| |
|
|
4,188
|
| |
|
|
|
| |
| Ethiopia—1.0%
|
|
|
Federal
Republic of Ethiopia 144A
6.625%, 12/11/24(2) |
986
|
|
666
|
| Gabon—4.3%
|
|
|
| Republic
of Gabon |
|
|
|
144A
6.950%, 6/16/25(2)(6) |
2,702
|
|
2,572
|
144A
7.000%, 11/24/31(2) |
135
|
|
105
|
RegS
6.950%, 6/16/25(3) |
300
|
|
285
|
| |
|
|
2,962
|
| |
|
|
|
| |
See Notes to
Financial Statements
Virtus Stone Harbor
Emerging Markets Income Fund
SCHEDULE OF INVESTMENTS (Unaudited)
(Continued)
May 31, 2023
($ reported in
thousands)
| |
Par
Value(1) |
|
Value
|
| |
|
|
|
| Indonesia—4.6%
|
|
|
Indonesia
Government Bond
8.375%, 4/15/39 |
40,300,000
IDR |
|
$ 3,123
|
| Ivory
Coast—1.0% |
|
|
| Ivory
Coast Government International Bond |
|
|
|
RegS
5.250%, 3/22/30(3) |
489
EUR |
|
427
|
RegS
5.875%, 10/17/31(3) |
330
EUR |
|
287
|
| |
|
|
714
|
| |
|
|
|
| |
| Kenya—6.5%
|
|
|
| Republic
of Kenya |
|
|
|
144A
6.875%, 6/24/24(2)(6) |
$ 4,031
|
|
3,704
|
RegS
8.250%, 2/28/48(3)(6) |
1,025
|
|
749
|
| |
|
|
4,453
|
| |
|
|
|
| |
| Lebanon—0.8%
|
|
|
| Lebanese
Republic |
|
|
|
| 6.375%,
3/9/20(7) |
148
|
|
8
|
| 6.400%,
5/26/23(7) |
848
|
|
48
|
RegS
8.250%, 4/12/21(3)(7) |
5,175
|
|
298
|
RegS
6.100%, 10/4/22(3)(7) |
3,217
|
|
185
|
RegS
7.000%, 4/22/31(3)(7) |
377
|
|
22
|
| |
|
|
561
|
| |
|
|
|
| |
| Mongolia—0.2%
|
|
|
Mongolia
Government International Bond 144A
8.650%, 1/19/28(2) |
156
|
|
154
|
| Mozambique—1.6%
|
|
|
Republic
of Mozambique 144A
5.000%, 9/15/31(2)(5)(6) |
1,531
|
|
1,071
|
| |
Par
Value(1) |
|
Value
|
| |
|
|
|
| Nigeria—2.2%
|
|
|
| Republic
of Nigeria |
|
|
|
144A
6.125%, 9/28/28(2) |
$ 697
|
|
$ 561
|
144A
8.375%, 3/24/29(2) |
401
|
|
347
|
144A
7.696%, 2/23/38(2)(6) |
860
|
|
593
|
| |
|
|
1,501
|
| |
|
|
|
| |
| Pakistan—0.5%
|
|
|
Islamic
Republic of Pakistan RegS
8.250%, 4/15/24(3) |
700
|
|
368
|
| Papua
New Guinea —1.2% |
|
|
Papua
New Guinea Government International Bond RegS
8.375%, 10/4/28(3)(6) |
867
|
|
783
|
| Senegal—0.4%
|
|
|
Republic
of Senegal 144A
6.250%, 5/23/33(2) |
365
|
|
289
|
| South
Africa—3.0% |
|
|
| Republic
of South Africa |
|
|
|
| 6.500%,
2/28/41 |
26,900
ZAR |
|
776
|
| 8.750%,
2/28/48 |
36,800
ZAR |
|
1,310
|
| |
|
|
2,086
|
| |
|
|
|
| |
| Tunisia—3.1%
|
|
|
| Tunisian
Republic |
|
|
|
144A
6.750%, 10/31/23(2) |
360
EUR |
|
361
|
RegS
5.625%, 2/17/24(3) |
2,040
EUR |
|
1,749
|
| |
|
|
2,110
|
| |
|
|
|
| |
| Turkey—1.2%
|
|
|
Republic
of Turkey
9.875%, 1/15/28 |
804
|
|
801
|
See Notes to Financial Statements
Virtus Stone Harbor
Emerging Markets Income Fund
SCHEDULE OF INVESTMENTS (Unaudited)
(Continued)
May 31, 2023
($ reported in
thousands)
| |
Par
Value(1) |
|
Value
|
| |
|
|
|
| Venezuela—0.2%
|
|
|
Republic
of Venezuela RegS
9.000%, 5/7/23(3)(7)(8) |
$ 2,250
|
|
$
143 |
| Zambia—1.3%
|
|
|
| Republic
of Zambia |
|
|
|
144A
5.375%, 9/20/23(2)(7) |
124
|
|
55
|
144A
8.970%, 7/30/27(2)(6)(7) |
865
|
|
418
|
RegS
8.970%, 7/30/27(3)(6)(7) |
900
|
|
434
|
| |
|
|
907
|
| |
|
|
|
| |
Total
Foreign Government Securities
(Identified Cost $56,624) |
|
48,607
|
| |
|
|
|
| |
| Corporate
Bonds and Notes—53.4% |
| Brazil—0.6%
|
|
|
MC
Brazil Downstream Trading S.a.r.l. 144A
7.250%, 6/30/31(2)(6) |
550
|
|
402
|
| China—0.7%
|
|
|
Wanda
Properties International Co., Ltd. RegS
7.250%, 1/29/24(3) |
800
|
|
445
|
| Colombia—3.8%
|
|
|
Empresas
Publicas de Medellin ESP RegS
7.625%, 9/10/24(3) |
2,700,000
COP |
|
560
|
Gran
Tierra Energy International Holdings Ltd. 144A
6.250%, 2/15/25(2)(6) |
1,267
|
|
1,055
|
Gran
Tierra Energy, Inc. 144A
7.750%, 5/23/27(2)(6) |
1,410
|
|
1,020
|
| |
|
|
2,635
|
| |
|
|
|
| |
| |
Par
Value(1) |
|
Value
|
| |
|
|
|
| Ghana—1.9%
|
|
|
| Tullow
Oil plc |
|
|
|
| RegS
7.000%, 3/1/25(3) |
$ 1,912
|
|
$ 1,023
|
| RegS
10.250%, 5/15/26(3) |
368
|
|
272
|
| |
|
|
1,295
|
| |
|
|
|
| |
| India—2.5%
|
|
|
Adani
Electricity Mumbai Ltd. RegS
3.949%, 2/12/30(3)(6) |
1,038
|
|
782
|
Adani
Green Energy Ltd. RegS
4.375%, 9/8/24(3) |
200
|
|
184
|
Vedanta
Resources Finance II plc 144A
8.950%, 3/11/25(2)(6) |
1,051
|
|
782
|
| |
|
|
1,748
|
| |
|
|
|
| |
| Indonesia—4.3%
|
|
|
Indika
Energy Capital IV Pte Ltd. RegS
8.250%, 10/22/25(3)(6) |
1,085
|
|
1,069
|
| Theta
Capital Pte Ltd. |
|
|
|
| RegS
8.125%, 1/22/25(3)(6) |
935
|
|
763
|
| RegS
6.750%, 10/31/26(3)(6) |
1,550
|
|
1,093
|
| |
|
|
2,925
|
| |
|
|
|
| |
| Kazakhstan—1.4%
|
|
|
Development
Bank of Kazakhstan JSC 144A
10.950%, 5/6/26(2) |
506,000
KZT |
|
933
|
| Macau—0.5%
|
|
|
Studio
City Finance Ltd. 144A
5.000%, 1/15/29(2) |
500
|
|
362
|
See Notes to Financial Statements
Virtus Stone Harbor
Emerging Markets Income Fund
SCHEDULE OF INVESTMENTS (Unaudited)
(Continued)
May 31, 2023
($ reported in
thousands)
| |
Par
Value(1) |
|
Value
|
| |
|
|
|
| Mexico—33.5%
|
|
|
| Banco
Mercantil del Norte S.A. |
|
|
|
| 144A
5.875%(2)(6)(9) |
$ 1,268
|
|
$ 1,078
|
| RegS
6.750%(3)(9) |
770
|
|
721
|
Cemex
SAB de C.V. 144A
9.125% (2)(6)(9) |
793
|
|
790
|
| Petroleos
Mexicanos |
|
|
|
| 7.470%,
11/12/26 |
45,240
MXN |
|
2,188
|
| 7.690%,
1/23/50(6) |
3,629
|
|
2,340
|
| RegS
7.190%, 9/12/24(3) |
63,700
MXN |
|
3,334
|
| RegS
6.700%, 2/16/32(3) |
171
|
|
129
|
Poinsettia
Finance Ltd. RegS
6.625%, 6/17/31(3) |
13,423
|
|
11,112
|
Sixsigma
Networks Mexico S.A. de C.V. 144A
7.500%, 5/2/25(2)(6) |
1,541
|
|
1,346
|
| |
|
|
23,038
|
| |
|
|
|
| |
| Peru—0.5%
|
|
|
| Petroleos
del Peru S.A. |
|
|
|
| RegS
4.750%, 6/19/32(3) |
250
|
|
180
|
| RegS
5.625%, 6/19/47(3) |
225
|
|
136
|
| |
|
|
316
|
| |
|
|
|
| |
| Turkey—0.8%
|
|
|
Aydem
Yenilenebilir Enerji AS 144A
7.750%, 2/2/27(2)(6) |
655
|
|
532
|
| Uzbekistan—1.6%
|
|
|
Uzauto
Motors AJ 144A
4.850%, 5/4/26(2) |
1,285
|
|
1,095
|
| |
Par
Value(1) |
|
Value
|
| |
|
|
|
| Venezuela—0.2%
|
|
|
| Petroleos
de Venezuela S.A. |
|
|
|
| RegS
6.000%, 11/15/26(3)(10) |
$ 2,550
|
|
$
51 |
| RegS
9.750%, 5/17/35(3)(10) |
4,200
|
|
105
|
| |
|
|
156
|
| |
|
|
|
| |
| Vietnam—1.1%
|
|
|
Mong
Duong Finance Holdings B.V. 144A
5.125%, 5/7/29(2)(6) |
890
|
|
772
|
Total
Corporate Bonds and Notes
(Identified Cost $43,478) |
|
36,654
|
| |
|
|
|
| |
| Credit
Linked Notes—4.8% |
| Iraq—4.8%
|
|
|
| Republic
of Iraq |
|
|
|
(Counterparty:
BOA)
3.154%, 1/1/28(5)(8) |
492,121
JPY |
|
3,138
|
(Counterparty:
BOA)
3.227%, 1/6/28(5)(8) |
27,258
JPY |
|
174
|
Total
Credit Linked Notes
(Identified Cost $5,304) |
|
3,312
|
| |
|
|
|
| |
Total
Long-Term Investments—129.0%
(Identified Cost $105,406) |
|
88,573 |
| |
|
|
|
| |
TOTAL
INVESTMENTS—129.0%
(Identified Cost $105,406) |
|
$
88,573 |
| Other
assets and liabilities, net—(29.0)% |
|
(19,899
) |
| NET
ASSETS—100.0% |
|
$
68,674 |
| Abbreviations:
|
| CDS
|
Credit
Default Swap |
| DAC
|
Designated
Activity Company |
| JSC
|
Joint Stock
Company |
| LIBOR
|
London
Interbank Offered Rate |
For information regarding the abbreviations, see
the Key Investment Terms starting on page 7.
See Notes to Financial Statements
Virtus Stone Harbor
Emerging Markets Income Fund
SCHEDULE OF INVESTMENTS (Unaudited)
(Continued)
May 31, 2023
($ reported in
thousands)
| Footnote
Legend: |
|
(1) |
Par
Value disclosed in foreign currency is reported in thousands. |
|
(2) |
Security
exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2023, these securities amounted to a value of
$24,697 or 36.0% of net assets. |
|
(3) |
Regulation
S security. Security is offered and sold outside of the United States; therefore, it is exempt from registration with the SEC under Rules 903 and 904 of the Securities Act of 1933. |
|
(4) |
This Note
was issued for the sole purpose of funding a leveraged loan between the issuer and the borrower. As the credit risk for this security lies solely with the borrower, the name represented here is that of the borrower. |
|
(5) |
Variable
rate security. Rate disclosed is as of May 31, 2023. Information in parenthesis represents benchmark and reference rate for each security. Certain variable rate securities are not based on a published reference rate and spread but are determined by
the issuer or agent and are based on current market conditions, or, for mortgage-backed securities, are impacted by the individual mortgages which are paying off over time. These securities do not indicate a reference rate and spread in their
descriptions. |
|
(6) |
All or
a portion is segregated as collateral for reverse repurchase agreements. On May 31, 2023, securities valued at $30,826 were pledged as collateral for reverse repurchase agreements. |
|
(7) |
Security
in default; no interest payments are being received. |
|
(8) |
The
value of this security was determined using significant unobservable inputs and is reported as a Level 3 security in the Fair Value Hierarchy table located after the Schedule of Investments. |
|
(9) |
No
contractual maturity date. |
|
(10) |
Security
in default; no interest payments are being received during the bankruptcy proceedings. |
| Counterparties:
|
|
| BCLY
|
Barclays
|
| BOA
|
Bank of
America |
| JPM
|
JPMorgan
Chase Bank N.A. |
| MS
|
Morgan
Stanley |
| Foreign
Currencies: |
|
| BRL
|
Brazilian
Real |
| COP
|
Colombian
Peso |
| EUR
|
Euro
|
| IDR
|
Indonesian
Rupiah |
| JPY
|
Japanese
Yen |
| KZT
|
Kazakhstani
Tenge |
| MXN
|
Mexican
Peso |
| ZAR
|
South
African Rand |
| Reverse
Repurchase Agreements as of May 31, 2023 were as follows: |
| Counterparty
|
Interest
Rate |
Acquisition
Date* |
Amount
|
| JPM
|
5.25%
|
05/04/23
|
$
(890) |
| JPM
|
5.35
|
05/15/23
|
(599)
|
| JPM
|
5.40
|
05/04/23
|
(950)
|
| JPM
|
5.40
|
05/22/23
|
(324)
|
| JPM
|
5.40
|
05/22/23
|
(659)
|
| JPM
|
5.45
|
05/04/23
|
(2,074)
|
| JPM
|
5.50
|
05/04/23
|
(1,786)
|
| JPM
|
5.50
|
05/04/23
|
(1,141)
|
| JPM
|
5.50
|
05/04/23
|
(354)
|
See Notes to Financial Statements
Virtus Stone Harbor
Emerging Markets Income Fund
SCHEDULE OF INVESTMENTS (Unaudited)
(Continued)
May 31, 2023
($ reported in
thousands)
| Reverse
Repurchase Agreements as of May 31, 2023 were as follows: |
| Counterparty
|
Interest
Rate |
Acquisition
Date* |
Amount
|
| JPM
|
5.55%
|
05/04/23
|
$
(423) |
| JPM
|
5.55
|
05/04/23
|
(246)
|
| JPM
|
5.55
|
05/04/23
|
(527)
|
| JPM
|
5.55
|
05/04/23
|
(623)
|
| JPM
|
5.55
|
05/04/23
|
(2,218)
|
| JPM
|
5.55
|
05/04/23
|
(843)
|
| JPM
|
5.55
|
05/04/23
|
(855)
|
| JPM
|
5.55
|
05/04/23
|
(606)
|
| JPM
|
5.55
|
05/04/23
|
(646)
|
| JPM
|
5.55
|
05/04/23
|
(305)
|
| JPM
|
5.55
|
05/04/23
|
(829)
|
| JPM
|
5.55
|
05/04/23
|
(432)
|
| JPM
|
5.55
|
05/04/23
|
(294)
|
| JPM
|
5.60
|
05/04/23
|
(1,930)
|
| JPM
|
5.60
|
05/04/23
|
(575)
|
| JPM
|
5.65
|
05/04/23
|
(1,030)
|
| JPM
|
5.65
|
05/04/23
|
(652)
|
| JPM
|
5.65
|
05/04/23
|
(232)
|
| JPM
|
5.65
|
05/04/23
|
(1,052)
|
| JPM
|
5.75
|
05/04/23
|
(842)
|
| JPM
|
5.85
|
05/04/23
|
(830)
|
| Total
|
|
|
$(24,767)
|
| Footnote
Legend: |
|
* |
All
agreements can be terminated by either party on demand at value plus accrued interest. |
| Centrally
cleared credit default swaps - sell protection(1) outstanding as of May 31, 2023 was as follows: |
|
| Reference
Entity |
Payment
Frequency |
|
Fixed
Rate |
Expiration
Date |
Notional
Amount(2) |
Value
|
|
Premiums
Paid
(Received) |
|
Unrealized
Appreciation |
|
Unrealized
Depreciation |
| Republic
of Argentina 4 Year CDS(3) |
Quarterly
|
|
5.000%
|
6/20/25
|
$7,000
|
$(3,980)
|
|
$(1,307)
|
|
$—
|
|
$(2,673)
|
| Total
|
|
|
|
|
|
|
$(3,980)
|
|
$(1,307)
|
|
$—
|
|
$(2,673)
|
See Notes to Financial Statements
Virtus Stone Harbor
Emerging Markets Income Fund
SCHEDULE OF INVESTMENTS (Unaudited)
(Continued)
May 31, 2023
($ reported in
thousands)
| Over-the-counter
credit default swaps - sell protection(1) outstanding as of May 31, 2023 were as follows: |
| Reference
Entity |
Payment
Frequency |
Counterparty
|
Fixed
Rate |
Expiration
Date |
Notional
Amount(2) |
|
Value
|
|
Premiums
Paid
(Received) |
|
Unrealized
Appreciation |
|
Unrealized
Depreciation |
| Arab
Republic of Egypt CDS |
Quarterly
|
MS
|
1.000%
|
12/20/25
|
$
3,600 |
|
$(1,224)
|
|
$
(647) |
|
$
— |
|
$
(577) |
| Eskom
Holdings 5 Year CDS(4) |
Quarterly
|
BCLY
|
1.000%
|
12/20/25
|
5,300
|
|
(296)
|
|
(465)
|
|
169
|
|
—
|
| Republic
of Argentina 5 Year CDS(3) |
Quarterly
|
BCLY
|
5.000%
|
12/20/25
|
11,200
|
|
(7,114)
|
|
(1,803)
|
|
—
|
|
(5,311)
|
| Total
|
|
|
|
|
|
|
$(8,634)
|
|
$(2,915)
|
|
$169
|
|
$(5,888)
|
|
Footnote Legend: |
|
(1) |
If
the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery
of the referenced obligation or underlying investments comprising the referenced index or (ii) pay a net settlement amount in the form of cash or investments equal to the notional amount of the swap less the recovery value of the referenced
obligation or underlying investments comprising the referenced index. |
|
(2) |
The
maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement. |
|
(3) |
Based
on Republic of Argentina Sovereign Debt Obligation, USD Denominated 1.00% fixed coupon, 7/09/2029 maturity. |
|
(4) |
Based
on Eskom Holdings SOC, Ltd. Corporate Debt Obligation, USD Denominated 6.35% fixed coupon, 8/10/2028 maturity. |
See Notes to Financial Statements
Virtus Stone Harbor
Emerging Markets Income Fund
SCHEDULE OF INVESTMENTS (Unaudited)
(Continued)
May 31, 2023
($ reported in
thousands)
The following table summarizes the value of the
Fund’s investments as of May 31, 2023, based on the inputs used to value them (See Security Valuation Note 2A in the Notes to Financial Statements):
| |
Total
Value at
May 31, 2023 |
|
Level
2
Significant
Observable
Inputs |
|
Level
3
Significant
Unobservable
Inputs |
| Assets:
|
|
|
|
|
|
| Debt
Instruments: |
|
|
|
|
|
| Corporate
Bonds and Notes |
$
36,654 |
|
$
36,654 |
|
$
— |
| Foreign
Government Securities |
48,607
|
|
48,464
|
|
143
|
| Credit
Linked Notes |
3,312
|
|
—
|
|
3,312
|
| Total
Assets |
88,573
|
|
85,118
|
|
3,455
|
| Liabilities:
|
|
|
|
|
|
| Other
Financial Instruments:(1) |
|
|
|
|
|
| Centrally
Cleared Credit Default Swaps |
(3,980)
|
|
(3,980)
|
|
—
|
| Over-the-Counter
Credit Default Swaps |
(8,634)
|
|
(8,634)
|
|
—
|
| Reverse
Repurchase Agreements |
(24,767)
|
|
(24,767)
|
|
—
|
| Total
Liabilities |
(37,381)
|
|
(37,381)
|
|
—
|
| Total
Investments |
$
51,192 |
|
$
47,737 |
|
$3,455
|
|
(1) |
Other
financial instruments are derivative instruments reflected in the Schedule of Investments. Swaps are reported at value. For liabilities arising from reverse repurchase agreements, the carrying amount approximates fair value due to the short-term
maturity of these financial instruments. |
There were no securities valued using quoted prices
(Level 1) at May 31, 2023.
Securities held by the
Fund with an end of period value of $51 were transferred from Level 3 to Level 2 due to a increase in trading activities at period end.
Securities held by the Fund with an end of period value
of $143 were transferred from Level 2 to Level 3 due to a decrease in trading activities at period end.
Some of the Fund’s investments that were
categorized as Level 3 were valued utilizing third party pricing information without adjustment. Such valuations are based on unobservable inputs. A significant change in third party information could result in a significantly lower or higher value
of Level 3 investments.
See Notes to Financial Statements
Virtus Stone Harbor
Emerging Markets Income Fund
SCHEDULE OF INVESTMENTS (Unaudited)
(Continued)
May 31, 2023
($ 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.
| |
Total
|
|
Corporate
Bonds
And Notes |
|
Foreign
Government
Securities |
|
Credit
Linked
Notes |
| Investments
in Securities |
|
|
|
|
|
|
|
| Balance
as of November 30, 2022: |
$
3,632 |
|
$
108(a) |
|
$
— |
|
$
3,524 |
| Accrued
discount/(premium) |
39
|
|
—
|
|
—
|
|
39
|
| Net
realized gain (loss) |
58
|
|
193
|
|
—
|
|
(135)
|
| Net
change in unrealized appreciation (depreciation)(b) |
221
|
|
(57)
|
|
—
|
|
278
|
| Purchases
|
—
(c) |
|
—
(c) |
|
—
|
|
—
|
| Sales
(d) |
(587)
|
|
(193)
|
|
—
|
|
(394)
|
| Transfers
into Level 3(e) |
143
|
|
—
|
|
143
|
|
—
|
| Transfers
from Level 3(e) |
(51)
|
|
(51)
|
|
—
|
|
—
|
| Balance
as of May 31, 2023 |
$ 3,455
|
|
$
— |
|
$ 143
|
|
$ 3,312
|
(a) Includes internally fair
valued security currently priced at zero ($0).
(b)
The net change in unrealized appreciation (depreciation) on investments still held at May 31, 2023, was $228.
(c) Amount is less than $500 (not in thousands).
(d) Includes paydowns on securities.
(e) Transfers into and/or from represent the ending
value as of May 31, 2023, for any investment security where a change in the pricing level occurred from the beginning to the end of the period.
See Notes to
Financial Statements
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
(Unaudited)
May 31, 2023
(Reported in thousands except shares and per share amounts)
| Assets
|
|
|
Investment in securities at value (Identified cost
$105,406)
|
$
88,573 |
|
Foreign currency at value (cost
$—(a))
|
—
(a) |
|
Cash
|
281
|
|
Due from
broker
|
156
|
|
Cash pledged as collateral for reverse repurchase
agreements
|
275
|
|
Cash collateral pledged for
swaps
|
11,106
|
| Receivables
|
|
|
Dividends and
interest
|
2,046
|
|
Tax reclaims
|
3
|
|
Prepaid Trustees’
retainer
|
4
|
|
Prepaid expenses and other assets (Note
4)
|
12
|
|
Total
assets
|
102,456
|
| Liabilities
|
|
|
Borrowings through reverse repurchase agreements (Note
8)
|
24,767
|
|
Over-the-counter swaps at value (Swap premium
$2,915)
|
8,634
|
| Payables
|
|
|
Interest on reverse repurchase
agreements
|
99
|
|
Professional fees
|
96
|
|
Investment advisory fees (Note
4)
|
78
|
|
Variation margin payable on cleared
swaps
|
42
|
|
Administration and accounting
fees
|
9
|
|
Trustee deferred compensation plan (Note
4)
|
4
|
|
Other accrued
expenses
|
53
|
|
Total
liabilities
|
33,782
|
|
Net
Assets
|
$
68,674 |
| Net
Assets Consist of: |
|
|
Common stock ($0.001 par value; unlimited shares
authorized)
|
$
17 |
|
Capital paid in on shares of beneficial
interest
|
225,430
|
|
Total distributable earnings (accumulated
losses)
|
(156,773)
|
|
Net
Assets
|
$
68,674 |
|
Common Shares
Outstanding
|
17,232,116
|
|
Net Asset Value Per
Share(b)
|
$
3.99 |
|
(a) |
Amount
is less than $500 (not in thousands). |
|
(b) |
Net
Asset Value Per Share is calculated using unrounded net assets. |
See Notes to Financial Statements
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
STATEMENT OF OPERATIONS (Unaudited)
SIX MONTHS ENDED May 31, 2023
($ reported in thousands)
| Investment
Income |
|
|
Interest
|
$
5,242 |
|
Dividends
|
34
|
|
Foreign taxes withheld
|
(28)
|
|
Total investment
income
|
5,248
|
| Expenses
|
|
|
Investment advisory
fees
|
465
|
|
Administration and accounting
fees
|
54
|
|
Professional fees
|
105
|
|
Printing fees and expenses
|
28
|
|
Trustees’ fees and
expenses
|
11
|
|
Transfer agent fees and
expenses
|
6
|
|
Custodian fees
|
3
|
|
Miscellaneous
expenses
|
34
|
|
Total expenses before interest
expense
|
706
|
|
Interest expense on reverse repurchase agreements (Note
8)
|
540
|
|
Total expenses after interest
expense
|
1,246
|
|
Net investment income
(loss)
|
4,002
|
| Net
Realized and Unrealized Gain (Loss) on Investments |
|
| Net
realized gain (loss) from: |
|
|
Investments
|
(7,305)
|
|
Foreign currency
transactions
|
(75)
|
|
Foreign capital gains
tax
|
(—)
(1) |
|
Forward foreign currency exchange
contracts
|
(300)
|
|
Swaps
|
(2,629)
|
| Net
change in unrealized appreciation (depreciation) on: |
|
|
Investments
|
6,094
|
|
Foreign currency
transactions
|
(5)
|
|
Forward foreign currency exchange
contracts
|
172
|
|
Swaps
|
3,029
|
|
Net realized and unrealized gain (loss) on
investments
|
(1,019)
|
|
Net increase (decrease) in net assets resulting from
operations
|
$
2,983 |
|
(1) |
Amount
is less than $500 (not in thousands). |
See Notes to Financial Statements
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
($
reported in thousands)
| |
Six
Months
Ended
May 31, 2023
(Unaudited) |
|
Year
Ended
November 30, 2022 |
Increase
(Decrease) In Net Assets
From Operations |
|
|
|
|
Net investment income
(loss)
|
$
4,002 |
|
$
8,808 |
|
Net realized gain
(loss)
|
(10,309)
|
|
(12,323)
|
|
Net change in unrealized appreciation
(depreciation)
|
9,290
|
|
(19,311)
|
|
Increase (decrease) in net assets resulting from
operations
|
2,983
|
|
(22,826)
|
| From
Dividends and Distributions to Shareholders |
|
|
|
|
Net investment income and net realized
gains
|
(6,172)
(1) |
|
(1,512)
|
|
Return of
capital
|
—
|
|
(10,711)
|
|
Dividends and Distributions to
Shareholders
|
(6,172)
|
|
(12,223)
|
| From
Capital Share Transactions |
|
|
|
|
Reinvestment of distributions resulting in the issuance of common stock (129,837 and 241,484 shares,
respectively)
|
570
|
|
1,208
|
|
Increase (decrease) in net assets from capital
transactions
|
570
|
|
1,208
|
|
Net increase (decrease) in net
assets
|
(2,619)
|
|
(33,841)
|
| Net
Assets |
|
|
|
|
Beginning of
period
|
71,293
|
|
105,134
|
|
End of
period
|
$
68,674 |
|
$
71,293 |
|
(1) |
Please
note that the tax status of the Fund’s distributions is determined at the end of the taxable year. See Notes to Financial Statements. |
See Notes to Financial Statements
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
STATEMENT OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED May 31,
2023
($ reported in thousands)
| Increase
(Decrease) in cash |
|
| Cash
flows provided by (used for) operating activities: |
|
|
Net increase (decrease) in net assets resulting from
operations
|
$
2,983 |
| Adjustments
to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used for) operating activities: |
|
|
Proceeds from sales and paydowns of long-term
investments
|
33,038
|
|
(Increase) Decrease in investment securities sold
receivable
|
1,991
|
|
Purchases of long-term
investments
|
(38,529)
|
|
Increase (Decrease) in investment securities purchased
payable
|
(778)
|
|
Net (purchases) or sales of short-term
investments
|
10,256
|
|
Net change in unrealized (appreciation)/depreciation on
investments
|
(6,094)
|
|
Net change in unrealized (appreciation)/depreciation of forward foreign currency exchange
contracts
|
(172)
|
|
Net realized (gain)/loss on
investments
|
7,305
|
|
Net realized (gain)/loss on sales of investments from changes in the foreign exchange
rates
|
98
|
|
Amortization of premiums and inflation income and accretion of discounts on
investments
|
(1,537)
|
|
(Increase) Decrease in due from
broker
|
(80)
|
|
(Increase) Decrease in tax reclaims
receivable
|
3
|
|
(Increase) Decrease in dividends and interest
receivable
|
(266)
|
|
(Increase) Decrease in prepaid expenses and other
assets
|
(8)
|
|
(Increase) Decrease in prepaid Trustees’
retainer
|
2
|
|
Increase (Decrease) in interest payable on reverse repurchase
agreements
|
3
|
|
Increase (Decrease) in over-the-counter swaps at
value
|
(7,164)
|
|
Increase (Decrease) in variation margin payable on swap
contracts
|
90
|
|
Increase (Decrease) in affiliated expenses payable
|
(1)
|
|
Increase (Decrease) in non-affiliated expenses payable
|
(27)
|
|
Cash provided by (used for) operating
activities
|
1,113
|
| Cash
provided (used for) financing activities: |
|
|
Cash receipts from reverse repurchase
agreements
|
106,989
|
|
Cash payments for reverse repurchase
agreements
|
(110,822)
|
|
Cash distributions paid to
shareholders
|
(5,602)
|
|
Cash provided by (used for) financing
activities
|
(9,435)
|
|
Net increase (decrease) in
cash
|
(8,322)
|
|
Restricted and unrestricted cash at beginning of
period
|
19,984
|
|
Restricted and unrestricted cash at end of
period
|
$
11,662 |
| |
|
See Notes to Financial Statements
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
STATEMENT OF CASH FLOWS (Continued)
SIX MONTHS ENDED May 31,
2023
($ reported in thousands)
| Supplemental
cash flow information: |
|
|
Reinvestment of dividends and
distributions
|
$
570 |
|
Cash paid during the period for interest expense on reverse repurchase
agreements
|
$
537 |
| |
|
| Reconciliation
of restricted and unrestricted cash at the end of period to the statement of assets and liabilities: |
|
|
Cash and foreign currency at
value
|
$
281 |
|
Cash collateral pledged for
swaps
|
11,106
|
|
Cash pledged as collateral for reverse repurchase
agreements
|
275
|
| |
$11,662
|
See Notes to Financial Statements
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD
|
|
Six
Months
Ended May 31,
2023
(Unaudited) |
|
Year
Ended November 30, |
| |
2022
|
|
2021
|
|
2020
|
|
2019
|
|
2018
|
|
| PER
SHARE DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
$
4.17 |
|
$
6.24 |
|
$
7.04 |
|
$
8.91 |
|
$
10.58 |
|
$
14.67 |
| Income
(loss) from investment operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)(1)
|
0.23
|
|
0.52
|
|
0.60
|
|
0.64
|
|
0.89
|
|
1.13
|
|
Net realized and unrealized gain (loss)
|
(0.05)
|
|
(1.87)
|
|
(0.52)
|
|
(1.08)
|
|
(0.40)
|
|
(3.06)
|
|
Total from investment operations
|
0.18
|
|
(1.35)
|
|
0.08
|
|
(0.44)
|
|
0.49
|
|
(1.93)
|
| Dividends
and Distributions to Shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
(0.36)
|
|
(0.09)
|
|
(0.57)
|
|
(0.28)
|
|
(0.76)
|
|
(0.42)
|
|
Return of capital
|
—
|
|
(0.63)
|
|
(0.31)
|
|
(1.15)
|
|
(1.40)
|
|
(1.74)
|
|
Total dividends and distributions to shareholders
|
(0.36)
|
|
(0.72)
|
|
(0.88)
|
|
(1.43)
|
|
(2.16)
|
|
(2.16)
|
|
Net asset value, end of period
|
$
3.99 |
|
$
4.17 |
|
$
6.24 |
|
$
7.04 |
|
$
8.91 |
|
$
10.58 |
|
Market value, end of period
|
$
4.00 |
|
$
4.24 |
|
$
6.65 |
|
$
7.40 |
|
$
13.18 |
|
$
12.05 |
|
Total return, net asset value(2), (3)
|
4.15%
|
|
(22.31)%
|
|
0.36%
|
|
(3.32)%
|
|
4.45%
|
|
(14.51)%
|
|
Total return, market value(2), (3)
|
2.44%
|
|
(25.98)%
|
|
0.66%
|
|
(32.92)%
|
|
29.86%
|
|
(6.89)%
|
| RATIOS/SUPPLEMENTAL
DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of total expenses after
interest expense to average
net assets(4),
(5)
|
3.43%
|
|
2.95%
|
|
2.37%
|
|
2.56%
|
|
1.97%
|
|
2.96%
|
|
Ratio of net investment income (loss) to average net assets(4)
|
11.00%
|
|
10.55%
|
|
8.57%
|
|
9.04%
|
|
8.88%
|
|
8.76%
|
|
Portfolio turnover rate(2)
|
39%
|
|
37%
|
|
47%
|
|
127%
|
|
107%
|
|
130%
|
|
Net assets, end of period (000’s)
|
$68,674
|
|
$71,293
|
|
$105,134
|
|
$117,235
|
|
$146,213
|
|
$170,992
|
|
Borrowings, end of period (000’s)
|
$24,767
|
|
$28,600
|
|
$
45,481 |
|
$
46,000 |
|
$
8,976 |
|
$
85,000 |
|
Asset coverage, per $1,000 of borrowings(6)
|
$
3,773 |
|
$
3,493 |
|
$
3,312 |
|
$
3,545 |
|
$
17,290 |
|
$
3,019 |
| |
|
|
(1) |
Calculated
using average shares outstanding. |
|
(2) |
Not
annualized for periods less than one year. |
|
(3) |
Total return
on market value is calculated assuming a purchase of common shares on the opening of the first day and sale on the closing of the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be
reinvested at prices obtained under the Fund’s Automatic Reinvestment and Cash Purchase Plan. Total return on market value is not annualized for periods of less than one year. Brokerage commissions that a shareholder may pay are not reflected.
Total return on market value does not reflect the deduction of taxes that a shareholder may pay on fund distributions or the sale of fund shares. Total return on net asset value uses the same methodology, but with use of net asset value for the
beginning, ending and reinvestment values. |
|
(4) |
Annualized
for periods less than one year. |
|
(5) |
Ratio of
total expenses before interest expense to average net assets was 1.94% for the six months ended May 31, 2023, and 2.03%, 1.96%, 1.99%, 1.59% and 1.88% for the years ended November 30, 2022, 2021, 2020, 2019 and 2018, respectively. |
|
(6) |
Represents
value of net assets plus the borrowings at the end of the period divided by the borrowings at the end of the period multiplied by $1,000. |
See Notes to Financial Statements
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited)
May 31, 2023
Note 1. Organization
Virtus Stone Harbor Emerging Markets Income
Fund (the “Fund”) is a closed-end, non-diversified management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund was organized as a Massachusetts business trust on
December 22, 2010 pursuant to an Agreement and Declaration of Trust governed by the laws of the Commonwealth of Massachusetts (the “Declaration of Trust”). The Fund’s investment objective is outlined in the Manager’s
Discussion of Fund Performance pages. There is no guarantee that the Fund will achieve its investment objective.
Note 2. Significant Accounting Policies
The Fund is an investment company that
follows the accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its financial statements and for derivatives, included in Note 3 below. The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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 |
| |
The
Fund’s Board of Trustees has designated the Investment Adviser as the valuation designee to perform fair valuations pursuant to Rule 2a-5 under the Investment Company Act of 1940. The Fund utilizes a fair value hierarchy which prioritizes the
inputs to valuation techniques used to measure fair value into three broad levels. The Fund’s policy is to recognize transfers into or out of Level 3 at the end of the reporting period. |
•
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 Investment Adviser’s 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. Illiquid, restricted
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
equity securities and illiquid private placements are
internally fair valued by the Investment Adviser’s Valuation Committee, and 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 American Depositary Receipts, 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 instruments, including convertible
bonds, and restricted securities, are valued based on evaluated quotations received from independent pricing services or from dealers who make markets in such securities. For most bond types, the pricing service utilizes matrix pricing that
considers one or more of the following factors: yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type, activity of the underlying equities, and current day trade information, as well as dealer supplied prices.
These valuations are generally categorized as Level 2 in the hierarchy. Structured debt instruments, such as mortgage-backed and asset-backed securities may also incorporate collateral analysis and utilize cash flow models for valuation and are
generally categorized as Level 2 in the hierarchy. Pricing services do not provide pricing for all securities and therefore indicative bids from dealers are utilized which are based on pricing models used by market makers in the security and are
generally categorized as Level 2 in the hierarchy. Debt instruments that are internally fair valued by the Investment Adviser’s Valuation Committee are generally categorized as Level 3 in the hierarchy.
Listed derivatives, such as options and
futures, that are actively traded are valued at the last posted settlement price from the exchange where they are principally traded and are categorized as Level 1 in the hierarchy. Over-the-counter (“OTC”) derivative contracts, which
include forward currency contracts, swaps, swaptions, options and equity linked instruments, are valued based on model prices provided by independent pricing services or from dealer quotes. Depending on the derivative type and the specific terms of
the transaction, these models vary and include observable inputs in actively quoted markets including but not limited to: underlying reference entity details, indices, spreads, interest rates, yield curves, dividend and exchange rates. These
instruments are generally categorized as Level 2 in the hierarchy. Centrally cleared swaps listed or traded on a bilateral or trade facility platform, such as a registered exchange, are valued at the last posted settlement price determined by the
respective exchange. These securities are generally categorized as Level 2 within the hierarchy.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
Investments in open-end mutual funds are
valued at NAV. Investments in closed-end funds and ETFs are valued as of the close of regular trading on the NYSE each business day. Each is 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 the sale of securities are determined on the identified cost basis. Dividend income and capital gain distributions are recognized on the ex-dividend date or, in the case of certain foreign
securities, as soon as the Fund is notified. Interest income is recorded on the accrual basis. The Fund amortizes premiums and accretes discounts using the effective interest method. Premiums on callable debt instruments are amortized to interest
income to the earliest call date using the effective interest method. Conversion premium is not amortized. |
| |
Any distributions from
underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds. |
| C.
|
Income Taxes |
| |
It is the Fund’s
intention to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) and to distribute substantially all of its taxable income and capital gains, if any, to its shareholders. Therefore,
no provision for federal income taxes or excise taxes has been made. |
| |
The Fund may be subject to
foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. The Fund will accrue such taxes and recoveries as applicable based upon current interpretations of the tax rules and regulations that
exist in the markets in which it invests. |
| |
Management of the Fund has
concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. The Fund’s U.S. federal income tax return is generally subject to examination by the Internal Revenue Service for a
period of three years after it is filed. State, local and/or non-U.S. tax returns and/or other filings may be subject to examination for different periods, depending upon the tax rules of each applicable jurisdiction. |
| D.
|
Distributions to Shareholders
|
| |
The Fund declares
distributions on a monthly basis. Distributions are recorded by the Fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from U.S. GAAP. |
| |
Distributions may represent
earnings from net investment income, realized capital gains, or, if necessary, return of capital. |
| E.
|
Foreign Currency Transactions
|
| |
Non-U.S.
investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the foreign currency exchange rate effective at the end of the reporting period. Cost of investments is translated at
the currency exchange rate effective at the trade date. The gain or loss resulting from a |
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
| |
change in currency exchange
rates between the trade and settlement date of a portfolio transaction is treated as a gain or loss on foreign currency. Likewise, the gain or loss resulting from a change in currency exchange rates between the date income is accrued and the date it
is paid is treated as a gain or loss on foreign currency. The Fund bifurcates that portion of the results of operations arising from changes in foreign exchange rates on investments from the fluctuations arising from changes in the market prices of
securities held and such fluctuations are included with the net realized and unrealized gain or loss on foreign currency transactions. |
| F.
|
Credit Linked Notes |
| |
The Fund may invest in credit
linked notes to obtain economic exposure to high yield, emerging markets or other securities. Investments in a credit linked note typically provide the holder with a return based on the return of an underlying reference instrument, such as an
emerging market bond. Like an investment in a bond, investments in credit linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. In
addition to the risks associated with the underlying reference instrument, an investment in a credit linked note is also subject to liquidity risk, market risk, interest rate risk and the risk that the counterparty will be unwilling or unable to
meet its obligations under the note. |
| G.
|
Payment-In-Kind Securities
|
| |
The Fund may invest in
payment-in-kind securities, which are debt or preferred stock securities that require or permit payment of interest in the form of additional securities. Payment-in-kind securities allow the issuer to avoid or delay the need to generate cash to meet
current interest payments and, as a result, may involve greater risk than securities that pay interest currently or in cash. |
| H.
|
Leveraged Loans |
| |
The Fund may invest in direct
debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. Leveraged loans are generally non-investment grade and often involve borrowers that are highly leveraged. The Fund
may invest in obligations of borrowers who are in bankruptcy proceedings. Leveraged loans are typically senior in the corporate capital structure of the borrower. A loan is often administered by a bank or other financial institution (the
“lender”) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the leveraged loan. The Fund’s investments in loans may be in the form of participations in loans or assignments of all or a
portion of loans from third parties. When investing in loan participations, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan participation and only upon
receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the leveraged loan with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the
lender that is selling the leveraged loan. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. |
| |
The Fund
may invest in multiple series or tranches of a loan, which may have varying terms and carry different associated risks. Leveraged loans may involve foreign borrowers and investments may be denominated in foreign currencies. Direct |
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
| |
indebtedness of emerging
countries involves a risk that the government entities responsible for the repayment of the debt may be unable, or unwilling, to pay the principal and interest when due. |
| |
The leveraged loans have
floating rate loan interests which generally pay interest at rates that are periodically determined by reference to a base lending rate plus a premium. The base lending rates are generally LIBOR, SOFR, the prime rate offered by one or more U.S.
banks or the certificate of deposit rate. When a leveraged loan is purchased the Fund may pay an assignment fee. On an ongoing basis, the Fund may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a
leveraged loan. Prepayment penalty fees are received upon the prepayment of a leveraged loan by a borrower. Prepayment penalty, facility, commitment, consent and amendment fees are recorded to income as earned or paid. |
| |
The Fund may invest in both
secured loans and “covenant lite” loans which have few or no financial maintenance covenants that would require a borrower to maintain certain financial metrics. The lack of financial maintenance covenants in covenant lite loans
increases the risk that the Fund will experience difficulty or delays in enforcing its rights on its holdings of such loans, which may result in losses, especially during a downturn in the credit cycle. |
| I.
|
Expenses
|
| |
Expenses incurred together by
the Fund and other affiliated mutual funds are allocated in proportion to the net assets of each such fund, except where allocation of direct expenses to the fund and each such other fund, or an alternative allocation method, can be more
appropriately used. |
| |
In addition to the net annual
operating expenses that the Fund bears directly, the shareholders of the Fund indirectly bear the pro-rata expenses of any underlying mutual funds in which the Fund invests. |
| J.
|
Cash and Cash Equivalents
|
| |
Cash and
cash equivalents include deposits held at financial institutions, and are inclusive of dollar denominated cash, foreign currency, cash collateral pledged for swaps, and deposits with brokers for reverse repurchase agreements. |
Note 3. Derivative Financial Instruments and
Transactions
($ 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 are such disclosures and accounting policies for each specific type of derivative instrument used by the Fund.
| A.
|
Forward Foreign Currency
Exchange Contracts |
| |
A forward
foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a future date. Forward foreign currency exchange contracts, when used by the Fund, help to manage the overall exposure to the
currencies in which some of the investments held by the Fund are denominated. The contract is marked-to-market daily and the change in market value is recorded by the Fund as an unrealized appreciation or depreciation. When the contract
|
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
| |
is closed, the Fund records a
realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The use of forward foreign currency exchange contracts involves the risk that the value of the contract changes
unfavorably due to movements in the value of the referenced foreign currencies. Non-deliverable forward foreign currency exchange contracts are settled with the counterparty in U.S. dollars without the delivery of foreign currency. |
| |
During the six months ended
May 31, 2023, the Fund entered into forward foreign currency exchange contracts as an economic hedge against either specific transactions or portfolio instruments or to obtain exposure to, or hedge exposure away from, foreign currencies (foreign
currency exchange rate risk). Forward foreign currency contracts outstanding at period end, if any, are listed after the Fund’s Schedule of Investments. |
| B.
|
Swaps
|
| |
The Fund enters into swap
agreements, in which the Fund and a counterparty agree either to make periodic net payments on a specified notional amount or a net payment upon termination. Swap agreements are negotiated in the OTC market and may be entered into as a bilateral
contract (“OTC swaps”) or centrally cleared (“centrally cleared swaps”). The value of the swap is reflected on the Statement of Assets and Liabilities as “Swaps at value”. Swaps are marked-to-market daily and
changes in value are recorded as “Net change in unrealized appreciation (depreciation) on swaps” in the Statement of Operations. |
| |
Any upfront premiums paid are
recorded as assets and any upfront fees received are recorded as liabilities and are shown under “Swaps at value” in the Statement of Assets and Liabilities and are amortized over the term of the swap. When a swap is terminated, the Fund
records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund’s basis in the contract, if any. Generally, the basis of the contracts is the unamortized premium received or
paid. Cash settlements between the Fund and the counterparty are recognized as “Net realized gain (loss) on swaps” in the Statement of Operations. Swap contracts outstanding at period end, if any, are listed after the Fund’s
Schedule of Investments. |
| |
In a centrally cleared swap,
immediately following execution of the swap agreement, the swap agreement is submitted to a central counterparty (the “CCP”) and the Fund’s counterparty on the swap agreement becomes the CCP. The Fund is required to interface with
the CCP through a clearing broker. Upon entering into a centrally cleared swap, the Fund is required to deposit initial margin with the clearing broker in the form of cash or securities in an amount that varies depending on the size and risk profile
of the particular swap. |
| |
Securities deposited as
margin are designated on the Schedule of Investments and cash deposited is recorded on the Statement of Assets and Liabilities as “Cash collateral pledged for swaps.” |
| |
Swap
transactions involve, to varying degrees, elements of interest rate, credit and market risk in excess of the amounts recognized in the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for
these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements, and |
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
| |
that there may be unfavorable
changes in interest rates and/or market values associated with these transactions. |
| |
Credit default swaps – The Fund may either buy or sell (write) credit default swaps on single-name issuers (corporate or sovereign), a combination or basket of single-name issuers or traded indexes. Credit default swaps on single-name
issuers are agreements in which the buyer pays fixed periodic payments to the seller in consideration for a guarantee from the protection seller to make specific payment should a negative credit event take place with respect to the referenced entity
(e.g., bankruptcy, failure to pay, obligation accelerators, repudiation, moratorium or restructuring). Credit default swaps on a combination or basket of single-name issuers are agreements in which the buyer pays fixed periodic payments to the
seller in consideration for a guarantee from the protection seller to make specific payment should a negative credit event take place with respect to any of the referenced entities (e.g., bankruptcy, failure to pay, obligation accelerators,
repudiation, moratorium or restructuring). Credit default swaps on traded indexes are agreements in which the buyer pays fixed periodic payments to the seller in consideration for a guarantee from the seller to make a specific payment should a
write-down, principal or interest shortfall or default of all or individual underlying securities included in the index occurs. As a buyer, if an underlying credit event occurs, the Fund will either receive from the seller an amount equal to the
notional amount of the swap and deliver the referenced security or underlying securities comprising the index or receive a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying
securities comprising the index. As a seller (writer), if an underlying credit event occurs, the Fund will either pay the buyer an amount equal to the notional amount of the swap and take delivery of the referenced security or underlying securities
comprising the index or pay a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising the index. The Fund may enter into credit default swaps to manage their
exposure to the market or certain sectors of the market, to reduce their risk exposure to defaults of corporate and/or sovereign issuers or to create exposure to corporate and/or sovereign issuers to which they are not otherwise exposed (credit
risk). |
| |
During the six months ended
May 31, 2023, the Fund utilized single name credit default swaps to short individual securities or to gain exposure to a credit or asset-backed index. |
| |
The
following is a summary of derivative instruments categorized by primary risk exposure, and location as presented in the Statement of Assets and Liabilities as of May 31, 2023: |
| Statement
Line Description |
|
Primary
Risk |
|
| Asset
Derivatives |
| Over-the-counter
swaps at value(1) |
|
Credit
contracts |
$
169 |
|
| Total
|
|
|
$
169 |
|
| Liability
Derivatives |
| Variation
margin payable on cleared swaps(1) |
|
Credit
contracts |
$(2,673)
|
|
| Over-the-counter
swaps at value(1) |
|
Credit
contracts |
(5,888)
|
|
| Total
|
|
|
$(8,561)
|
|
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
| |
|
|
(1) |
Represents
cumulative appreciation (depreciation) on swap contracts as reported in the Schedule of Investments. Only current day’s variation margin is shown in the Statement of Assets and Liabilities for centrally cleared swap contracts. For OTC swap
contracts, the value (including premiums) at May 31, 2023 is shown in the Statement of Assets and Liabilities. |
The following is a summary of derivative
instruments categorized by primary risk exposure, and location as presented in the Statement of Operations for the six months ended May 31, 2023:
| Statement
Line Description |
Primary
Risk |
|
|
| Net
Realized Gain (Loss) from |
|
|
| Forward
foreign currency exchange contracts |
Foreign
currency contracts |
$
(300) |
|
| Swaps
|
Credit
contracts |
(2,629)
|
|
| Total
|
|
$
(2,929) |
|
| Net
Change in Unrealized Appreciation (Depreciation) on |
|
|
| Forward
foreign currency exchange contracts |
Foreign
currency contracts |
$
172 |
|
| Swaps
|
Credit
contracts |
3,029
|
|
| Total
|
|
$
3,201 |
|
The table below shows the quarterly average
volume (unless otherwise specified) of the derivatives held by the Fund for the six months ended May 31, 2023.
|
|
|
|
Forward Foreign Currency Exchange Purchase
Contracts(1)
|
$
830 |
|
Forward Foreign Currency Exchange Sale
Contracts(1)
|
2,361
|
|
Credit Default Swap Contracts - Sell
Protection(1)
|
38,753
|
|
(1) Average notional amount. |
| C.
|
Derivative Risks |
| |
A derivative contract may
suffer a mark-to-market loss if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract. |
| |
The Fund’s risk of loss
from counterparty credit risk on derivatives bought or sold OTC rather than traded on a securities exchange, is generally limited to the aggregate unrealized gain netted against any collateral held by the Fund. For OTC purchased options, the Fund
bears the risk of loss of the amount of the premiums paid plus the positive change in market values net of any collateral held by such Fund should the counterparty fail to perform under the contracts. Options written by a Fund do not typically give
rise to counterparty credit risk, as options written generally obligate the Fund, and not the counterparty to perform. |
| |
With
exchange traded purchased options and futures and centrally cleared swaps generally speaking, there is less counterparty credit risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible
default. The clearinghouse stands between the buyer and the seller of the contract; |
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
| |
therefore, credit risk is
limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or
insolvency) of the clearing broker or clearinghouse. Additionally, credit risk exists in exchange traded futures and centrally cleared swaps with respect to initial and variation margin that is held in a clearing broker’s customer accounts.
While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the
clearing broker for all its clients, typically the shortfall would be allocated on a pro-rata basis across all the clearing broker’s customers, potentially resulting in losses to the Fund. |
| |
In order to better define its
contractual rights and to secure rights that will help the Fund mitigate its counterparty risk, the Fund may enter into an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar
agreement with its derivative contract counterparties. An ISDA Master Agreement is a bilateral agreement between the Fund and a counterparty that governs certain OTC derivatives and typically contains, among other things, collateral posting terms
and netting provisions in the event of a default and/or termination event. Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or
receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty.
However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to
OTC derivatives to terminate derivative contracts prior to maturity in the event the Fund’s net assets decline by a stated percentage or the Fund fails to meet the terms of its ISDA Master Agreements, which would cause the Fund to accelerate
payment of any net liability owed to the counterparty. |
| D.
|
Collateral Requirements and
Master Netting Agreements (“MNA”) |
| |
For derivatives traded under
an ISDA Master Agreement, the collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of any collateral currently pledged by the Fund and
the counterparty. |
| |
Cash
collateral that has been pledged to cover obligations of the Fund and cash collateral received from the counterparty, if any, is reported separately on the Statement of Assets and Liabilities as cash pledged as collateral and cash received as
collateral, respectively. Non-cash collateral pledged by the Fund, if any, is noted in the Schedule of Investments. Typically, the Fund and counterparties are not permitted to sell, re-pledge or use the collateral they receive. To the extent amounts
due to the Fund from its counterparties are not fully collateralized, contractually or otherwise, the Fund bears the risk of loss from counterparty non-performance. The Fund attempts to mitigate counterparty risk by only entering into agreements
with counterparties that it believes have the financial resources to honor its obligations and by monitoring the financial stability of those counterparties. |
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
| |
For financial reporting
purposes, the Fund does not offset derivative assets and liabilities that are subject to netting arrangements in the Statement of Assets and Liabilities. |
| |
The
following table presents the Fund’s derivative assets and liabilities and reverse repurchase agreements by counterparty net of amounts available for offset under a MNA and net of the related collateral received/pledged by the Fund as of May
31, 2023: |
| At
May 31, 2023, the Fund’s derivative assets and liabilities (by type) are as follows: |
|
|
| |
Assets
|
Liabilities
|
Derivative
Financial
Instruments: |
|
|
| Centrally
cleared swaps |
$—
|
$
42 |
| OTC
swaps |
—
|
8,634
|
| Reverse
repurchase agreements |
—
|
24,767
|
Total
derivative assets and liabilities in
the Statement of Assets and Liabilities |
$—
|
$33,443
|
Derivatives
not subject to a MNA
or similar agreement |
—
|
(42)
|
Total
assets and liabilities
subject to a MNA |
$—
|
$33,401
|
The following
table presents the Fund’s derivative liabilities and reverse repurchase agreements by counterparty net of amounts available for offset under a MNA and net of the related collateral received/pledged by the Fund as of May 31, 2023.
| Counterparty
|
|
Derivatives
Liabilities
Subject to
a MNA by
Counterparty |
|
Derivatives
Available
for Offset |
|
Non-cash
Collateral
Pledged |
|
Cash
Collateral
Pledged(1) |
|
Net
Amount of
Derivative
Liabilities(1) |
|
Barclays
|
|
$
7,410 |
|
$—
|
|
$
— |
|
$(7,410)
|
|
$—
|
|
JPMorgan Chase Bank N.A.
|
|
24,767
|
|
—
|
|
(24,767)
|
|
—
|
|
—
|
|
Morgan Stanley
|
|
1,224
|
|
—
|
|
—
|
|
(1,224)
|
|
—
|
|
Total
|
|
$33,401
|
|
$—
|
|
$
24,767 |
|
$(8,634)
|
|
$—
|
(1) These amounts are limited to the derivatives asset/liability balance and, accordingly, do not include excess collateral
received/pledged.
Note 4. Investment
Advisory Fees and Related Party Transactions
($ reported in thousands)
| A.
|
Investment Adviser |
| |
Virtus
Alternative Investment Advisers, Inc. (the “Adviser”), an indirect, wholly-owned subsidiary of Virtus Investment Partners, Inc. (“Virtus”), is the investment adviser to the Fund. The Adviser manages the Fund’s
investment program and general operations of the Fund, including oversight of the Fund’s subadviser. |
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
| |
As compensation for its
services to the Fund, the Adviser receives a fee at an annual rate of 1.00% of the average daily value of the Fund’s total assets (including any assets attributable to any leverage used) minus the Fund’s accrued liabilities (other than
the Fund liabilities incurred for any leverage) (“Managed Assets”) provided that the Adviser fee does not exceed 1.50% of the Fund’s net assets. |
| B.
|
Subadviser
|
| |
Stone Harbor Investment
Partners, a division of Virtus Fixed Income Advisers, LLC, an indirect, wholly-owned subsidiary of Virtus, is the subadviser to the Fund. The subadviser manages the investments of the Fund, for which it is paid a fee by the Adviser. |
| C. |
Expense Limitation |
| |
The Adviser has contractually
agreed to limit the Fund’s annual total operating expenses, subject to the exclusions listed below, so that such expenses do not exceed, on an annualized basis, 0.58% of average daily net assets through April 10, 2024. Following the
contractual period, the Adviser may discontinue these expense reimbursement arrangements at any time. The reimbursements are accrued daily and received monthly. |
| |
The exclusions include
investment advisory fees, interest, any other fees or expenses relating to financial leverage, preferred shares (such as dividends on preferred shares, auction agent fees and commissions and rating agency fees) or borrowing (such as interest,
commitment, amendment and renewal expenses on credit or redemption facilities), taxes, extraordinary, unusual or infrequently occurring expenses (such as litigation), costs related to share offerings, brokerage commissions, expenses incurred in
connection with any merger or reorganization, underlying fund expenses and dividend expenses, if any (each expressed as a percentage of average daily net assets attributable to common shares). |
| D. |
Expense Recapture |
| |
Under certain conditions, the
Adviser may recapture operating expenses reimbursed or fees waived under these arrangements within three years after the date on which such amounts were incurred or waived. The Fund must pay its ordinary operating expenses before the Adviser is
entitled to any reimbursement and must remain in compliance with any applicable expense limitations or, if none, the expense limitation in effect at the time of the waiver or reimbursement. |
| |
During the six months ended
May 31, 2023, the Adviser did not recapture expenses. |
| E.
|
Administration Services
|
| |
Virtus Fund Services, LLC, an
indirect, wholly-owned subsidiary of Virtus, serves as administrator to the Fund. For the services provided by the administrator under the Administration Agreement, the Fund pays the administrator an asset-based fee calculated on the Fund’s
average daily Managed Assets. This fee is calculated daily and paid monthly. |
| |
For the
six months ended May 31, 2023, the Fund incurred administration fees totaling $47 which are included in the Statement of Operations within the line item “Administration and accounting fees.” |
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
| F.
|
Trustees’ Fees |
| |
For the six months ended May
31, 2023, the Fund incurred Trustees’ fees totaling $11 which are included in the Statement of Operations within the line item “Trustees’ fees and expenses.” |
| G.
|
Investments with Affiliates
|
| |
The Fund is permitted to
purchase assets from or sell assets to certain related affiliates under specified conditions outlined in procedures adopted by the Board. The procedures have been designed to ensure that any purchase or sale of assets by the Fund from or to another
fund or portfolio that are, or could be, considered an affiliate by virtue of having a common investment adviser (or affiliated investment advisers), common Trustees and/or common officers comply with Rule 17a-7 under the 1940 Act. Further, as
defined under the procedures, each transaction is effected at the current market price. |
| |
During the six months
ended May 31, 2023, the Fund did not engage in any transactions pursuant to Rule 17a-7 under the 1940 Act. |
| H.
|
Trustees Deferred Compensation
Plan |
| |
The Fund
provides a deferred compensation plan for its Trustees who receive compensation from the Fund. Under the deferred compensation plan, Trustees may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Fund, and
then, to the extent permitted by the 1940 Act, in turn, may be invested in the shares of affiliated or unaffiliated mutual funds selected by the participating Trustees. Investments in such instruments are included in “Prepaid expenses and
other assets” in the Statement of Assets and Liabilities at May 31, 2023. |
Note 5. Purchases and Sales of Securities
($ reported in thousands)
Purchases and sales of securities (excluding
short-term securities) during the six months ended May 31, 2023, were as follows:
| Purchases
|
|
Sales
|
| $38,529
|
|
$33,038
|
There were no
purchases or sales of long-term U.S. government and agency securities during the six months ended May 31, 2023.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
Note 6. Federal Income Tax Information
($ reported in thousands)
At May 31, 2023, the approximate aggregate
cost basis and the unrealized appreciation (depreciation) of investments and other financial instruments held by the Fund for federal income tax purposes were as follows:
Federal
Tax Cost |
|
Unrealized
Appreciation |
|
Unrealized
(Depreciation) |
|
Net
Unrealized
Appreciation
(Depreciation) |
| $65,206
|
|
$1,277
|
|
$(15,291)
|
|
$(14,014)
|
The Fund has
capital loss carryovers available to offset future realized capital gains, if any, to the extent permitted by the Code. Net capital losses are carried forward without expiration and generally retain their short-term and/or long-term tax character,
as applicable. For the fiscal year ended November 30, 2022, the Fund’s capital loss carryovers were as follows:
| Short-Term
|
|
Long-Term
|
| $56,960
|
|
$71,860
|
Note 7. Credit and Market
Risk and Asset Concentration
In July
2017, the head of the United Kingdom Financial Conduct Authority (“FCA”) announced the intention to phase out the use of LIBOR by the end of 2021. However, after subsequent announcements by the FCA, the LIBOR administrator and other
regulators, certain of the most widely used LIBORs are expected to continue until June 30, 2023. The ICE Benchmark Administration Limited, which is regulated and authorized by FCA, and the administrator of LIBOR, ceased publishing certain LIBOR
settings on December 31, 2021. On April 3, 2023, the FCA announced its decision to require LIBOR’s administrator to continue to publish the 1-month, 3-month, and 6-month U.S. dollar settings under an unrepresentative synthetic methodology
until September 30, 2024. On March 15, 2022, the Adjustable Interest Act (LIBOR) Act (the “LIBOR Act”) was enacted into law which directs the Federal Reserve Board, as a fallback mechanism, to identify benchmark rates based on SOFR that
will replace LIBOR in certain financial contracts after June 30, 2023. On December 16, 2022, the Federal Reserve adopted regulations implementing the LIBOR Act. The Fund may be exposed to financial instruments tied to LIBOR to determine payment
obligations, financing terms, hedging strategies or investment value. The expected discontinuation of LIBOR could have a significant impact on the financial markets and may present a material risk for certain market participants, including the Fund.
Abandonment of or modifications to LIBOR could lead to significant short- and long-term uncertainty and market instability. The risks associated with this discontinuation and transition may be exacerbated if the work necessary to effect an orderly
transition to an alternative reference rate is not completed in a timely manner. It remains uncertain the effects such changes will have on the Fund, issuers of instruments in which the Fund invests, and the financial markets generally.
Local, regional or global events such as war
or military conflict, acts of terrorism, the spread of infectious illness or other public health issue, recessions, or other events could have a significant impact on the Fund and its investments, including hampering the ability of the Fund’s
portfolio manager(s) to invest the Fund’s assets as intended.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
Emerging market countries typically have
economic and political systems that are less fully developed, and can be expected to be less stable than those of more developed countries. For example, the economies of such countries can be subject to rapid and unpredictable rates of inflation or
deflation. Since these markets are often small, they may be more likely to suffer sharp and frequent price changes or long-term price depression because of adverse publicity, investor perceptions or the actions of a few large investors. They may
also have policies that restrict investment by foreigners, or that prevent foreign investors from withdrawing their money at will.
Certain emerging markets may also face other
significant internal or external risks, including the risk of war and civil unrest. Each of these factors can affect the value and liquidity of the assets of the Fund. Failure to generate adequate earnings from foreign trade would make it difficult
for an emerging market country to service foreign debt. Disruptions resulting from social and political factors may cause the securities markets of emerging market countries to close. If this were to occur, the liquidity and value of the
Fund’s assets invested in corporate debt obligations of emerging market companies would decline.
The imposition of sanctions, exchange
controls (including repatriation restrictions), confiscation of assets and property, trade restrictions (including tariffs) and other government restrictions by the U.S. or other governments, or from problems in registration, settlement or custody,
may also result in losses. The type and severity of sanctions and other similar measures, including counter sanctions and other retaliatory actions, that may be imposed could vary broadly in scope, and their impact is impossible to predict. For
example, the imposition of sanctions and other similar measures could, among other things, cause a decline in the value and/or liquidity of securities issued by the sanctioned country or companies located in or economically tied to the sanctioned
country and increase market volatility and disruption in the sanctioned country and throughout the world. Sanctions and other similar measures could limit or prevent the Fund from buying and selling securities (in the sanctioned country and other
markets), significantly delay or prevent the settlement of securities transactions, and significantly impact the Fund’s liquidity and performance.
Sanctions threatened or imposed may result
in a decline in the value and liquidity of the Fund’s assets. The securities of the Fund may be deemed to have a zero value. The Fund may make investments that are illiquid or that may become less liquid in response to market developments or
adverse investor perceptions. Illiquid investments may be more difficult to value. If the Fund is forced to sell securities at an unfavorable time and/or under unfavorable conditions, such sales may adversely affect the Fund’s NAV and dilute
investors’ interests. Liquidity risk may be the result of, among other things, the reduced number and capacity of traditional market participants to make a market in fixed income securities or the lack of an active market. The potential for
liquidity risk may be magnified by a rising interest rate environment or other circumstances where investor redemptions from fixed income funds may be higher than normal, potentially causing increased supply in the market due to selling activity.
These risks may be more pronounced in connection with the Fund’s investments in securities of issuers located in emerging market countries.
For all these reasons, investments in
emerging markets may be considered speculative. To the extent that the Fund invests a significant portion of its assets in a particular emerging market, the Fund will be more vulnerable to financial, economic, political and other developments in
that country, and conditions that negatively impact that country will have a
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
greater impact on the Fund as compared with a fund that
does not have its holdings concentrated in a particular country.
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 leverages its portfolio through
entering into reverse repurchase agreements or the issuance of debt securities. 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.
Note 8. Borrowings
($ reported in thousands)
The Fund may borrow from banks and other
financial institutions and may also borrow additional funds by entering into reverse repurchase agreements or the issuance of debt securities (collectively, “Borrowings”) in an amount that does not exceed 33 1/3% of the Fund’s
Managed Assets (defined in Note 4) immediately after such transactions. It is possible that following such Borrowings, the assets of the Fund will decline due to market conditions such that this 33 1/3% limit will be exceeded. In that case, the
leverage risk to Common Shareholders will increase.
In a reverse repurchase agreement, the Fund
delivers a security in exchange for cash to a financial institution, the counterparty, with a simultaneous agreement to repurchase the same or substantially the same security at an agreed upon price and date. The Fund is entitled to receive
principal and interest payments, if any, made on the security delivered to the counterparty during the term of the agreement. Cash received in exchange for securities delivered plus accrued interest payments to be made by the Fund to counterparties
are reflected as a liability on the Statement of Assets and Liabilities. Interest payments made by the Fund to counterparties are recorded as a component of interest expense on the Statement of Operations. In periods of increased demand for the
security, the Fund may receive a fee for use of the security by the counterparty, which may result in interest income to the Fund. The Fund will segregate assets determined to be liquid to cover its obligations under reverse repurchase agreements.
The segregated assets are found on the Fund’s Schedule of Investments as full or partially pledge securities. The total amount of securities pledged at May 31, 2023 was $30,826. As all agreements can be terminated by either party on demand,
face value approximates fair value at May 31, 2023 . For the six months ended May 31, 2023 , the average amount of reverse repurchase agreements outstanding was $20,352, at a weighted average interest rate of 5.25%.
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
The following table indicates the total
amount of reverse repurchase agreements, reconciled to gross liability as of May 31, 2023:
| |
Overnight
&
Continuous |
Up to 30
days |
30-90 days
|
Greater
than
90 days |
Total
|
| |
|
|
|
|
|
| Sovereign
Debt Obligations |
$13,842
|
$—
|
$—
|
$—
|
$13,842
|
| Corporate
Bonds |
10,925
|
—
|
—
|
—
|
10,925
|
| Total
|
$24,767
|
$—
|
$—
|
$—
|
$24,767
|
| Gross
amount of unrecognized liabilites of reverse repurchase agreements |
$24,767
|
Note 9.
Indemnifications
Under the
Fund’s organizational documents, the Fund, its Trustees and officers are indemnified against certain liabilities arising out of the performance of their duties to 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 these arrangements and expects the risk of loss to be remote.
Note 10. Capital Shares
At May 31, 2023, the Fund has one class of
common stock with $0.001 par value of which unlimited shares are authorized.
Note 11. Restricted Securities
Restricted securities are not registered
under the Securities Act of 1933, as amended (the “1933 Act”). Generally, 144A securities are excluded from this category. The Fund will bear any costs, including those involved in registration under the 1933 Act, in connection with the
disposition of such securities. At May 31, 2023, the Fund did not hold any securities that were restricted.
Note 12. Regulatory Matters and Litigation
From time to time, the Fund, the Adviser,
the subadviser, and/or their respective affiliates 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, and laws and regulations affecting their activities. At this time, the Fund and the Adviser believe that the outcomes of such matters are not likely, either individually or in the aggregate, to be material to
these financial statements.
Note 13. Recent
Accounting Pronouncements
In March
2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04 (“ASU 2020-04”), Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in
ASU 2020-04 provide optional
VIRTUS STONE HARBOR
EMERGING MARKETS INCOME FUND
NOTES TO FINANCIAL
STATEMENTS (Unaudited) (Continued)
May 31, 2023
temporary financial reporting relief from the effect of
certain types of contract modifications due to the planned discontinuation of the LIBOR and other interbank-offered reference rates as of the end of 2021. In March 2021, the administrator for LIBOR announced the extension of the publication of a
majority of the USD LIBOR settings to June 30, 2023. On December 21, 2022, the FASB issued ASU 2022-06 to defer the sunset date of ASC 848 until December 31, 2024. ASU 2020-04 is effective for certain reference rate-related contract modifications
that occur during the period March 12, 2020 through December 31, 2024. Management is currently evaluating ASU 2020-04 and ASU 2020-06, but does not believe there will be a material impact.
Note 14. Subsequent Events
Management has evaluated the impact of all
subsequent events on the Fund through the date the financial statements were available for issuance, and has determined that the following event requires recognition or disclosure in these financial statements.
On July 10, 2023, Virtus Stone Harbor
Emerging Markets Total Income Fund announced that its proposed reorganization with and into the Fund, which was scheduled to occur on or about August 4, 2023 subject to certain closing conditions, will be delayed pending regulatory approval related
to the transfer or sale of certain foreign assets. An update on the timing of the reorganization will be provided at a later date.
CERTIFICATION
The Fund files the required annual Chief
Executive Officer (“CEO”) certification regarding compliance with the NYSE’s listing standards no more than 30 days after each annual shareholder meeting for the Fund. The Fund has included the certifications of the Fund’s
CEO and Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC for the period of this report.
KEY INFORMATION
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 Dividend 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 and may opt out by calling Shareholder Relations at the number listed above. 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 subadviser votes 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 https://www.sec.gov.
PORTFOLIO HOLDINGS INFORMATION
The Fund files its complete schedule of
portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form NPORT-P. Form NPORT-P is available on the SEC’s website at https://www.sec.gov.
Virtus Stone
Harbor Emerging Markets Income Fund
Results of Annual Meeting of
Shareholders (Unaudited)
The Annual
Meeting of Shareholders of Virtus Stone Harbor Emerging Markets Income Fund (the “Fund”) was held on May 22, 2023. The meeting was held for purposes of (i) electing four (4) nominees to the Board of Trustees; and (ii) approving the
issuance of additional common shares of beneficial interest of the Fund in connection with the reorganization of Virtus Stone Harbor Emerging Markets Total Income Fund with and into the Fund (the “Reorganization”). The results were as
follows:
| Election
of Trustees |
Votes
For |
Votes
Withheld |
| F.
Ford Drummond |
11,105,662.000
|
698,369.000
|
| Sidney
E. Harris |
11,088,732.000
|
715,299.000
|
| Philip
R. McLoughlin |
11,131,041.000
|
672,990.000
|
| Geraldine
M. McNamara |
11,156,890.000
|
647,141.000
|
Based on the
foregoing, Messrs. Drummond, Harris and McLoughlin and Ms. McNamara were re-elected to the Board of Trustees. The Fund’s other Trustees who continue in office are George R. Aylward*, Donald C. Burke, Sarah E. Cogan, Deborah A. DeCotis, John R.
Mallin, Connie D. McDaniel, R. Keith Walton and Brian T. Zino.
*Interested Trustee
| |
Votes
For |
Votes
Withheld |
Abstain
|
| Approval
of the issuance of additional common shares of beneficial interest of the Fund in connection with the Reorganization |
4,717,990.000
|
806,962.000
|
245,344.000
|
Based on the
foregoing, Shareholders approved the issuance of additional common shares of the Fund.
THIS PAGE
INTENTIONALLY BLANK.
THIS PAGE
INTENTIONALLY BLANK.
VIRTUS STONE HARBOR EMERGING
MARKETS INCOME FUND
101 Munson Street
Greenfield, MA 01301-9668
Board of Trustees
George R. Aylward
Donald C. Burke
Sarah E. Cogan
Deborah A. DeCotis
F. Ford Drummond
Sidney E. Harris
John R. Mallin
Connie D. McDaniel
Philip R. McLoughlin, Chair
Geraldine M. McNamara
R. Keith Walton
Brian T. Zino
Officers
George R. Aylward, President
and Chief Executive Officer
Peter Batchelar, Senior Vice President
W. Patrick Bradley, Executive
Vice President, Chief Financial Officer, and Treasurer
Timothy Branigan, Vice
President and Fund Chief Compliance Officer
Jennifer Fromm, Vice President,
Chief Legal Officer, Counsel and Secretary
Julia R. Short, Senior Vice
President
Richard W. Smirl, Executive Vice President
Investment Adviser
Virtus Alternative Investment Advisers, Inc.
One Financial Plaza
Hartford, CT 06103-2608
Administrator
Virtus Fund Services, LLC
One Financial Plaza
Hartford, CT 06103
Custodian
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286-1048
Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
How to Contact Us
| Shareholder
Services |
1-866-270-7788
|
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.
Virtus Stone Harbor Emerging Markets Income Fund
c/o Computershare Investor Services
P.O. Box 43078
Providence, RI 02940-3078
For more information about
Virtus Closed-End Funds, please
contact us
at 1-866-270-7788
or closedendfunds@virtus.com
or visit Virtus.com.
Item 2. Code of Ethics.
Response not required for
semi-annual report.
Item 3. Audit Committee Financial Expert.
Response not required for semi-annual report.
Item 4.
Principal Accountant Fees and Services.
Response not required for semi-annual report.
Item 5. Audit Committee of Listed Registrants.
Response not required for semi-annual report.
Item 6.
Investments.
| |
(a) |
Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is
included as part of the report to shareholders filed under Item 1(a) of this form. |
| Item 7. |
Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. |
Response not required for semi-annual report.
| Item 8. |
Portfolio Managers of Closed-End Management Investment Companies.
|
| |
(a) |
Response not required for semi-annual report. |
| |
(b) |
William Perry, who was identified as a portfolio manager in response to paragraph (a)(1) of this Item in the
registrant’s most recently filed annual report on Form N-CSR, retired on March 31, 2023, and therefore is no longer a portfolio manager of the registrant. |
| Item 9. |
Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. |
Not applicable.
| Item 10. |
Submission of Matters to a Vote of Security Holders. |
There have been no material changes to the procedures by which the shareholders may recommend nominees to the Registrant’s Board of
Trustees that were implemented after the Registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule
14A (17 CFR 240.14a-101)), or this Item.
| Item 11. |
Controls and Procedures. |
| |
(a) |
The registrant’s principal executive and principal financial officers, or persons performing similar
functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required
by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or
15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
| |
(b) |
There were no changes in the registrant’s internal control over financial reporting (as defined in Rule
30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the period covered by this report that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting. |
| Item 12. |
Disclosure of Securities Lending Activities for Closed-End
Management Investment Companies. |
Not applicable.
| |
(a)(2)(1) |
Not applicable. |
| |
(a)(2)(2) |
Not applicable. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
(Registrant)
Virtus Stone Harbor Emerging Markets Income
Fund |
|
|
|
| By (Signature and
Title)* /s/ George R.
Aylward
|
|
George R. Aylward, President and Chief Executive
Officer |
|
(principal executive officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940,
this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
| By (Signature and
Title)* /s/ George R.
Aylward
|
|
George R. Aylward, President
and Chief Executive Officer |
|
(principal executive officer) |
|
|
|
| By (Signature and
Title)* /s/ W. Patrick
Bradley
|
|
W. Patrick Bradley, Executive Vice President, |
|
Chief Financial Officer, and Treasurer |
|
(principal financial officer) |
| * |
Print the name and title of each signing officer under his or her signature. |
Certification Pursuant to Rule 30a-2(a) under the 1940
Act and Section 302 of the Sarbanes-Oxley Act
I, George R. Aylward, certify that:
| 1. |
I have reviewed this report on Form N-CSR of Virtus Stone Harbor
Emerging Markets Income Fund; |
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the
periods presented in this report; |
| 4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule
30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
| |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared; |
| |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles; |
| |
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
| |
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. |
The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
| |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting. |
|
|
|
|
|
| Date: 8/4/23 |
|
|
|
/s/ George R. Aylward |
|
|
|
|
George R. Aylward, President and Chief Executive Officer |
|
|
|
|
(principal executive officer) |
Certification Pursuant to Rule 30a-2(a) under the 1940
Act and Section 302 of the Sarbanes-Oxley Act
I, W. Patrick Bradley, certify that:
| 1. |
I have reviewed this report on Form N-CSR of Virtus Stone Harbor
Emerging Markets Income Fund; |
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the
periods presented in this report; |
| 4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule
30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
| |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared; |
| |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles; |
| |
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
| |
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. |
The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
| |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting. |
|
|
|
|
|
| Date: 8/4/23 |
|
|
|
/s/ W. Patrick Bradley |
|
|
|
|
W. Patrick Bradley, Executive Vice President, Chief Financial Officer, and Treasurer |
|
|
|
|
(principal financial officer) |
Certification Pursuant to Rule 30a-2(b) under the 1940
Act and Section 906 of the Sarbanes-Oxley Act
I, George R. Aylward, President and Chief Executive Officer of Virtus Stone Harbor
Emerging Markets Income Fund (the “Registrant”), certify that:
| |
1. |
The Form N-CSR of the Registrant (the “Report”) fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Registrant. |
|
|
|
|
|
| Date: 8/4/23 |
|
|
|
/s/ George R. Aylward |
|
|
|
|
George R. Aylward, President and Chief Executive Officer |
|
|
|
|
(principal executive officer) |
I, W. Patrick Bradley, Executive Vice President, Chief Financial Officer, and Treasurer of Virtus Stone Harbor
Emerging Markets Income Fund (the “Registrant”), certify that:
| |
1. |
The Form N-CSR of the Registrant (the “Report”) fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Registrant. |
|
|
|
|
|
| Date: 8/4/23 |
|
|
|
/s/ W. Patrick Bradley |
|
|
|
|
W. Patrick Bradley, Executive Vice President, Chief Financial Officer, and Treasurer |
|
|
|
|
(principal financial officer) |
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