If You Invested in Virtus Convertible & Income Fund (NCV)

Virtus Convertible & Income Fund (NYSE: NCV) is a diversified, closed-end management investment company. According to the fund’s disclosures, its primary investment objective is to provide total return through a combination of capital appreciation and high current income. The fund’s common shares trade on the New York Stock Exchange under the symbol NCV, and it also has a series of preferred shares that trade separately.

The fund seeks to achieve its objective by investing in a portfolio of domestic convertible securities and non-convertible income-producing securities. Its portfolio of investments has included exposure to sectors such as software, the internet, commercial services (in the form of convertible bonds and notes), and media, oil, gas & consumable fuels, and entertainment (in the form of corporate bonds and notes). This mix reflects the fund’s focus on both equity-linked and fixed-income instruments.

Investment strategy and structure

As a closed-end fund, Virtus Convertible & Income Fund issues a fixed number of shares that trade on an exchange. The market price of the fund’s shares can differ from its net asset value, and its own risk disclosures note that shares of closed-end funds may trade at a premium or discount to their net asset value. The fund emphasizes that an investment is subject to risk, including the risk of possible loss of principal, and that shares may be worth less upon their sale than what an investor paid for them.

The fund’s investment adviser is Virtus Investment Advisers, Inc. or Virtus Investment Advisers, LLC, as referenced in its press releases, and Voya Investment Management serves as subadviser. The adviser and subadviser are responsible for managing the fund’s portfolio within the stated objective of total return through capital appreciation and high current income.

Convertible and income-focused portfolio

Virtus Convertible & Income Fund’s strategy involves investing in domestic convertible securities, which combine characteristics of debt and equity, and in non-convertible income-producing securities. The portfolio has included convertible bonds and notes tied to sectors such as software, internet, and commercial services, as well as corporate bonds and notes in media, oil, gas & consumable fuels, and entertainment. These holdings are intended to support the fund’s goal of generating high current income while also offering potential for capital appreciation.

The fund has also issued 5.625% Series A Cumulative Preferred Shares, which trade on the New York Stock Exchange under the symbol NCV PR A. These preferred shares are rated “A” by Fitch Ratings, were issued at $25.00 per share, and pay distributions quarterly. The fund’s press releases state that these preferred shares are now callable at any time at the liquidation value of $25.00 per share plus accrued dividends.

Distributions and shareholder features

Regular press releases from Virtus Convertible & Income Fund describe quarterly distributions on the 5.625% Series A Cumulative Preferred Shares, including the accrual periods for which distributions are paid. The fund notes that distributions are subject to tax characterization that is finalized in Form 1099-DIV provided to shareholders for federal income tax purposes. The fund also indicates that shareholders participating in an Automatic Dividend Reinvestment Plan may receive fractional shares in certain corporate actions, such as reverse stock splits, instead of cash for fractional share interests.

In a separate announcement, Virtus Convertible & Income Fund and Virtus Convertible & Income Fund II disclosed a 1-for-4 reverse stock split of the issued and outstanding common shares of each fund, effective as of the start of trading on a specified effective date. One new share was issued for every four outstanding common shares. The funds stated that the reverse stock splits were intended to result in a higher per-share market price for each fund’s common shares and that increasing the per-share market price may broaden the range of potential investors and potentially improve the market for, and liquidity of, the common shares. The funds also noted that the reverse stock splits may reduce certain per-share transaction fees and other administrative costs, such as stock exchange listing fees.

Tax and risk considerations

The fund’s communications emphasize that the reverse stock splits were not expected to result in a taxable transaction for holders of the funds, although the exchange of fractional shares for cash could cause some shareholders to realize gains or losses, which could create a taxable event. The fund’s notices also state that distribution information reported in certain announcements is provided as an estimate and is not for tax reporting purposes, and that actual amounts and sources of distributions for tax purposes depend on the fund’s investment experience and applicable tax regulations.

Virtus Convertible & Income Fund highlights several key risks in its disclosures: an investment in the fund is subject to risk, including possible loss of principal; shares may be worth less upon sale than the purchase price; and closed-end fund shares may trade at a premium or discount to net asset value. For more detailed information about the fund’s investment objective and risks, the fund directs investors to its annual report.

Role within the finance and insurance sector

Within the finance and insurance sector, Virtus Convertible & Income Fund operates in the area of securities and commodity exchanges through its listing on the New York Stock Exchange and its focus on a portfolio of convertible and income-producing securities. The fund’s structure as a closed-end management investment company, its emphasis on total return through capital appreciation and high current income, and its use of preferred shares and common shares provide investors with a specific vehicle for exposure to convertible and income-oriented strategies.