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Event-Driven Investing in the Current Environment
A Primer on Event-Driven Investing in the Current Environment
Activity
- Global M&A activity has started to pick up reaching approximately $2.5 trillion for the first ten months of 2023, led predominantly by North American activity.
- October was the busiest period in the last 18 and 24 months, globally and domestically, respectively. Energy & Healthcare deals lead in the US.
- The number of +$5B deals (a favorite category for MERIX) in North America is up over 15% year over year.
- Although geopolitical tensions continue to hold up some deals, several high-profile transactions have cleared multiple regulatory hurdles globally, and companies are sensing increased support from U.S. regulators.
- CEO confidence continues to rise as inflation and volatility continue to moderate.
- Financing is beginning to become more readily available from direct lenders and banks. Sponsors and corporations are also well-armed for opportunities ahead with strong levels of dry powder and cash on corporate balance sheets.
Source: Citi Event Driven M&A Executive Summary – October 2023
Spreads
As of October 31st, the median annualized spread of definitive agreements we tracked globally was about 9.1%, slightly tighter than the near decade high spreads in the previous months. Several large, notable deals closed in Oct., including Activision Blizzard Inc/Microsoft Corp. and Horizon Therapeutics Plc/Amgen Inc., which has contributed to increased investor confidence and subsequent spread narrowing.
Performance and Risk Statistics Updates
Year to date through October, the Virtus Westchester Credit Event Fund (WCFIX) was +6.23%, Virtus Westchester Event-Driven Fund (WCEIX) was +1.85%, and The Merger Fund® (MERIX) was +2.34%.
For October, MERIX returned -0.18% while both the S&P 500 and US AGG were down -2.10% and -1.58% respectively. During the month, spreads widened on the VMware Inc/Broadcom Inc deal as Chinese regulators further delayed approving the deal, however this was partially offset by gains achieved from the completion of the Activision Blizzard Inc/Microsoft Corp. deal as well as our SPAC positions. New deal activity has continued to offer many high-quality deals with attractive annualized spreads over 10%, including Exxon Corp’s acquisition of Pioneer Natural Resources Co. as well as Chevron’s offer for Hess, which to date are two of the largest deals of the year. While the first 6 months of the year produced a performance headwind due to TD Bank calling off its acquisition of First Horizon, as well as a tougher regulatory environment that widened spreads and created temporary negative marks to market, we are now starting to see many positive developments across our portfolios as we begin to harvest the wider spreads on many high-profile deals that we believe have a high probability of closing. Since our May 26th trough, both the equity and bond markets experienced extreme volatility while our Funds offered a stable source of uncorrelated alpha.
Westchester Funds... Uncorrelated Performance Example vs Indices
Source: Ycharts
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. Investment return and principal value will fluctuate, so your shares, when redeemed, may be worth more or less than their original cost.
The Merger Fund® Performance During and Post Recessions
Although recent inflation data has been improving, we continue to be asked by clients how The Merger Fund® as performed during and post recessionary periods. Research suggests that each recessionary period tends to have distinct differences relative to the health of corporate balance sheets that may impact Merger Activity. During past recessions, MERIX underperformed bonds yet in the most recent environment it has consistently outperformed both Treasuries and longer duration indices like the AGG. Even as value has been restored to the Bond market, MERIX continued to outperform Bonds through the Q3. We continue to believe that market timing is extremely difficult and that the current environment continues to offer an attractive opportunity for M&A.
- During Recessions
- There have been 4 recessions over The Merger Fund’s®34-year history.
- MERFX had positive returns and outperformed the S&P 500 75% of the time.
- MERFX underperformed Bonds during rate transitions (Note: The Fed cut rates from 5.50% to 1.00% from March 2001-November 2002; The Fed cut rates from 4.5% to 0% from Dec 2007- Dec 2008 and remained at 0% for seven years).
- Post-Recessions – 1-Year
- MERFX continued to provide lower correlated returns to Stocks and Bonds, however each recessionary period has been unique encompassing different macro and micro economic factors.
- MERFX outperformed Stocks 50% of the time (Note: In the 2 recent time periods, stocks were supported by quantitative easing and other Fed measures).
- MERFX underperformed Bonds in the first 2 post-recessions (US Aggregate data not available for April 1991 – March 1992) and has significantly outperformed during the most recent period.
TMF Recessions (NBER):
(Data as of 11/17/2023)
| Symbol | Name | Recession Jul 1990 - Mar 1991 |
Post Recession Apr 1991 - Mar 1992 |
Recession Mar 2001 - Nov 2001 |
Post Recession Dec 2001 - Nov 2002 |
Recession Dec 2007 - Jun 2009 |
Post Recession Jul 2009 - Jun 2010 |
Recession Feb 2020 - Apr 2020 |
Post Recession May 2020 - May 2021 |
|---|---|---|---|---|---|---|---|---|---|
| MERFX | The Merger Fund A | 2.03% | 14.81% | 1.15% | -6.06% | 1.58% | 3.88% | -0.64% | 7.05% |
| ^BBUSATR | Bloomberg US Aggregate | NA | NA | 5.29% | 7.36% | 4.77% | 9.48% | 3.00% | 0.16% |
| ^SPXTR | S&P 500 Total Return | 7.64% | 12.18% | -0.90% | -16.55% | -24.99% | 13.96% | -9.26% | 46.98% |
Source: Ycharts
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. Investment return and principal value will fluctuate, so your shares, when redeemed, may be worth more or less than their original cost.
Risk Metrics:
(as of
)
| 3 Year | MERIX | WCEIX | WCFIX | S&P 500® Index | Bloomberg U.S. Aggregate Bond Index | Morningstar U.S. Fund Event Driven Category |
|---|---|---|---|---|---|---|
| Total Return | 2.08 | 3.92 | 8.18 | 10.36 | -5.57 | 3.30 |
| Standard Deviation | 3.11 | 6.72 | 9.17 | 17.81 | 6.24 | 5.46 |
| Alpha (vs. S&P 500®) | -0.45 | -0.13 | 3.61 | 0.00 | -9.88 | -0.27 |
| Sharpe Ratio | -0.04 | 0.25 | 0.64 | 0.45 | -1.22 | 0.11 |
| Sortino Ratio | -0.05 | 0.44 | 1.55 | 0.69 | -1.34 | 0.31 |
| Beta (vs. S&P 500®) | 0.04 | 0.22 | 0.27 | 1.00 | 0.23 | 0.16 |
| Correlation | 0.23 | 0.57 | 0.52 | 1.00 | 0.67 | 0.44 |
| Beta (vs. Agg) | 0.00 | 0.29 | 0.45 | 1.92 | 1.00 | 0.22 |
| Correlation (vs. Agg) | 0.00 | 0.27 | 0.31 | 0.67 | 1.00 | 0.18 |
(as of
)
| 5 Year | MERIX | WCEIX | WCFIX | S&P 500® Index | Bloomberg U.S. Aggregate Bond Index | Morningstar U.S. Fund Event Driven Category |
|---|---|---|---|---|---|---|
| Total Return | 3.42 | 3.91 | 6.89 | 11.01 | -0.06 | 3.86 |
| Standard Deviation | 3.07 | 7.77 | 10.73 | 18.69 | 5.63 | 6.40 |
| Alpha (vs. S&P 500®) | 0.78 | -0.67 | 1.81 | 0.00 | -3.09 | -0.08 |
| Sharpe Ratio | 0.48 | 0.25 | 0.46 | 0.48 | -0.34 | 0.32 |
| Sortino Ratio | 0.67 | 0.34 | 0.66 | 0.72 | -0.43 | 0.53 |
| Beta (vs. S&P 500®) | 0.07 | 0.28 | 0.35 | 1.00 | 0.13 | 0.22 |
| Correlation | 0.44 | 0.68 | 0.60 | 1.00 | 0.42 | 0.57 |
| Beta (vs. Agg) | 0.06 | 0.28 | 0.42 | 1.38 | 1.00 | 0.24 |
| Correlation (vs. Agg) | 0.11 | 0.21 | 0.22 | 0.42 | 1.00 | 0.19 |
(as of
)
| 10 Year | MERIX | WCEIX | WCFIX | S&P 500® Index | Bloomberg U.S. Aggregate Bond Index | Morningstar U.S. Fund Event Driven Category |
|---|---|---|---|---|---|---|
| Total Return | 3.02 | NA | NA | 11.18 | 0.88 | 2.88 |
| Standard Deviation | 2.99 | NA | NA | 14.95 | 4.41 | 5.51 |
| Alpha (vs. S&P 500®) | 0.83 | NA | NA | 0.00 | -1.27 | -0.59 |
| Sharpe Ratio | 0.59 | NA | NA | 0.66 | -0.08 | 0.26 |
| Sortino Ratio | 0.87 | NA | NA | 1.00 | -0.11 | 0.38 |
| Beta (vs. S&P 500®) | 0.09 | NA | NA | 1.00 | 0.10 | 0.23 |
| Correlation | 0.46 | NA | NA | 1.00 | 0.32 | 0.56 |
| Beta (vs. Agg) | 0.02 | NA | NA | 1.08 | 1.00 | 0.18 |
| Correlation (vs. Agg) | 0.04 | NA | NA | 0.32 | 1.00 | 0.13 |
Performance (%):
(as of )| Product / Market Indices | Ticker | MTD | YTD | 1 Year | 2 Year | 3 Year | 5 Year | 10 Year |
|---|---|---|---|---|---|---|---|---|
| Westchester Event-Driven | WCEIX* | -0.94 | 1.84 | 1.85 | -0.59 | 3.92 | 3.91 | NA |
| Westchester Credit Event | WCFIX* | -0.27 | 6.23 | 7.05 | 0.50 | 8.18 | 6.89 | NA |
| The Merger Fund® | MERIX* | -0.18 | 2.34 | 2.36 | 1.84 | 2.08 | 3.42 | 3.02 |
| S&P 500® Index | -2.10 | 10.69 | 10.14 | -3.02 | 10.36 | 11.01 | 11.18 | |
| Bloomberg Barclays U.S. Aggregate Bond Index | -1.58 | -2.77 | 0.36 | -8.01 | -5.57 | -0.06 | 0.88 |
* MERIX inception date is 8/1/13 (The Merger Fund® A Shares inception date is 1/31/89), WCEIX inception date is 1/2/14, WCFIX inception date is 10/29/17.
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. Investment return and principal value will fluctuate, so your shares, when redeemed, may be worth more or less than their original cost.
Class I shares have no sales charges and are not available to all investors. Other share classes have sales charges. The Merger Fund® - The fund class gross expense ratio is 1.36%. The net expense ratio is 1.25%, which reflects a contractual expense reimbursement in effect through 04/30/2024. This ratio reflects the direct and indirect expenses paid by the Fund. The net expense ratio minus dividend and interest expense on short sales and indirect expenses incurred by the underlying funds in which the Fund invests is 1.17%. Virtus Westchester Credit Event Fund - The fund class gross expense ratio is 1.53%. The net expense ratio is 1.48%, which reflects a contractual expense reimbursement in effect through 04/30/2025. This ratio reflects the direct and indirect expenses paid by the Fund. The net expense ratio minus dividend and interest expense on short sales and indirect expenses incurred by the underlying funds in which the Fund invests is 1.45%. Virtus Westchester Event-Driven Fund - The fund class gross expense ratio is 1.70%. The net expense ratio is 1.57%, which reflects a contractual expense reimbursement in effect through 04/30/2025. This ratio reflects the direct and indirect expenses paid by the Fund. The net expense ratio minus dividend and interest expense on short sales and indirect expenses incurred by the underlying funds in which the Fund invests is 1.45%.
All investments carry a certain degree of risk, including possible loss of principal.
IMPORTANT RISK CONSIDERATIONS
The Merger® Fund: 3, 8, 12, 4, 9, 1, 2, 5, 13, 11, 7, 10; Virtus Westchester Event-Driven Fund: 3, 8, 4, 12, 9, 1, 2, 5, 7, 10; Virtus Westchester Credit Event Fund:3, 8, 1, 12, 9, 2, 5, 6, 4, 7, 10.
- 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: Investments in derivatives such as futures, options, forwards, and swaps may increase volatility or cause a loss greater than the principal investment.
- Fundamental Risk of Investing: There can be no assurance that the portfolio will achieve its investment objectives. An investment in the portfolio is subject to the risk of loss of principal; shares may decrease in value.
- Foreign Investing: Investing in foreign securities subjects the portfolio to additional risks such as increased volatility, currency fluctuations, less liquidity, and political, regulatory, economic, and market risk.
- Hedging: The portfolio’s hedging strategy will be subject to the portfolio’s investment adviser’s ability to correctly assess the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the investments in the portfolio being hedged.
- Lower-rated Securities: Instruments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.
- Market Volatility: The value of the securities in the portfolio 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 portfolio, including hampering the ability of the portfolio's manager(s) to invest its assets as intended.
- Merger-arbitrage & Event-driven: Merger-arbitrage and event-driven investing involve the risk that the adviser’s evaluation of the outcome of a proposed event, whether it be a merger, reorganization, regulatory issue, or other event, will prove incorrect and that the fund’s return on the investment may be negative.
- Portfolio Turnover: The portfolio’s principal investment strategies may result in a consistently high portfolio turnover rate. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when the portfolio is held in a taxable account.
- Prospectus: For additional information on risks, please see the fund’s prospectus.
- Sector Focused Investing: Events negatively affecting a particular industry or market sector in which the portfolio focuses its investments may cause the value of the portfolio to decrease.
- Short Sales: The portfolio may engage in short sales and may incur a loss if the price of a borrowed security increases before the date on which the portfolio replaces the security.
- Technology Concentration: Because the portfolio is presently heavily weighted in the technology sector, it will be impacted by that sector’s performance more than a portfolio with broader sector diversification.
GLOSSARY
Alpha: A risk-adjusted measure of an investment’s excess return relative to a benchmark. Beta: A quantitative measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Correlation: A measure that determines the degree to which two variables’ movements are associated. The correlation coefficient will vary from -1 to +1. A -1 indicates perfect negative correlation and +1 indicates perfect positive correlation. Long Position: Refers to the purchase of a security with the expectation that it will rise in value. Deal Spreads: The difference between what the buyer (acquirer) is offering in terms of price for the seller’s (target) stock, typically at a premium to the market price, the result of some risk of the transaction being delayed or terminated. Long Position: Refers to the purchase of a security with the expectation that it will rise in value. Maximum Drawdown: The peak-to-trough decline during a specific record period of an investment, fund, or commodity. A drawdown is usually quoted as the percentage between the peak and the trough. Sharpe Ratio: A risk-adjusted measure calculated using standard deviation and excess return to determine reward per unit of risk. Short Position: Refers to the sale of a borrowed security with the intention of buying it back later at a lower price. Standard Deviation: Measures variability of returns around the average return for an investment portfolio. Higher standard deviation suggests greater risk.
INDEX DEFINITIONS
The Bloomberg U.S. Aggregate Bond Index measures the U.S. investment grade fixed rate bond market. The Morningstar U.S. Fund Event Driven Category Average contains strategies that attempt to profit when security prices change in response to certain corporate actions, such as bankruptcies, mergers and acquisitions, emergence from bankruptcy, shifts in corporate strategy, and other atypical events. Activist shareholder and distressed investment strategies also fall into this category. These portfolios typically focus on equity securities but can invest across the capital structure. The category average is calculated on a total return basis with dividends reinvested. The category average is unmanaged and is not available for direct investment. The S&P 500® Index is a free-float market capitalization-weighted index of 500 of the largest U.S. companies. Indexes are calculated on a total return basis. Indexes are unmanaged, their returns do not reflect any fees, expenses, or sales charges, and are not available for direct investment.
Please consider a Fund’s investment objectives, risks, charges, and expenses carefully before investing. For this and other information about any Virtus Fund, contact your financial representative, call 800-243-4361, or visit virtus.com for a prospectus or summary prospectus. Read it carefully before investing.
Not insured by FDIC/NCUSIF or any federal government agency. No bank guarantee. Not a deposit. May lose value.
Distributed by VP Distributors, LLC member FINRA and subsidiary of Virtus Investment Partners, Inc.