April 2024: Squaring Strong Activity with Paper Losses

  • Merger activity remained strong in April. Global monthly volume of $320 billion brought the year-to-date total to $1.1 trillion.
  • Two deals negatively impacted our mark-to-market performance with paper losses:
    • Capri Holdings/Tapestry, Inc. is undergoing a review from the Federal Trade Commission (FTC) that uncovered potentially negative implications for consumers and encouraged us to reduce our position.
    • Nippon Steel Corp’s acquisition of U.S. Steel is facing political headwinds and a perceived risk to completion. We are more optimistic than market expectations that this deal will ultimately close.
  • As investors, it can be difficult to reconcile the current levels of M&A activity and historically high spread levels with the funds’ slightly negative performance.
  • Arbitrage portfolios can exhibit flat or uneventful performance at times, followed by bursts of returns when deals are completed or hurdles are cleared.
  • We believe such buying opportunities could be particularly attractive in a volatile market, providing a source of complementary returns and the potential for long-term success.

Spreads

Spreads remain very attractive. As of April 30th, we are tracking approximately 145 transactions globally, with a median annualized spread of roughly 14%. Both The Merger Fund® and the Virtus Westchester Event-Driven Fund hold arbitrage investments with a weighted median annualized spread in the mid-teens. As a reminder, the funds' net performance will typically be lower than the gross spreads, which would be net of fund expenses, trading and hedging costs, time slippage, and the occasional terminated transaction.

Though counterintuitive, the performance of an arbitrage portfolio does not always align immediately with market trends or even short-term deal spread movements. The merger and arbitrage (M&A) journey can be bumpy between announcement and closure. This can occasionally lead to unrealized mark-to-market losses in the portfolio. The takeaway, however, is that these drawdowns can be recovered and deal consideration received at the deal close. Moreover, these situations can provide attractive buying opportunities during periods of volatility.

April 2024 Performance Review

The Merger Fund® (MERIX): -0.94%  

  • Nine deals were completed, and capital was redeployed into eight new situations. There were no broken transactions. As of the end of April, we held 58 positions and were approximately 99% invested.
  • Top contributors: Pioneer Natural Resources/Exxon Mobil Corp.; SPACs; Macro Portfolio Hedge; Hess Corp./Chevron Corp.; Shockwave Medical Inc./Johnson & Johnson.
  • Top detractors: Capri Holdings, Ltd./Tapestry, Inc.; United States Steel Corp./Nippon Steel Corp.; Juniper Networks, Inc./Hewlett Packard Enterprise Co., McGrath RentCorp/WillScot Mobile Mini Holdings Corp.; Axionics Inc./Boston Scientific Corp.

Virtus Westchester Event Driven Fund (WCEIX): -1.49%

  • Ten deals were completed during the month, with capital redeployed into eight new situations. There were no broken transactions. As of the end of April, the Fund held 74 positions and was approximately 118% invested.
  • Top contributors: Pioneer Natural Resources/Exxon Mobil Corp.; Hess Corp./Chevron Corp.; Macro Portfolio Hedge; Carrier Global Corp.; Endeavor Group Holdings Inc./Silver Lake Management LLC.
  • Top detractors: Capri Holdings, Ltd./Tapestry, Inc.; United States Steel Corp./Nippon Steel Corp.; Juniper Networks, Inc./Hewlett Packard Enterprise Co.; Closed-End Funds; McGrath RentCorp/WillScot Mobile Mini Holdings Corp.

Virtus Westchester Credit Event Fund (WCFIX): 0.0%

  • Seven deals were completed, with capital redeployed into seven new transactions. There were no broken transactions. The Fund held 41 transactions and was 98% invested at the end of the month.
  • Top contributors: NFP Corp./Aon PLC; Calumet Specialty Food; SPACs; California Resources.
  • Top detractors: Closed-End Funds; Clear Channel Outdoor Holdings; Everi Holdings Inc./Global Gaming & PlayDigital; IPOs-DCM; United States Steel Corp./Nippon Steel Corp.

Performance and Risk/Reward Updates

Risk Metrics:

Past years
(as of )
Risk Statistics as of month end
3 Year MERIX WCEIX WCFIX S&P 500® Index Bloomberg U.S. Aggregate Bond Index Morningstar U.S. Fund Event Driven Category
Total Return 1.00 -0.24 2.25 8.06 -3.54 0.22
Standard Deviation 2.99 4.68 3.97 17.65 7.34 4.98
Alpha (vs. S&P 500®) -2.21 -4.14 -1.73 0.00 -8.20 -3.56
Sharpe Ratio -0.69 -0.70 -0.21 0.27 -0.88 -0.53
Sortino Ratio -0.80 -0.84 -0.29 0.41 -1.09 -0.62
Beta (vs. S&P 500®) 0.03 0.15 0.15 1.00 0.29 0.13
Correlation 0.16 0.58 0.72 1.00 0.69 0.41
Beta (vs. Agg) 0.03 0.24 0.27 1.68 1.00 0.19
Correlation (vs. Agg) 0.08 0.38 0.53 0.69 1.00 0.25

Performance (%):

(as of )
Performance table as of month end
Product / Market Indices Ticker MTD YTD 1 Year 2 Year 3 Year 5 Year 10 Year
Westchester Event-Driven WCEIX* -1.49 -0.75 3.37 1.73 -0.24 3.06 3.31
Westchester Credit Event WCFIX* 0.00 1.82 7.45 4.57 2.25 6.70 NA
The Merger Fund® MERIX* -0.94 -0.35 3.58 2.65 1.00 2.80 3.01
S&P 500® Index -4.08 6.04 22.66 12.22 8.06 13.19 12.41
Bloomberg U.S. Aggregate Bond Index -2.53 -3.28 -1.47 -0.95 -3.54 -0.16 1.20

* 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 1.37%. The net expense ratio is 1.27%, which reflects a contractual expense reimbursement in effect through 04/30/2025. 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 1.61%. The gross expense ratio minus dividend and interest expenses 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 1.67%. The net expense ratio is 1.57%, which reflects a contractual expense reimbursement in effect through 04/30/2025. The net expense ratio minus dividend and interest expenses on short sales is 1.53%.

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.

  1. 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.
  2. Derivatives: Investments in derivatives such as futures, options, forwards, and swaps may increase volatility or cause a loss greater than the principal investment.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. Prospectus: For additional information on risks, please see the fund’s prospectus.
  11. 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.
  12. 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.
  13. 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.  

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