Practical Solutions for Today s Bond Markets VIRTUS SEIX LEVERAGED FINANCE FUNDS
The Challenge In a market environment defined by low yields, volatility, and rising interest rates, investors are seeking a way to add income, diversification, and interest rate protection to their portfolios. The Opportunity High-yield bonds and floating rate bank loans have historically offered compelling long-term performance and portfolio diversification benefits. These asset classes particularly floating rate bank loans are also known for their attractive defensive attributes when interest rates are rising.
Higher income potential High-yield bonds and floating rate bank loans continue to offer compelling yields compared to most other fixed income options in today s low-interest-rate environment. ATTRACTIVE CURRENT YIELD VS. OTHER FIXED INCOME ASSET CLASSES 1 (AS OF 12/31/17) 5.15% 6.33% 3-Month T-Bill 0.00% U.S. Government 1.79% Aggregate 2.97% Corporate 3.94% Municipal 4.22% Leveraged Loans High Yield Diversification LOW CORRELATION TO OTHER FIXED INCOME ASSET CLASSES (1/1/92 12/31/17) 2 INDEX S&P 500 1.00 REITs 0.55 1.00 Leveraged Loans 0.42 0.48 1.00 Aggregate 0.04 0.18-0.02 1.00 High Yield 0.61 0.60 0.74 0.22 1.00 U.S. Corporate 0.25 0.35 0.29 0.88 0.53 1.00 U.S. Treasury -0.02-0.03-0.10 0.28-0.09 0.12 1.00 S&P REITs Leveraged Aggregate High U.S. Treasury 500 Loans Yield Corporate Since high-yield bonds have exposure to both credit and interest-rate risk, and floating rate bank loans are primarily influenced by credit risk, they may provide a differentiated fixed income return source to help improve portfolio diversification. 1 Source: Merrill Lynch, Barclays, Credit Suisse. The 3-Month T-Bill, U.S. Government, Aggregate, Corporate, Municipal, Leveraged Loan, and High Yield Markets are represented by the BofA Merrill Lynch 3-month U.S. Treasury Bill Index, Bloomberg Barclays 1-5 Year U.S. Government Bond Index, Bloomberg Barclays U.S. Aggregate Bond Index, Bloomberg Barclays U.S. Aggregate Credit Corporate Investment Grade Index, Bloomberg Barclays Municipal Bond Index, Credit Suisse Leveraged Loan Index, and Bloomberg Barclays U.S. Corporate High Yield Bond Index, respectively. 2 Source: FactSet. The S&P 500, REITs, Leverage Loans, Aggregate, High Yield, U.S. Corporate, and Treasury Markets are represented by the S&P 500 Index, FTSE NAREIT All Equity REITs Index, Credit Suisse Leveraged Loan Index, Bloomberg Barclays U.S. Aggregate Bond Index, Bloomberg Barclays U.S. Corporate High Yield Bond Index, Bloomberg Barclays U.S. Aggregate Credit Corporate Investment Grade Index, and Bloomberg Barclays U.S. Short Treasury Index, respectively. Past performance is not indicative of future results. 1
Capital appreciation potential High-yield bonds and floating rate bank loans offer the potential for price gains from improved company performance, better industry dynamics, and/or ratings upgrades. This, coupled with the potentially powerful compounding benefits of higher income, has provided solid total return opportunities over the long term. HIGH-YIELD BONDS AND LEVERAGED LOANS VS. EQUITY MARKETS (AS OF 12/31/17) Return per Unit of Risk Annualized Return Standard Deviation 1.1 1.0 0.7 0.5 LEVERAGED LOAN INDEX 5.70% 5.01% HIGH YIELD INDEX 7.98% 8.26% LARGE-CAP EQUITY INDEX 9.61% 13.96% SMALL-CAP EQUITY INDEX 9.88% 18.44% Historically, high-yield bonds and leveraged loans have provided more attractive returns per unit of risk than large- and small-cap equities. Sources: Standard & Poor s, Russell, Bloomberg Barclays, Bloomberg The Leveraged Loan, High Yield, Large-Cap Equity and Small-Cap Equity Markets are represented by the Credit Suisse Leveraged Loan Index, Bloomberg Barclays High Yield Credit Index, S&P 500 Index, and Russell 2000 Index, respectively. Returns were calculated using monthly data and begin with the inception of the Credit Suisse Leveraged Loan Index on 1/1/92. Past performance is not indicative of future results. 2
Added protection from rising interest rates Most traditional bonds typically decline in value when interest rates rise, but since floating rate bank loans offer coupons that periodically reset in relation to a base rate (often LIBOR plus a fixed spread), they tend to perform comparatively well during rising rate periods, helping to protect principal value. The income return on high-yield bonds often provides downside protection in rising rate environments. In a rising rate environment High-yield bonds posted positive returns out of 16 periods 12 Leveraged loans posted positive returns out of 16 periods 16 RETURNS IN RISING INTEREST RATE ENVIRONMENTS 25% 20% Bloomberg Barclays Aggregate Index Bloomberg Barclays High Yield Index CS Leveraged Loan Index 15% 10% 5% 0% -5% 1/99-1/00 2/01-6/01 10/01-12/01 2/02-3/02 9/02-11/02 5/03-8/03 2/04-5/04 8/05-10/05 1/06-6/06 12/08-2/09 3/09-6/09 11/09-12/09 8/10-3/11 4/13-8/13 1/15-7/15 7/16-1/17 Time periods from 6/30/97 to 12/31/17 when month-end 10-Year Treasury yields rose at least 50 basis points. A Basis Point is equal to 0.01%. Past performance is not indicative of future results. Sources: Bloomberg, Barclays Capital, Credit Suisse 3
2 may be 1 better than Including an allocation to both high yield and bank loans historically has provided a higher return per unit of risk than an allocation to high yield or bank loans alone. Historically, a blend of 50% + floating rate bank loans 50% high-yield bonds has provided the highest Sharpe ratio. Sharpe Ratio 0.66 0.69 0.70 0.69 0.63 100% HIGH YIELD 75% HIGH YIELD + 25% BANK LOANS 50% HIGH YIELD + 50% BANK LOANS 25% HIGH YIELD + 75% BANK LOANS 100% BANK LOANS Annualized Returns 8.02% 7.47% 6.89% 6.30% 5.70% Standard Deviation 8.25% 7.17% 6.22% 5.46% 5.00% 4 The High Yield and Bank Loan Markets are represented by the Bloomberg Barclays U.S. Corporate High Yield Bond Index and Credit Suisse Leveraged Loan Index, respectively. Sharpe ratio is a risk-adjusted measure calculated using standard deviation and excess return to determine reward per unit of risk. Past performance is not indicative of future results. 1 For the period 1/1/92 12/31/17. Source: FactSet.
Maximizing a fixed income portfolio s potential Adding an allocation to high-yield bonds and floating rate bank loans to an investment grade bond portfolio has historically increased yields and returns, while decreasing overall risk. In the example below, allocating 25% of a bond portfolio to a 50%/50% blend of floating rate bank loans and high-yield bonds resulted in better performance with lower risk. 1 Sharpe Ratio 0.85 Sharpe Ratio 1.04 Sharpe Ratio 0.99 100% INVESTMENT GRADE BONDS Annualized Returns 5.55% Standard Deviation 3.54% 75% INVESTMENT GRADE BONDS + 12.5% HIGH YIELD + 12.5% BANK LOANS Annualized Returns 5.93% Standard Deviation 3.26% 50% INVESTMENT GRADE BONDS + 25% HIGH YIELD + 25% BANK LOANS Annualized Returns 6.28% Standard Deviation 3.78% The Investment Grade, High Yield, and Bank Loan Markets are represented by the Bloomberg Barclays U.S. Aggregate Bond Index, Bloomberg Barclays U.S. Corporate High Yield Bond Index, and Credit Suisse Leveraged Loan Index, respectively. Past performance is not indicative of future results. 1 For the period 1/1/92 12/31/17. Source: FactSet. 5
The Seix Advantage A Focus on Fixed Income Seix Investment Advisors, one of Virtus Investment Partners affiliated managers, has exclusively focused on managing fixed income assets since 1992. Seix seeks to generate competitive absolute and relative risk-adjusted returns over the full market cycle through a bottom-up focused, top-down aware process. Seix employs multi-dimensional approaches based on strict portfolio construction methodology, sell disciplines, and trading strategies with prudent risk management as a cornerstone. Performance-oriented, risk-focused and collaborative culture. Sound, transparent and repeatable investment philosophy and process. Founded in 1992 as an institutional fixed income boutique 40 investment professionals with 23 years of average experience $ 24.8 billion in AUM A Seasoned Portfolio Management Team George Goudelias Senior Portfolio Manager Managing Director & Head of Leveraged Finance, Seix Investment Advisors 31 years experience Vincent Flanagan, CFA Portfolio Manager Senior High Yield Research Analyst Media & Technology, Seix Investment Advisors 21 years experience Michael Kirkpatrick Senior Portfolio Manager Managing Director, Seix Investment Advisors 27 years experience James FitzPatrick, CFA Portfolio Manager Managing Director & Head of Leveraged Finance Trading, Seix Investment Advisors 22 years experience 6 AUM and years of experience as of 12/31/17.
3 solutions for adding yield, diversification, and interest rate protection HIGH YIELD Virtus Seix High Income Fund Invests primarily in high yield corporate bonds and other U.S. dollardenominated debt instruments of U.S. and non-u.s. issuers. May invest up to 100% of its assets in securities rated below investment grade. Will opportunistically invest in CCC-rated securities. I SHARES: STHTX A SHARES: SAHIX / R6 SHARES: STHZX R SHARES: STHIX Seix adheres to a strict security selection and risk management approach to enhance returns and protect against downside risk in this asymmetrical market, that: Seeks issues that may be misunderstood or misrated by agencies and the markets Practices a sell discipline, employing an upside spread target designed to capture upside potential and downside tolerance limits focused on limiting risk Virtus Seix High Yield Fund Invests primarily in high yield corporate bonds and other U.S. dollar-denominated debt instruments of U.S. and non-u.s. issuers. Typically invests in the healthiest segment of the high yield market (BB & strong B credits). I SHARES: SAMHX A SHARES: HYPSX / R6 SHARES: HYIZX R SHARES: HYLSX Virtus Seix Floating Rate High Income Fund Invests in floating rate high yield leveraged loans and seeks to generate an attractive spread above LIBOR. Typically emphasizes securities that are within the BB and B segment of the leveraged loan market. I SHARES: SAMBX A SHARES SFRAX / R6 SHARES SFRZX C SHARES SFRCX LEVERAGED LOANS As specialists in leveraged loans, Seix brings a number of advantages to investors interested in capitalizing on this area of the market, including: Meticulous portfolio construction focused on loans that possess the most attractive risk/reward relationships Commitment to liquidity and diversification by sector and issue size Downside protection and downside tolerance limit 7
DEFINITIONS Credit ratings noted herein are calculated based on S&P, Moody s, and Fitch ratings. Generally, ratings range from AAA, the highest quality rating, to D, the lowest, with BBB and above being called investment grade securities. BB and below are considered below investment grade securities. If the ratings from all three agencies are available, securities will be assigned the median rating based on the numerical equivalents. If the ratings are available from only two of the agencies, the more conservative of the ratings will be assigned to the security. If the rating is available from only one agency, then that rating will be used. Any security not rated by S&P, Moody s, or Fitch is placed in the NR (Not Rated) category. Ratings do not apply to a fund or to a fund s shares. Ratings are subject to change. Current Yield is the annual income (interest or dividends) divided by the current price of the security. This measure looks at the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased the bond and held it for a year. Downside protection is a strategy that limits the potential loss that would result from a decline in a security or market. The London Interbank Offered Rate (LIBOR) is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. Standard deviation measures variability of returns around the average return for an investment portfolio. Higher standard deviation suggests greater risk. The Bloomberg Barclays Municipal Bond Index is a market capitalization-weighted index that measures the long-term tax-exempt bond market. The Bloomberg Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt. The Bloomberg Barclays U.S. Aggregate Bond Index measures the U.S. investment grade fixed rate bond market. The Bloomberg Barclays U.S. Aggregate Credit Corporate Investment Grade Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-u.s. industrial, utility, and financial issuers that meet specified maturity, liquidity, and quality requirements. The Bloomberg Barclays 1-5 Year U.S. Government Bond Index is comprised of the U.S. Treasury and U.S. Agency Indices. The index includes U.S. dollardenominated, fixed-rate, nominal U.S. Treasuries and U.S. agency debentures (securities issued by U.S. government owned or government sponsored entities, and debt explicitly guaranteed by the U.S. government). The Bloomberg Barclays U.S. Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting. The BofA Merrill Lynch 3-month U.S. Treasury Bill Index is an index of short-term U.S. Government securities with a remaining term to final maturity of less than three months. The Credit Suisse Leveraged Loan Index tracks the investable market of the U.S. dollar denominated leveraged loan market. It consists of issues rated 5B or lower, meaning that the highest rated issues included in this index are Moody s/s&p ratings of Baa1/BB+ or Ba1/BBB+. All loans are funded term loans with a tenor of at least one year and are made by issuers domiciled in developed countries. Dow Jones U.S. Select Real Estate Securities Index represents equity real estate investment trusts (REITs) and real estate operating companies traded in the U.S. The FTSE NAREIT All Equity REITs Index contains all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. The Russell 2000 Index is a market capitalization-weighted index of the 2,000 smallest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The S&P 500 Index is a free-float market capitalization-weighted index of 500 of the largest U.S. companies. The indexes are calculated on a total return basis with dividends reinvested. The indexes are unmanaged, their returns do not reflect any fees, expenses, or sales charges, and are not available for direct investment. Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell is a trademark of Frank Russell Company. 8
Virtus (NASDAQ: VRTS) is a distinctive partnership of boutique investment managers singularly committed to the long-term success of individual and institutional investors. n We are not constrained by a single investment approach; rather, we provide access to independent, specialized investment philosophies through our multi-discipline, multi-strategy approach n We have the flexibility, agility, and responsiveness of a boutique asset management firm with similar product breadth and investment talent of our larger peers n We are committed to thoughtfully providing investment solutions, adhering to the highest standards of product quality, operational excellence, and fiduciary responsibility IMPORTANT RISK CONSIDERATIONS Bank Loans: Loans may be unsecured or not fully collateralized, may be subject to restrictions on resale and/or trade infrequently on the secondary market. Loans can carry significant credit and call risk, can be difficult to value and have longer settlement times than other investments, which can make loans relatively illiquid at times. Credit & Interest: Debt securities are subject to various risks, the most prominent of which are credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt securities may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities. Foreign & Emerging Markets: Investing internationally, especially in emerging markets, involves additional risks such as currency, political, accounting, economic, and market risk. High Yield-High Risk Fixed Income Securities: There is a greater level of credit risk and price volatility involved with high yield securities than investment grade securities. Prospectus: For additional information on risks, please see the fund s prospectus. The Funds are the successors of the former RidgeWorth Funds, which carried substantially the same names, investment objectives, and strategies, as a result of their reorganization with and into the Funds on 7/14/17. Please carefully consider a Fund s investment objectives, risks, charges, and expenses before investing. For this and other information about any Virtus mutual fund, contact your financial representative, call 1-800-243-4361, or visit virtus.com for a prospectus or summary prospectus. Read it carefully before investing. Not all products or marketing materials are available at all firms. 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. 5269 02-18 2018 Virtus Investment Partners, Inc.