The Transparency Imperative: How Virtus' Section 19(a) Disclosures Signal Sustainability and Investor Trust

In an era where investors demand both financial returns and ethical clarity, the line between profitability and sustainability has never been thinner. For income funds, which promise steady distributions, the composition of those payouts is a critical barometer of long-term viability. The recent Section 19(a) disclosures from the Virtus Equity & Convertible Income Fund offer a case study in how transparency—not just in numbers but in strategy—can either bolster or erode investor confidence.

The June 2025 distribution of $0.50 per share by Virtus, for instance, was composed of 9% net investment income and 91% net realized long-term capital gains [1]. At first glance, this might seem like a triumph for capital gains harvesting. But deeper scrutiny reveals a potential vulnerability: a heavy reliance on capital gains, while lucrative in the short term, often signals a fund’s need to liquidate assets to meet distribution targets. This raises a fundamental question: Is the fund’s strategy sustainable in a market where volatility could erode the value of its holdings?

Section 19(a) disclosures, mandated by the Investment Company Act of 1940, are designed to demystify the sources of distributions. Yet their true value lies in their ability to act as a proxy for fund management’s priorities. A fund that consistently draws from net investment income (interest or dividends) demonstrates a model rooted in generating organic returns. Conversely, one that leans on capital gains may be masking underperformance or operational inefficiencies. The SEC’s recent enforcement actions against funds with mischaracterized income or improper expense allocations underscore the regulatory stakes in this area [3].

For Virtus, the absence of return of capital in its June 2025 distribution is a positive sign. Return of capital, while tax-advantaged, effectively returns principal to investors and can erode the fund’s asset base over time. By avoiding this tactic, Virtus signals a commitment to preserving capital—a trait that resonates with risk-averse investors in a low-growth environment. However, the 91% capital gains component still warrants caution. If the fund’s portfolio is being routinely liquidated to fund distributions, it may struggle to maintain its yield in a downturn.

The broader implications for investor trust are clear. Section 19(a) notices, though estimates, are a window into a fund’s operational health. When paired with the SEC’s new climate-related disclosure rules—requiring firms to quantify material expenditures on sustainability initiatives—the message is unambiguous: investors want to see both financial and environmental accountability [2]. A fund that discloses its distribution sources with precision and candor, like Virtus, is more likely to earn the trust of a market increasingly wary of greenwashing and opaque practices.

The challenge for income funds lies in balancing immediate yield with long-term resilience. Virtus’ Section 19(a) disclosures, while informative, also serve as a reminder that transparency is not a one-time act but an ongoing dialogue. As the SEC tightens its grip on climate-related and operational disclosures, funds that fail to align their reporting with investor expectations risk being left behind.

In the end, the true test of sustainability is not just in the numbers but in the narrative they tell. For Virtus, the story is one of cautious optimism—a fund that avoids return of capital but remains heavily reliant on capital gains. For investors, the takeaway is clear: transparency is the bedrock of trust, and in the world of income investing, trust is the most valuable asset of all.

Source:[1] Virtus Equity & Convertible Income Fund Discloses Sources of Distribution – Section 19(a) Notice, https://ir.virtus.com/news/news-details/2025/Virtus-Equity--Convertible-Income-Fund-Discloses-Sources-of-Distribution--Section-19a-Notice/default.aspx[2] Comprehensive Analysis of the SEC's Landmark Climate ..., https://dart.deloitte.com/USDART/home/publications/deloitte/heads-up/2024/sec-climate-disclosure-rule-ghg-emissions-esg-financial-reporting[3] Proper Expense Allocation, Valuation, and Income Recognition Reinforced by Recent SEC Enforcement, https://www.bdo.com/insights/industries/financial-services/proper-expense-allocation,-valuation,-and-income-recognition-reinforced-by-recent-sec-enforcement