Virtus AllianzGI Diversified Income & Convertible Fund: Can Its Managed Distribution Plan Survive Rising Return-of-Capital Reliance?

The Virtus AllianzGI Diversified Income & Convertible Fund (NYSE: ACV) has long been a go-to for income-focused investors, leveraging a Managed Distribution Plan to deliver steady monthly payouts of $0.18 per share since at least early 2025. However, beneath the surface of these consistent distributions lies a growing reliance on return of capital (ROC)—a practice that risks eroding shareholder principal and casting doubt on the fund's long-term viability. As ROC now accounts for 100% of its May 2025 distribution and 71.4% year-to-date, investors must ask: How sustainable is this strategy?

The Managed Distribution Plan: A Double-Edged Sword

ACV's Managed Distribution Plan aims to provide predictable income, a feature many investors value. The fund targets a consistent $0.18 monthly payout, regardless of underlying performance. This model is appealing in volatile markets but carries risks when the fund's income and capital gains fall short of distribution needs. When that happens, the shortfall is met with ROC—essentially returning investors' own capital.

The data is stark:
- In February 2025, 83.3% of the distribution was ROC.
- By May 2025, 100% of the payout was ROC.
- Year-to-date (YTD), ROC accounts for 71.4% of distributions, with only 18.9% from long-term capital gains and 8% from short-term gains.

This trend signals a critical problem: ACV is increasingly unable to generate sufficient income or capital gains to fund its distributions.

Performance Metrics: A Disconnect Between Distributions and NAV

While ACV's five-year annualized total return on net asset value (NAV) is a respectable 10.98%, its fiscal YTD (as of May 2025) shows a -2.91% cumulative NAV return. This divergence highlights a stark reality: the fund's distributions are outpacing its ability to grow assets.

The fund's reliance on ROC not only reduces investors' tax basis but also risks shrinking its NAV. Over time, this could lead to a death spiral: as ROC eats into principal, NAV declines, and the fund may face pressure to cut distributions or liquidate assets to meet payouts.

Risks on the Horizon

1. Principal Erosion: Each ROC distribution chips away at investors' initial capital. For retirees or income seekers, this undermines the fund's core purpose.
2. NAV Declines: With YTD NAV down 2.91%, the fund's ability to sustain $0.18/month payouts without further ROC is questionable.
3. Termination Date: ACV is set to terminate by May 2030. Investors holding until then may face forced liquidation, compounding risks of capital loss.
4. Discount to NAV: Closed-end funds often trade at discounts to NAV. If ROC concerns spook investors, ACV's discount could widen, further hurting returns.

Investment Considerations: Is ACV Worth the Risk?

ACV's appeal hinges on its consistent distribution history, which has averaged a 9.88% annualized rate. However, the growing ROC dependency introduces critical questions:
- Can the fund's portfolio—allocated to convertibles, equities, and income securities—regenerate enough income or capital gains to reduce ROC reliance?
- How will the fund's NAV hold up as it nears its 2030 termination date?

For Income Seekers:
- Proceed with caution. While ACV's $0.18/month payout is tempting, the ROC-heavy composition means you're financing part of your “income” from your own capital.
- Monitor the fund's Section 19(a) notices closely. If ROC exceeds 50% of distributions, it's a red flag.

For Speculators:
- ACV's discount to NAV (if it persists) could create a trading opportunity. However, this requires timing the market and accepting high risk.

For Long-Term Holders:
- Avoid this fund. The 2030 termination date introduces uncertainty, and principal erosion from ROC makes this a poor core holding.

Conclusion

The Virtus AllianzGI Diversified Income & Convertible Fund's Managed Distribution Plan has delivered on its promise of consistency—but at a cost. With ROC now driving 100% of recent payouts, the fund's sustainability hinges on reversing this trend or facing a reckoning with its NAV and investor confidence. For most investors, especially those prioritizing capital preservation, ACV's current trajectory is too risky. Those still drawn to its income stream should treat it as a tactical, short-term play—and brace for potential volatility ahead of its 2030 termination.

Investors are urged to scrutinize ACV's Form 1099-DIV for precise distribution breakdowns and consider diversifying into funds with healthier income-to-ROC ratios. In the end, a distribution funded by return of capital isn't income—it's a loan from your future self.