N-CSR 1 b56711virtusequitytrust_ncsr.txt VIRTUS EQUITY TRUST AR10 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-00945 --------- Virtus Equity Trust ------------------------------------------------------------------ (Exact name of registrant as specified in charter) 101 Munson Street Greenfield, MA 01301-9668 ------------------------------------------------------------------ (Address of principal executive offices) (Zip code) Kevin J. Carr, Esq. Vice President, Chief Legal Officer, Counsel and Secretary for Registrant 100 Pearl Street Hartford, CT 06103-4506 ------------------------------------------------------------------ (Name and address of agent for service) Registrant's telephone number, including area code: (800) 243-1574 ------------------------------------------------------------------ Date of fiscal year end: March 31 -------- Date of reporting period: March 31, 2010 -------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Report to Shareholders is attached herewith. ANNUAL REPORT (VIRTUS MUTUAL FUNDS LOGO) ------------------------------------------------------------------------------------------------------------------------------------ Virtus Growth & Income Fund Virtus Mid-Cap Core Fund Virtus Mid-Cap Growth Fund Virtus Quality Large-Cap Value Fund Virtus Quality Small-Cap Fund Virtus Small-Cap Core Fund Virtus Small-Cap Growth Fund Virtus Small-Cap Sustainable Growth Fund Virtus Strategic Growth Fund Virtus Tactical Allocation Fund ------------------------------------------------------------------------------------------------------------------------------------ TRUST NAME: March 31, 2010 Eligible VIRTUS EQUITY TRUST shareholders can sign up for eDelivery at Virtus.com NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
TABLE OF CONTENTS Message to Shareholders ........................................................................................................ 1 Key Investment Terms and Footnote Legend ....................................................................................... 2 Disclosure of Fund Expenses .................................................................................................... 4 SCHEDULE FUND OF FUND* SUMMARY INVESTMENTS Virtus Growth & Income Fund ("Growth & Income Fund") ................................................... 6 26 Virtus Mid-Cap Core Fund ("Mid-Cap Core Fund") ......................................................... 8 27 Virtus Mid-Cap Growth Fund ("Mid-Cap Growth Fund") ..................................................... 10 28 Virtus Quality Large-Cap Value Fund ("Quality Large-Cap Value Fund") ................................... 12 29 Virtus Quality Small-Cap Fund ("Quality Small-Cap Fund") ............................................... 14 30 Virtus Small-Cap Core Fund ("Small-Cap Core Fund") ..................................................... 16 31 Virtus Small-Cap Growth Fund ("Small-Cap Growth Fund") ................................................. 18 32 Virtus Small-Cap Sustainable Growth Fund ("Small-Cap Sustainable Growth Fund") ......................... 20 33 Virtus Strategic Growth Fund ("Strategic Growth Fund") ................................................. 22 34 Virtus Tactical Allocation Fund ("Tactical Allocation Fund") ........................................... 24 35 Statements of Assets and Liabilities ................................................................................ 40 Statements of Operations ............................................................................................ 42 Statements of Changes in Net Assets ................................................................................. 44 Financial Highlights ................................................................................................ 48 Notes to Financial Statements ....................................................................................... 60 Report of Independent Registered Public Accounting Firm ............................................................. 74 Tax Information Notice .............................................................................................. 75 Consideration of Advisory and Sub-advisory Agreements by the Board of Trustees ...................................... 76 Results of Shareholder Meetings ..................................................................................... 78 Fund Management Tables .............................................................................................. 79 PROXY VOTING PROCEDURES AND VOTING RECORD (FORM N-PX) The adviser and subadvisers vote proxies relating to portfolio securities in accordance with procedures that have been approved by the Trust's Board of Trustees. You may obtain a description of these procedures, along with information regarding how the Funds voted proxies during the most recent 12-month period ended June 30, 2009, free of charge, by calling toll-free 1-800-243-1574. This information is also available through the Securities and Exchange Commission's website at http://www.sec.gov. FORM N-Q INFORMATION The Trust files a complete schedule of portfolio holdings for each Fund with the Securities and Exchange Commission (the "SEC") for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC's website at http://www.sec.gov. Form N-Q may be reviewed and copied at the SEC's Public Reference Room. Information on the operation of the SEC's Public Reference Room can be obtained by calling toll-free 1-800-SEC-0330. This report is not authorized for distribution to prospective investors in the funds of Virtus Equity Trust unless preceded or accompanied by an effective prospectus which includes information concerning the sales charge, each Fund's record and other pertinent information.
MESSAGE TO SHAREHOLDERS Dear Fellow Shareholders of Virtus Mutual Funds: The first quarter of 2010 gave investors a taste of the kind of volatility that could be in store for some time. [PHOTO OF GEORGE R. AYLWARD] The quarter began with a 9 percent correction in the S&P 500(R) Index from mid-January to early February 5, followed by a resumption of 2009's bull market. The major indices were up more than 4 percent for the quarter and by the end of March, both the Dow Jones Industrial Average(SM) and the S&P 500 Index were up more than 65 percent from their lows on March 9, 2009. Surprisingly robust consumer spending and corporate earnings continued to support the transition of the U.S. economy out of recession toward modest growth. Unfortunately, there are some dark clouds on the horizon that may temper investors' optimism. The economy must navigate the long term impact of the unprecedented government spending to revive the global economy. Significant headwinds remain for investors, as evidenced by the current underperformance of the Chinese equity market, the solvency crisis in the Eurozone and persistently high unemployment rates in the U.S. and abroad. We believe this volatility is a reminder that investors should rely on the discipline and focus of professional investment managers and financial advisors. Ask your financial advisor to review your portfolio to ensure it reflects your current investment objectives, your tolerance for risk, and your long-term financial goals. As your advisor reviews your portfolio, we hope you will consider the wide range of equity, fixed income and alternative funds that Virtus offers. On behalf of the entire team at Virtus Investment Partners, and the investment professionals at our affiliated managers and subadvisers, we look forward to continuing to serve all your investment needs. Sincerely, /s/ George R. Aylward George R. Aylward President, Virtus Mutual Funds MAY 2010 WHENEVER YOU HAVE QUESTIONS ABOUT YOUR ACCOUNT OR REQUIRE ADDITIONAL INFORMATION, PLEASE VISIT US ON THE WEB AT WWW.VIRTUS.COM OR CALL OUR SHAREOWNER SERVICE GROUP TOLL-FREE AT 1-800-243-1574. PERFORMANCE DATA QUOTED REPRESENTS PAST RESULTS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN PERFORMANCE SHOWN ABOVE. 1
KEY INVESTMENT TERMS AND FOOTNOTE LEGEND KEY INVESTMENT TERMS RUSSELL 1000(R) VALUE INDEX ADR (AMERICAN DEPOSITARY RECEIPT) The Russell 1000(R) Value Index is a market capitalization-weighted index of value-oriented stocks of the Represents shares of foreign companies traded in U.S. dollars on 1,000 largest companies in the Russell Universe, which comprises U.S. exchanges that are held by a bank or a trust. Foreign the 3,000 largest U.S. companies. The index is calculated on a companies use ADRs in order to make it easier for Americans to total return basis with dividends reinvested. buy their shares. RUSSELL 2000(R) INDEX BARCLAYS CAPITAL U.S. AGGREGATE BOND INDEX The Russell 2000(R) Index is a market capitalization-weighted The Barclays Capital U.S. Aggregate Bond Index measures the U.S. index of the 2,000 smallest companies in the Russell Universe, investment grade fixed rate bond market. The index is calculated which comprises the 3,000 largest U.S. companies. The index is on a total return basis. calculated on a total return basis with dividends reinvested. CONSUMER PRICE INDEX (CPI) RUSSELL 2000(R) GROWTH INDEX Measures the pace of inflation by measuring the change in The Russell 2000(R) Growth Index is a market consumer prices of goods and services, including housing, capitalization-weighted index of growth-oriented stocks of the electricity, food, and transportation, as determined by a smallest 2,000 companies in the Russell Universe, which monthly survey of the U.S. Bureau of Labor Statistics. comprises the 3,000 largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. EXCHANGE-TRADED FUNDS (ETF) RUSSELL 2000(R) VALUE INDEX Portfolios of stocks or bonds that track a specific market index. The Russell 2000(R) Value Index is a market capitalization-weighted index of value-oriented stocks of the FEDERAL RESERVE (THE "FED") smallest 2,000 companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The index is The central bank of the United States, responsible for calculated on a total return basis with dividends reinvested. controlling the money supply, interest rates and credit with the goal of keeping the U.S. economy and currency stable. Governed RUSSELL 2500(TM) INDEX by a seven-member board, the system includes 12 regional Federal Reserve Banks, 25 branches and all national and state banks that The Russell 2500(TM) Index is a market capitalization-weighted are part of the system. index of the 2,500 smallest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The index is ISHARES(R) calculated on a total return basis with dividends reinvested. Represents shares of an open-end Exchange-Traded Fund. RUSSELL 3000(R) GROWTH INDEX REIT (REAL ESTATE INVESTMENT TRUST) The Russell 3000(R) Growth Index is a market capitalization-weighted index of growth-oriented stocks of the A publicly traded company that owns, develops and operates 3,000 largest U.S. companies. The index is calculated on a total income-producing real estate such as apartments, office return basis with dividends reinvested. buildings, hotels, shopping centers and other commercial properties. RUSSELL MIDCAP(R) INDEX RUSSELL 1000(R) GROWTH INDEX The Russell Midcap(R) Index is a market capitalization-weighted index of medium-capitalization stocks of U.S. companies. The The Russell 1000(R) Growth Index is a market index is calculated on a total return basis with dividends capitalization-weighted index of growth-oriented stocks of the reinvested. 1,000 largest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. 2
KEY INVESTMENT TERMS AND FOOTNOTE LEGEND (CONTINUED) RUSSELL MIDCAP(R) GROWTH INDEX SPONSORED ADR (AMERICAN DEPOSITARY RECEIPT) The Russell Midcap(R) Growth Index is a market An ADR which is issued with the cooperation of the company whose capitalization-weighted index of medium-capitalization, stock will underlie the ADR. These shares carry all the rights growth-oriented stocks of U.S. companies. The index is of the common share such as voting rights. ADRs must be calculated on a total return basis with dividends reinvested. sponsored to be able to trade on the NYSE. RUSSELL MIDCAP(R) VALUE INDEX TACTICAL ALLOCATION FUND COMPOSITE INDEX The Russell Midcap(R) Value Index is a market A composite index consisting of 50% S&P 500(R) Index, which capitalization-weighted index of medium-capitalization, measures stock market total return performance, and 50% Barclays value-oriented stocks of U.S. companies. The index is calculated Capital U.S. Aggregate Bond Index, which measures bond market on a total return basis with dividends reinvested. total return performance. S&P 500(R) INDEX WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The S&P 500(R) Index is a free-float market Securities purchased on a when-issued or forward commitment capitalization-weighted index of 500 of the largest U.S. basis are also known as delayed delivery transactions. Delayed companies. The index is calculated on a total return basis with delivery transactions involve a commitment by a Fund to purchase dividends reinvested. or sell a security at a future date, ordinarily up to 90 days later. When-issued or forward commitments enable a Fund to lock SPDR(R) in what is believed to be an attractive price or yield on a particular security for a period of time, regardless of future S&P Depositary Receipt changes in interest rates. FOOTNOTE LEGEND (1) Federal Income Tax Information: For tax information at March 31, 2010, see the Federal Income Tax Information Note 9 in the Notes to Financial Statements. (2) Non-income producing. (3) Variable or step coupon security; interest rate shown reflects the rate currently in effect. (4) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At March 31, 2010 for the Tactical Allocation Fund, these securities amounted to a value of $7,996 or 4.0% of net assets. INDEXES ARE UNMANAGED AND NOT AVAILABLE FOR DIRECT INVESTMENT; THEREFORE, THEIR PERFORMANCE DOES NOT REFLECT THE EXPENSES ASSOCIATED WITH ACTIVE MANAGEMENT OF AN ACTUAL PORTFOLIO. 3
VIRTUS EQUITY TRUST DISCLOSURE OF FUND EXPENSES (UNAUDITED) FOR THE SIX-MONTH PERIOD OF OCTOBER 1, 2009 TO MARCH 31, 2010 We believe it is important for you to understand the impact EXPENSE TABLE of costs on your investment. All mutual funds have operating ---------------------------------------------------------------- expenses. As a shareholder of a Virtus Equity Trust Fund (each, Beginning Ending Annualized Expenses Paid a "Fund") you may incur two types of costs: (1) transaction Account Value Account Value Expense During costs, including sales charges on purchases of Class A shares October 1, 2009 March 31, 2010 Ratio Period* and contingent deferred sales charges on Class B and Class C ---------------------------------------------------------------- shares; and (2) ongoing costs, including investment advisory GROWTH & INCOME FUND+ fees; distribution and service fees; and other expenses. Class I ---------------------------------------------------------------- shares are sold without a sales charge and do not incur ACTUAL distribution and service fees. These examples are intended to Class A $1,000.00 $1,101.00 1.26% $ 6.60 help you understand your ongoing costs (in dollars) of investing Class B 1,000.00 1,097.10 2.00 10.46 in a Fund and to compare these costs with the ongoing costs of Class C 1,000.00 1,097.10 2.01 10.51 investing in other mutual funds. These examples are based on an Class I 1,000.00 1,101.80 1.01 5.29 investment of $1,000 invested at the beginning of the period and held for the entire six-month period. The following Expense HYPOTHETICAL (5% RETURN BEFORE EXPENSES) Table illustrates your Fund's costs in two ways. Class A 1,000.00 1,018.57 1.26 6.36 Class B 1,000.00 1,014.83 2.00 10.10 ACTUAL EXPENSES Class C 1,000.00 1,014.78 2.01 10.15 Class I 1,000.00 1,019.83 1.01 5.10 The first section of the accompanying table provides ---------------------------------------------------------------- information about actual account values and actual expenses. You MID-CAP CORE FUND may use the information in this section, together with the ---------------------------------------------------------------- amount you invested, to estimate the expenses that you paid over ACTUAL the period. Simply divide your account value by $1,000 (for Class A $1,000.00 $1,122.10 1.35% $ 7.14 example, an $8,600 account value divided by $1,000 = 8.6), then Class C 1,000.00 1,117.90 2.10 11.09 multiply the result by the number given for your Fund under the Class I 1,000.00 1,123.80 1.10 5.82 heading "Expenses Paid During Period" to estimate the expenses you paid on your account during the period. HYPOTHETICAL (5% RETURN BEFORE EXPENSES) Class A 1,000.00 1,018.11 1.35 6.82 HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES Class C 1,000.00 1,014.33 2.10 10.60 Class I 1,000.00 1,019.38 1.10 5.55 The second section of the accompanying table provides ---------------------------------------------------------------- information about hypothetical account values and hypothetical MID-CAP GROWTH FUND expenses based on the Fund's actual expense ratio and an assumed ---------------------------------------------------------------- rate of return of 5% per year before expenses, which is not your ACTUAL Fund's actual return. The hypothetical account values and Class A $1,000.00 $1,117.90 1.45% $ 7.66 expenses may not be used to estimate the actual ending account Class B 1,000.00 1,112.90 2.20 11.59 balance or expenses you paid for the period. You may use this Class C 1,000.00 1,112.90 2.20 11.59 information to compare the ongoing costs of investing in your Class I 1,000.00 1,118.90 1.20 6.34 Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the HYPOTHETICAL (5% RETURN BEFORE EXPENSES) shareholder reports of the other funds. Class A 1,000.00 1,017.61 1.45 7.32 Class B 1,000.00 1,013.82 2.20 11.11 Please note that the expenses shown in the accompanying table Class C 1,000.00 1,013.82 2.20 11.11 are meant to highlight your ongoing costs only and do not Class I 1,000.00 1,018.87 1.20 6.06 reflect any transactional costs, such as sales charges or ---------------------------------------------------------------- contingent deferred sales charges. Therefore, the second section QUALITY LARGE-CAP VALUE FUND of the accompanying table is useful in comparing ongoing costs ---------------------------------------------------------------- only, and will not help you determine the relative total costs ACTUAL of owning different funds. In addition, if those transactional Class A $1,000.00 $1,105.70 1.35% $ 7.09 costs were included, your costs would have been higher. The Class C 1,000.00 1,100.80 2.10 11.00 calculations assume no shares were bought or sold during the Class I 1,000.00 1,106.90 1.10 5.78 period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any HYPOTHETICAL (5% RETURN BEFORE EXPENSES) purchases or redemptions. Class A 1,000.00 1,018.11 1.35 6.82 Class C 1,000.00 1,014.33 2.10 10.60 Class I 1,000.00 1,019.38 1.11 5.55 ---------------------------------------------------------------- QUALITY SMALL-CAP FUND ---------------------------------------------------------------- ACTUAL Class A $1,000.00 $1,130.60 1.55% $ 8.23 Class C 1,000.00 1,126.80 2.30 12.20 Class I 1,000.00 1,133.00 1.30 6.91 HYPOTHETICAL (5% RETURN BEFORE EXPENSES) Class A 1,000.00 1,017.10 1.55 7.83 Class C 1,000.00 1,013.32 2.30 11.61 Class I 1,000.00 1,018.37 1.30 6.56 ---------------------------------------------------------------- 4
VIRTUS EQUITY TRUST DISCLOSURE OF FUND EXPENSES (UNAUDITED) (CONTINUED) FOR THE SIX-MONTH PERIOD OF OCTOBER 1, 2009 TO MARCH 31, 2010 EXPENSE TABLE EXPENSE TABLE ---------------------------------------------------------------- --------------------------------------------------------------- Beginning Ending Annualized Expenses Paid Beginning Ending Annualized Expenses Paid Account Value Account Value Expense During Account Value Account Value Expense During October 1, 2009 March 31, 2010 Ratio Period* October 1, 2009 March 31, 2010 Ratio Period* ---------------------------------------------------------------- --------------------------------------------------------------- SMALL-CAP CORE FUND TACTICAL ALLOCATION FUND ---------------------------------------------------------------- --------------------------------------------------------------- ACTUAL ACTUAL Class A $1,000.00 $1,114.40 1.59% $ 8.38 Class A $1,000.00 $1,067.70 1.28% $ 6.60 Class B 1,000.00 1,110.40 2.33 12.26 Class B 1,000.00 1,064.40 2.03 10.45 Class C 1,000.00 1,109.40 2.34 12.31 Class C 1,000.00 1,063.90 2.04 10.50 Class I 1,000.00 1,115.40 1.33 7.01 HYPOTHETICAL (5% RETURN BEFORE EXPENSES) HYPOTHETICAL (5% RETURN BEFORE EXPENSES) Class A 1,000.00 1,018.47 1.28 6.46 Class A 1,000.00 1,016.90 1.59 8.03 Class B 1,000.00 1,014.68 2.03 10.25 Class B 1,000.00 1,013.17 2.33 11.76 Class C 1,000.00 1,014.63 2.04 10.30 Class C 1,000.00 1,013.12 2.34 11.81 --------------------------------------------------------------- Class I 1,000.00 1,018.22 1.33 6.71 ---------------------------------------------------------------- The Funds may invest in other funds, and the annualized SMALL-CAP GROWTH FUND expense ratios noted above do not reflect fees and ---------------------------------------------------------------- expenses associated with the underlying funds. If such ACTUAL expenses and fees had been included, the expenses would Class A $1,000.00 $1,133.60 1.67% $ 8.88 have been higher. Class B 1,000.00 1,129.00 2.42 12.85 Class C 1,000.00 1,129.60 2.42 12.85 * Expenses are equal to the relevant Fund's annualized expense ratio, which includes waived fees and HYPOTHETICAL (5% RETURN BEFORE EXPENSES) reimbursed expenses, if applicable, multiplied by the Class A 1,000.00 1,016.50 1.67 8.43 average account value over the period, multiplied by Class B 1,000.00 1,012.71 2.42 12.22 the number of days (182) expenses were accrued in the Class C 1,000.00 1,012.71 2.42 12.22 most recent fiscal half-year, then divided by 365 ---------------------------------------------------------------- days to reflect the period since inception. SMALL-CAP SUSTAINABLE GROWTH FUND ---------------------------------------------------------------- + If net reimbursed extraordinary expenses from prior ACTUAL years and additional current year extraordinary Class A $1,000.00 $1,091.80 1.65% $ 8.61 expenses were excluded, the actual expenses paid and Class C 1,000.00 1,088.30 2.40 12.50 the hypothetical expenses would be as follows: Class I 1,000.00 1,094.30 1.40 7.31 ACTUAL HYPOTHETICAL (5% RETURN BEFORE EXPENSES) EXPENSES HYPOTHETICAL Class A 1,000.00 1,016.60 1.65 8.33 PAID EXPENSES Class C 1,000.00 1,012.81 2.40 12.12 -------- ------------ Class I 1,000.00 1,017.86 1.40 7.07 Growth & Income Fund ---------------------------------------------------------------- Class A $5.24 $5.05 STRATEGIC GROWTH FUND Class B 9.25 8.94 ---------------------------------------------------------------- Class C 9.38 9.04 ACTUAL Class I 4.24 4.09 Class A $1,000.00 $1,107.10 1.43% $ 7.51 Class B 1,000.00 1,103.60 2.18 11.43 You can find more information about the Funds' expenses in Class C 1,000.00 1,101.90 2.17 11.37 the Financial Statements section that follows. For Class I 1,000.00 1,108.80 1.17 6.15 additional information on operating expenses and other shareholder costs, refer to the prospectus. HYPOTHETICAL (5% RETURN BEFORE EXPENSES) Class A 1,000.00 1,017.71 1.43 7.22 Class B 1,000.00 1,013.92 2.18 11.01 Class C 1,000.00 1,013.97 2.17 10.96 Class I 1,000.00 1,019.02 1.17 5.91 ---------------------------------------------------------------- 5
TICKER SYMBOLS: A Share: PDIAX GROWTH & INCOME FUND B Share: PBGIX C Share: PGICX I Share: PXIIX - GROWTH & INCOME FUND (THE "FUND") is WHAT FACTORS AFFECTED THE FUND'S THE PRECEDING INFORMATION IS THE OPINION diversified and has an investment PERFORMANCE DURING ITS FISCAL YEAR? OF PORTFOLIO MANAGEMENT ONLY THROUGH THE objective to seek capital END OF THE PERIOD OF THE REPORT AS STATED appreciation and current income. - Given the strife the market had ON THE COVER. ANY SUCH OPINIONS ARE encountered in 2008 and early 2009, SUBJECT TO CHANGE AT ANY TIME BASED UPON For the fiscal year ended March 31, the Fund manager believed that the MARKET CONDITIONS AND SHOULD NOT BE RELIED 2010, the Fund's Class A shares at prudent strategy was to position the ON AS INVESTMENT ADVICE. NAV returned 48.67%, Class B shares Fund into stocks that offered the returned 47.49%, Class C shares best relative value. They believed INVESTING IN THE SECURITIES OF SMALL AND returned 47.60% and Class I shares that the best play was to be found in MID-SIZED COMPANIES INVOLVES GREATER RISKS returned 49.00%. For the same period, companies with tangible assets and AND PRICE VOLATILITY THAN INVESTING IN the S&P 500(R) Index, a broad-based earnings visibility. Two sectors that LARGER, MORE ESTABLISHED COMPANIES. equity index, returned 49.77%. contained companies exhibiting those qualities during the period were ------------------------------------------ ALL PERFORMANCE FIGURES ASSUME Energy and Materials. Also, there was Asset Allocation REINVESTMENT OF DISTRIBUTIONS AND still great uncertainty in the spring ---------------- EXCLUDE THE EFFECT OF SALES CHARGES. of 2009, which persisted well into PERFORMANCE DATA QUOTED REPRESENTS the fall, whether or not banks would The following table presents asset PAST RESULTS. PAST PERFORMANCE IS NO be able to survive, and what the allocations within certain sectors as a GUARANTEE OF FUTURE RESULTS AND financial services industry would percentage of total investments at March CURRENT PERFORMANCE MAY BE HIGHER OR look like. Furthermore, the massive 31, 2010. LOWER THAN THE PERFORMANCE SHOWN. government involvement created a INVESTMENT RETURN AND PRINCIPAL VALUE great deal of doubt as to what would Energy 19% WILL FLUCTUATE SO YOUR SHARES WHEN be left for shareholders of these Information Technology 18 REDEEMED, MAY BE WORTH MORE OR LESS stocks. Thus, the Fund manager Consumer Staples 13 THAN THEIR ORIGINAL COST. PLEASE generally avoided stocks within the Health Care 13 VISIT VIRTUS.COM FOR PERFORMANCE DATA Financial Sector. Another area that Industrials 13 CURRENT TO THE MOST RECENT MONTH-END. looked like the road to recovery Materials 9 would be extended was Consumer Telecommunication Services 4 HOW DID THE MARKET PERFORM DURING THE Discretionary. The American consumer, Other (includes short-term FUND'S FISCAL YEAR? with massive debt, concern about job investments) 11 loss, and squeezed by both lower --- - The broad market was incredibly wages and at the pump, seemed ill Total 100% strong for the year ended March 31, equipped to spend money on anything === 2010. The U.S. stock market made a other than necessities. As a result, ------------------------------------------ major bottom in early March of 2009, the Fund manager deployed the and enjoyed a powerful bull market portfolio into Consumer Staples, some through the end of the fiscal year. Health Care, a variety of Industrial The combination of easy monetary stocks, Technology (with a business policy and massive fiscal stimulus bent), Energy and Materials. Areas alleviated investor concerns about that were underweight versus the S&P corporate bankruptcies. Many U.S. were Financials, Consumer companies, in the meantime, had cut Discretionary, and Utilities. costs dramatically, repaired balance sheets, and pushed hard to increase - Overall the Fund beat its peer group, worker productivity. This vigilance but fell slightly short of the S&P has now led to greater profitability 500 Index, its benchmark over the and higher share prices in a variety full year. The more conservative of different stocks. strategy worked for several months, however, as the recovery took hold, many bank stocks, retail stocks, and leisure stocks began to recover. On an absolute basis it was still a tremendous year for the Fund, and overall we are pleased with performance. The Fund does tend to have a lower price-to-earnings ratio than the S&P 500 Index, which in the opinion of the managers, does tend to mean a less risky portfolio. As a result, the context of the performance given the massive market rally, would lend support to the idea that performance was solid. For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 6
GROWTH & INCOME FUND (CONTINUED) AVERAGE ANNUAL TOTAL RETURN(1) for periods ended 3/31/10 Inception Inception 1 year 5 years 10 years to 3/31/10 Date ------------------------------------------------------------------------------------------------------------------------------------ CLASS A SHARES AT NAV(2) 48.67% 1.79% -0.33% -- -- CLASS A SHARES AT POP(3,4) 40.12 0.60 -0.92 -- -- CLASS B SHARES AT NAV(2) 47.49 1.04 -1.07 -- -- CLASS B SHARES WITH CDSC(4) 43.49 1.04 -1.07 -- -- CLASS C SHARES AT NAV AND WITH CDSC(4) 47.60 1.04 -1.07 -- -- CLASS I SHARES 49.00 -- -- 7.17% 11/13/07 S&P 500(R) INDEX 49.77 1.92 -0.68 -7.31(5) --(5) FUND EXPENSE RATIOS(6): A SHARES: GROSS 1.60%, NET 1.42%; B SHARES: GROSS 2.35%, NET 2.17%; C SHARES: GROSS 2.35%, NET 2.17%; I SHARES: GROSS 1.35%, NET 1.17%. ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT virtus.com FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CLASS B SHARES DECLINE FROM 5% TO 0% OVER A FIVE-YEAR PERIOD. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE INDEX RETURN IS FROM CLASS I SHARES INCEPTION DATE. (6) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. NET EXPENSE: EXPENSES REDUCED BY A VOLUNTARY FEE WAIVER. GROSS EXPENSE: DOES NOT REFLECT THE EFFECT OF VOLUNTARY FEE WAIVER. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 This chart assumes an initial investment of $10,000 made on March 31, 2000, for Class A, Class B and Class C shares including any applicable sales charges or fees. The performance of the other share class will be greater or less than that shown based on differences in inception date, fees and sales charges. Performance assumes reinvestment of dividends and capital gain distributions. (PERFORMANCE GRAPH) Share Share Share S&P 500(R) Class A Class B Class C Index ------------------------------------------------------------------------------------------------------------------------------------ 3/31/2000 9425 10000 10000 10000 3/31/2001 7739 8152 8152 7815 3/30/2002 7779 8127 8127 7834 3/28/2003 5781 5993 5999 5895 3/31/2004 7781 8009 8015 7965 3/31/2005 8344 8526 8526 8496 3/31/2006 9192 9326 9326 9493 3/31/2007 10401 10474 10474 10616 3/30/2008 9838 9829 9835 10077 3/31/2009 6135 6088 6083 6239 3/31/2010 9120 8979 8978 9344 For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 7
TICKER SYMBOLS: A Share: VMACX MID-CAP CORE FUND C Share: VMCCX I Share: VIMCX - MID-CAP CORE FUND (THE "FUND") is WHAT FACTORS AFFECTED THE FUND'S ------------------------------------------ diversified and has an investment PERFORMANCE DURING ITS FISCAL PERIOD? Asset Allocation objective to seek long-term capital ---------------- appreciation. - Low-quality stocks, as measured by companies with negative return on The following table presents asset For the fiscal period June 22, 2009 equity, outperformed companies with allocations within certain sectors as a (inception date) through March 31, positive return on equity. Further, percentage of total investments at March 2010, the Fund's Class A shares at stocks with below-investment-grade 31, 2010. NAV returned 26.79%*, Class C shares credit ratings strongly outperformed returned 25.99% and Class I shares the index as companies that require Industrials 23% returned 26.99%. For the same period, higher financial leverage benefited Information Technology 16 the S&P 500(R) Index, a broad-based the most from the improvement in the Financials 15 equity index, returned 33.04% and the credit markets and continued low Health Care 12 Russell Midcap(R) Index, the Fund's interest rates. With the Consumer Staples 11 style-specific benchmark, returned underperformance of high-quality Consumer Discretionary 10 44.61%. stocks, the Mid-Cap Core Fund Materials 4 underperformed the Russell Midcap Utilities 4 * Returns less than one year are not Index for the fiscal period. Other (includes short-term annualized. investments) 5 - An underweight in utilities --- ALL PERFORMANCE FIGURES ASSUME contributed the most to performance Total 100% REINVESTMENT OF DISTRIBUTIONS AND while negative stock selection and an === EXCLUDE THE EFFECT OF SALES CHARGES. underweight in materials and ------------------------------------------ PERFORMANCE DATA QUOTED REPRESENTS processing as well as negative stock PAST RESULTS. PAST PERFORMANCE IS NO selection in energy detracted the GUARANTEE OF FUTURE RESULTS AND most. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE PRECEDING INFORMATION IS THE OPINION INVESTMENT RETURN AND PRINCIPAL VALUE OF PORTFOLIO MANAGEMENT ONLY THROUGH THE WILL FLUCTUATE SO YOUR SHARES WHEN END OF THE PERIOD OF THE REPORT AS STATED REDEEMED, MAY BE WORTH MORE OR LESS ON THE COVER. ANY SUCH OPINIONS ARE THAN THEIR ORIGINAL COST. PLEASE SUBJECT TO CHANGE AT ANY TIME BASED UPON VISIT virtus.com FOR PERFORMANCE DATA MARKET CONDITIONS AND SHOULD NOT BE RELIED CURRENT TO THE MOST RECENT MONTH-END. ON AS INVESTMENT ADVICE. HOW DID THE MARKET PERFORM DURING THE BECAUSE THE FUND HOLDS A LIMITED NUMBER OF FUND'S FISCAL PERIOD? SECURITIES, IT WILL BE IMPACTED BY EACH SECURITY'S PERFORMANCE MORE THAN A FUND - Investors experienced one of the WITH A LARGE NUMBER OF HOLDINGS. strongest stock market recoveries in history for the Fund's fiscal year INVESTING IN THE SECURITIES OF SMALL AND after experiencing one of the worst MID-SIZED COMPANIES INVOLVES GREATER RISKS stock market performances in history AND PRICE VOLATILITY THAN INVESTING IN in 2008. For the period, LARGER, MORE ESTABLISHED COMPANIES. mid-capitalization stocks performed the strongest with the Russell Midcap Index returning 44.61%, followed by small-cap stocks with the Russell 2000 Index increasing 33.77%, followed by large-cap stocks with the S&P 500 Index increasing 33.04%. - The fiscal period experienced the outperformance of classic cyclical sectors with consumer discretionary, materials and processing, and financial services performing the best while defensive sectors, such as utilities and consumer staples, lagged. - We believe the economic recovery is taking hold and the financial system appears to have stabilized. However, we continue to operate in an environment where businesses are cautiously optimistic about future growth but are still hesitant to commit to meaningful increases in human and physical capital. Further, unemployment remains near a 26-year high, restraining ongoing consumer spending which makes up nearly three quarters of the U.S. economy. For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 8
MID-CAP CORE FUND (CONTINUED) AVERAGE ANNUAL TOTAL RETURN(1) for periods ended 3/31/10 Inception Inception to 3/31/10 Date ------------------------------------------------------------------------------------------------------------------------------------ CLASS A SHARES AT NAV(2) 26.79% 6/22/09 CLASS A SHARES AT POP(3, 4) 19.50 6/22/09 CLASS C SHARES AT NAV(2) 25.99 6/22/09 CLASS C SHARES WITH CDSC 24.99 6/22/09 CLASS I SHARES 26.99 6/22/09 S&P 500(R) INDEX 33.04 --(5) RUSSELL MIDCAP(R) INDEX 44.61 --(5) FUND EXPENSE RATIOS(6): A SHARES: GROSS 3.01%, NET 1.35%; C SHARES: GROSS 3.76%, NET 2.10%; I SHARES: GROSS 2.76%, NET 1.10%. ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT virtus.com FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE INDEX RETURNS ARE FROM THE FUND'S INCEPTION DATE. (6) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. NET EXPENSE: EXPENSES REDUCED BY A CONTRACTUAL FEE WAIVER IN EFFECT THROUGH 6/30/10. GROSS EXPENSE: DOES NOT REFLECT THE EFFECT OF CONTRACTUAL FEE WAIVER. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 This chart assumes an initial investment of $10,000 made on June 22, 2009 (inception date of the Fund), for Class A, Class C and Class I shares including any applicable sales charges or fees. Performance assumes reinvestment of dividends and capital gain distributions. (PERFORMANCE GRAPH) Share Share Share S&P 500(R) Russell Midcap(R) Class A Class C Class I Index Index ------------------------------------------------------------------------------------------------------------------------------------ 6/22/2009 9425 10000 10000 10000 10000 3/31/2010 11950 12499 12699 13304 14461 For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 9
TICKER SYMBOLS: A Share: PHSKX MID-CAP GROWTH FUND B Share: PSKBX C Share: PSKCX I Share: PICMX ------------------------------------------ - MID-CAP GROWTH FUND (THE "FUND") is - As is usually the case in economic Asset Allocation diversified and has an investment recovery periods, smaller ---------------- objective to seek capital capitalization stocks outperformed appreciation. large. Mid-cap stocks also performed The following table presents asset very strongly, with the Russell allocations within certain sectors as a For the fiscal year ended March 31, Midcap Growth Index providing the percentage of total investments at March 2010, the Fund's Class A shares at highest return of the Russell style 31, 2010. NAV returned 58.89%, Class B shares categories. returned 57.68%, Class C shares Information Technology 27% returned 57.68%, and Class I shares WHAT FACTORS AFFECTED THE FUND'S Consumer Discretionary 16 returned 59.19%. For the same period PERFORMANCE DURING ITS FISCAL YEAR? Health Care 16 the S&P 500(R) Index, a broad-based Industrials 15 equity index, returned 49.77% and the - While the Fund performed strongly Financials 6 Russell Midcap(R) Growth Index, the over the fiscal year, the prevalence Materials 6 Fund's style-specific benchmark, of risk-seeking did have a negative Telecommunication Services 5 returned 63.00%. impact on relative returns. The Fund Other (includes short-term generally invests in companies that investments) 9 ALL PERFORMANCE FIGURES ASSUME are considered higher quality (i.e., --- REINVESTMENT OF DISTRIBUTIONS AND profitable, strong balance sheet, Total 100% EXCLUDE THE EFFECT OF SALES CHARGES. good growth prospects, etc.). With === PERFORMANCE DATA QUOTED REPRESENTS distressed companies leading the ------------------------------------------ PAST RESULTS. PAST PERFORMANCE IS NO charge in the equity markets, keeping GUARANTEE OF FUTURE RESULTS AND pace with the surging benchmark was a CURRENT PERFORMANCE MAY BE HIGHER OR challenge. Most of the sectors LOWER THAN THE PERFORMANCE SHOWN. participated strongly, with only the INVESTMENT RETURN AND PRINCIPAL VALUE traditionally defensive sectors of WILL FLUCTUATE SO YOUR SHARES WHEN telecom and utilities returning less REDEEMED, MAY BE WORTH MORE OR LESS than 50%. Our sector allocation was THAN THEIR ORIGINAL COST. PLEASE relatively neutral to performance, VISIT virtus.com FOR PERFORMANCE DATA while stock selection moderately CURRENT TO THE MOST RECENT MONTH-END. detracted. Strong contributors included soft-drink bottler Pepsi HOW DID THE MARKET PERFORM DURING THE Bottling, drug maker Valeant FUND'S FISCAL YEAR? Pharmaceutical, hospital operator Universal Health Services, and - The year ended March 31, 2010 storage technology provider Western coincided nearly perfectly with a Digital. Underperformers included sharp, broad recovery of the U.S. electrical products manufacturer equity markets. After dropping General Cable, utility AES, and auto precipitously late in 2008 and early deal Penske Automotive Group. 2009, the markets bottomed in early March 2009, and proceeded to rise on THE PRECEDING INFORMATION IS THE OPINION hopes that the stimulus packages put OF PORTFOLIO MANAGEMENT ONLY THROUGH THE in place by governments around the END OF THE PERIOD OF THE REPORT AS STATED world would divert a recession and ON THE COVER. ANY SUCH OPINIONS ARE result in resumed economic growth. As SUBJECT TO CHANGE AT ANY TIME BASED UPON the year progressed, it appeared that MARKET CONDITIONS AND SHOULD NOT BE RELIED depression-like conditions were ON AS INVESTMENT ADVICE. avoided, and many of the emerging economies around the world did, in INVESTING IN THE SECURITIES OF SMALL AND fact, resume growth. While the U.S. MID-SIZED COMPANIES INVOLVES GREATER RISKS economy continued to struggle with AND PRICE VOLATILITY THAN INVESTING IN high unemployment, a depressed LARGER, MORE ESTABLISHED COMPANIES. housing market, and escalating Federal, State, and Local debt levels, many positive signs did emerge over the course of the year. As a result, optimism and risk-seeking ruled the U.S. equity markets. The market's recovery, in many ways, was a mirror image of the declines experienced over the previous year. In general, the best performing stocks were those of companies that had experienced financial stress during the financial crisis, and themselves had higher probabilities of bankruptcy factored into their valuations. As economic optimism returned, these "troubled" companies, particularly those that were able to lower their cost structures and reduce debt levels, outperformed companies that were in a better position to survive the storm. For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 10
MID-CAP GROWTH FUND (CONTINUED) AVERAGE ANNUAL TOTAL RETURN(1) for periods ended 3/31/10 --------------------------------------------------------------------------------------------------------------------------------- Inception Inception 1 year 5 years 10 years to 3/31/10 Date --------------------------------------------------------------------------------------------------------------------------------- CLASS A SHARES AT NAV(2) 58.89% -1.31% -8.26% -- -- CLASS A SHARES AT POP(3, 4) 49.75 -2.48 -8.80 -- -- CLASS B SHARES AT NAV(2) 57.68 -2.09 -8.95 -- -- CLASS B SHARES WITH CDSC(4) 53.68 -2.09 -8.95 -- -- CLASS C SHARES AT NAV AND WITH CDSC(4) 57.68 -2.06 -- -4.91% 1/2/01 CLASS I SHARES AT NAV(2) 59.19 -- -- -7.56 9/13/07 S&P 500(R) INDEX 49.77 1.92 -0.68 --(5) --(5) RUSSELL MIDCAP(R) GROWTH INDEX 63.00 4.27 -1.69 --(5) --(5) --------------------------------------------------------------------------------------------------------------------------------- FUND EXPENSE RATIOS(7): A SHARES: GROSS 1.60%, NET 1.45%; B SHARES: GROSS 2.35%, NET 2.20%; C SHARES: GROSS 2.35%, NET 2.20%; I SHARES: GROSS 1.35%, NET 1.20%. ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT virtus.com FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CLASS B SHARES DECLINE FROM 5% TO 0% OVER A FIVE-YEAR PERIOD. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE INDEX RETURNED 0.88% FOR CLASS C SHARES AND -6.81% FOR CLASS I SHARES FROM THE INCEPTION DATE OF THE RESPECTIVE SHARE CLASS. (6) THE INDEX RETURNED 2.48% FOR CLASS C SHARES AND -4.27% FOR CLASS I SHARES FROM THE INCEPTION DATE OF THE RESPECTIVE SHARE CLASS. (7) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. NET EXPENSE: EXPENSES REDUCED BY A VOLUNTARY FEE WAIVER. GROSS EXPENSE: DOES NOT REFLECT THE EFFECT OF VOLUNTARY FEE WAIVER. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 --------------------------------------------------------------------------------------------------------------------------------- This chart assumes an initial investment of $10,000 made on March 31, 2000, for Class A and Class B shares including any applicable sales charges or fees. The performance of the other share classes will be greater or less than that shown based on differences in inception date, fees and sales charges. Performance assumes reinvestment of dividends and capital gain distributions. (PERFORMANCE GRAPH) Russell MidCap Share Share S&P 500 Growth Class A Class B Index Index ------- ------- ------- ------- 3/31/2000 9425 10000 10000 10000 3/31/2001 4175 4398 7815 5458 3/30/2002 4017 4199 7834 5715 3/28/2003 2700 2803 5895 4223 3/31/2004 4102 4225 7965 6319 3/31/2005 4252 4350 8496 6844 3/31/2006 4964 5038 9493 8396 3/31/2007 4851 4888 10616 8976 3/30/2008 4192 4193 10077 8567 3/31/2009 2505 2482 6239 5176 3/31/2010 3980 3914 9344 8437 For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 11
TICKER SYMBOLS: QUALITY LARGE-CAP VALUE FUND A Share: PPTAX C Share: PPTCX I Share: PIPTX - QUALITY LARGE-CAP VALUE FUND (THE - Concerns remain, however, with the THE PRECEDING INFORMATION IS THE OPINION "FUND") is diversified and has an most notable being sovereign credit OF PORTFOLIO MANAGEMENT ONLY THROUGH THE investment objective to seek risk and a still fragile global END OF THE PERIOD OF THE REPORT AS STATED long-term capital appreciation. economy. In January, markets briefly ON THE COVER. ANY SUCH OPINIONS ARE sold off related to concerns SUBJECT TO CHANGE AT ANY TIME BASED UPON For the fiscal year ended March 31, regarding a possible default by MARKET CONDITIONS AND SHOULD NOT BE RELIED 2010, the Fund's Class A shares at NAV Greece and the knock on effects that ON AS INVESTMENT ADVICE. returned 47.40%, Class C shares that would have throughout Europe. returned 46.15% and Class I shares BECAUSE THE FUND HOLDS A LIMITED NUMBER OF returned 47.74%. For the fiscal year, - For the period, mid-capitalization SECURITIES, IT WILL BE MORE IMPACTED BY the S&P 500(R) Index, a broad-based stocks performed the strongest with EACH SECURITY'S PERFORMANCE MORE THAN A equity index, returned 49.77%; and the Russell Midcap Index returning FUND WITH A LARGER NUMBER OF HOLDINGS. the Russell 1000(R) Value Index, the 67.71%, followed by small-cap stocks Fund's style-specific benchmark, with the Russell 2000 Index ------------------------------------------ returned 53.56%. increasing 62.77%, followed by Asset Allocation large-cap stocks with the S&P 500 ---------------- ALL PERFORMANCE FIGURES ASSUME Index increasing 49.77%. REINVESTMENT OF DISTRIBUTIONS AND The following table presents asset EXCLUDE THE EFFECT OF SALES CHARGES. - The materials, consumer allocations within certain sectors as a PERFORMANCE DATA QUOTED REPRESENTS discretionary, and industrials percentage of total investments at March PAST RESULTS. PAST PERFORMANCE IS NO sectors performed the best during the 31, 2010. GUARANTEE OF FUTURE RESULTS AND period reflecting strong gains in CURRENT PERFORMANCE MAY BE HIGHER OR economically sensitive sectors. Financials 21% LOWER THAN THE PERFORMANCE SHOWN. Telecommunications services, Consumer Staples 14 INVESTMENT RETURN AND PRINCIPAL VALUE utilities, and consumer staples Energy 14 WILL FLUCTUATE SO YOUR SHARES WHEN lagged, reflecting the rotation out Information Technology 13 REDEEMED, MAY BE WORTH MORE OR LESS of more defensive names. Consumer Discretionary 11 THAN THEIR ORIGINAL COST. PLEASE Industrials 11 VISIT virtus.com FOR PERFORMANCE DATA WHAT FACTORS AFFECTED THE FUND'S Health Care 6 CURRENT TO THE MOST RECENT MONTH-END. PERFORMANCE DURING ITS FISCAL YEAR? Other (includes short-term investments) 10 HOW DID THE MARKET PERFORM DURING THE - Low-quality stocks, as measured by --- FUND'S FISCAL YEAR? profitability (return on equity) and Total 100% leverage (long-term debt-to-capital) === - Stock markets moved higher during the outperformed high-quality stocks ------------------------------------------ fiscal year after bottoming in March during the period. Further, stocks 2009. A year ago investors were with below-investment-grade credit concerned about the dramatic decline ratings strongly outperformed the in economic activity that followed a index as companies that require severe disruption in the credit higher financial leverage benefited markets in late 2008. Since then, the most from the improvement in the however, investors have embraced an credit markets. With the apparent stabilization in the underperformance of high-quality economy. Despite an unemployment rate stocks, the Fund underperformed the that remains stubbornly high, Russell 1000 Value Index for the government figures indicate that the fiscal period. economy has finally stopped losing jobs. In addition, companies have - Strong stock selection and an worked off excess inventories that underweight in energy and health care resulted from the recession. All of contributed the most to performance this bodes well for the economy and while negative stock selection and an the stock market. underweight in financials as well as negative stock selection in consumer discretionary detracted the most. For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 12
QUALITY LARGE-CAP VALUE FUND (CONTINUED) AVERAGE ANNUAL TOTAL RETURN(1) for periods ended 3/31/10 ------------------------------------------------------------------------------------------------------------------------------------ Inception Inception 1 year to 3/31/10 Date ------------------------------------------------------------------------------------------------------------------------------------ CLASS A SHARES AT NAV(2) 47.40% 0.08% 7/29/05 CLASS A SHARES AT POP(3, 4) 38.92 -1.18 7/29/05 CLASS C SHARES AT NAV AND WITH CDSC(4) 46.15 -0.67 7/29/05 CLASS I SHARES AT NAV 47.74 -8.34 6/06/08 S&P 500(R) INDEX 49.77 --(5) --(5) RUSSELL 1000(R) VALUE INDEX 53.56 --(6) --(6) FUND EXPENSE RATIOS(7): A SHARES: GROSS 1.46%, NET 1.35%; C SHARES: GROSS 2.21%, NET 2.10%; I SHARES: GROSS 1.21%, NET 1.10%. ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT virtus.com FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE INDEX RETURNED 0.97% FOR CLASS C SHARES AND -5.77% FOR CLASS I SHARES FROM THE INCEPTION DATE OF THE RESPECTIVE SHARE CLASSES. (6) THE INDEX RETURNED 0.15% FOR CLASS C SHARES AND -7.27% FOR CLASS I SHARES FROM THE INCEPTION DATE OF THE RESPECTIVE SHARE CLASSES. (7) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. NET EXPENSE: EXPENSES REDUCED BY A VOLUNTARY FEE WAIVER AND EXCLUDING EXTRAORDINARY EXPENSES. GROSS EXPENSE: DOES NOT REFLECT THE EFFECT OF VOLUNTARY FEE WAIVER. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 ------------------------------------------------------------------------------------------------------------------------------------ This chart assumes an initial investment of $10,000 made on July 29, 2005, (inception date of the Fund) for Class A and Class C shares including any applicable sales charges or fees. The performance of the other share class will be greater or less than that shown based on differences in inception date, fees and sales charges. Performance assumes reinvestment of dividends and capital gain distributions. (PERFORMANCE GRAPH) Russell Share Share S&P 500(R) 1000(R) Value Class A Class C Index Index ------- ------- ---------- ------------- 7/29/2005 9425 10000 10000 10000 3/31/2006 10311 10895 10626 10831 3/30/2007 12481 13096 11884 12654 3/31/2008 10597 11038 11281 11389 3/31/2009 6417 6630 6984 6558 3/31/2010 9459 9690 10460 10070 For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 13
TICKER SYMBOLS: A Share: PQSAX QUALITY SMALL-CAP FUND C Share: PQSCX I Share: PXQSX - QUALITY SMALL-CAP FUND (THE "FUND") - The fiscal period experienced the THE PRECEDING INFORMATION IS THE OPINION is diversified and has an investment outperformance of classic cyclical OF PORTFOLIO MANAGEMENT ONLY THROUGH THE objective to seek long-term capital sectors with consumer discretionary, END OF THE PERIOD OF THE REPORT AS STATED appreciation. materials and processing, and energy ON THE COVER. ANY SUCH OPINIONS ARE performing the best while defensive SUBJECT TO CHANGE AT ANY TIME BASED UPON For the fiscal year ended March 31, sectors, such as utilities and MARKET CONDITIONS AND SHOULD NOT BE RELIED 2010, the Fund's Class A shares at consumer staples, lagged. ON AS INVESTMENT ADVICE. NAV returned 60.78%, Class C shares returned 59.74%, and Class I shares - We believe the economic recovery is BECAUSE THE FUND HOLDS A LIMITED NUMBER OF returned 61.32%. For the same period, taking hold and the financial system SECURITIES, IT WILL BE IMPACTED BY EACH the S&P 500(R) Index, a broad-based appears to have stabilized. However, SECURITY'S PERFORMANCE MORE THAN A FUND equity index, returned 49.77%; and we continue to operate in an WITH A LARGER NUMBER OF HOLDINGS. the Russell 2000(R) Value Index, the environment where businesses are INVESTING IN THE SECURITIES OF SMALL AND Fund's style-specific benchmark, cautiously optimistic about future MID-SIZED COMPANIES INVOLVES GREATER RISKS returned 65.07%. growth but are still hesitant to AND PRICE VOLATILITY THAN INVESTING IN commit to meaningful increases in LARGER, MORE ESTABLISHED COMPANIES. ALL PERFORMANCE FIGURES ASSUME human and physical capital. Further, BECAUSE THE FUND IS HEAVILY WEIGHTED IN A REINVESTMENT OF DISTRIBUTIONS AND unemployment remains near a 26-year SINGLE SECTOR, IT WILL BE IMPACTED BY THAT EXCLUDE THE EFFECT OF SALES CHARGES. high, restraining ongoing consumer SECTOR'S PERFORMANCE MORE THAN A FUND WITH PERFORMANCE DATA QUOTED REPRESENTS spending which makes up nearly three A BROADER SECTOR DIVERSIFICATION. PAST RESULTS. PAST PERFORMANCE IS NO quarters of the U.S. economy. GUARANTEE OF FUTURE RESULTS AND ------------------------------------------ CURRENT PERFORMANCE MAY BE HIGHER OR WHAT FACTORS AFFECTED THE FUND'S ASSET ALLOCATION LOWER THAN THE PERFORMANCE SHOWN. PERFORMANCE DURING ITS FISCAL YEAR? ---------------- INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO YOUR SHARES WHEN - Low-quality stocks, as measured by The following table presents asset REDEEMED, MAY BE WORTH MORE OR LESS companies with negative return on allocations within certain sectors as a THAN THEIR ORIGINAL COST. PLEASE equity, outperformed companies with percentage of total investments at March VISIT VIRTUS.COM FOR PERFORMANCE DATA positive return on equity. Further, 31, 2010. CURRENT TO THE MOST RECENT MONTH-END. stocks with below-investment-grade credit ratings strongly outperformed Industrials 27% HOW DID THE MARKET PERFORM DURING THE the index as companies that require Financials 20 FUND'S FISCAL YEAR? higher financial leverage benefited Health Care 11 the most from the improvement in the Energy 10 - Investors experienced one of the credit markets and continued low Information Technology 9 strongest stock market recoveries in interest rates. With the Consumer Discretionary 8 history for the Fund's fiscal year underperformance of high-quality Consumer Staples 4 after experiencing one of the worst stocks, the Quality Small-Cap Fund Other (includes short-term stock market performances in history underperformed the Russell 2000 Value investments) 11 in 2008. For the period, Index for the fiscal period. --- mid-capitalization stocks performed Total 100% the strongest with the Russell Midcap - Strong stock selection and an === Index returning 67.71%, followed by underweight in financial services and ------------------------------------------ small-cap stocks with the Russell an underweight in utilities 2000 Index increasing 62.77%, contributed the most to performance followed by large-cap stocks with the while negative stock selection in S&P 500 Index increasing 49.77%. producer durables and negative stock selection and an underweight in materials and processing detracted the most. For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 14
QUALITY SMALL-CAP FUND (CONTINUED) AVERAGE ANNUAL TOTAL RETURN1 for periods ended 3/31/10 ------------------------------------------------------------------------------------------------------------------------------------ Inception Inception 1 year to 3/31/10 Date ------------------------------------------------------------------------------------------------------------------------------------ CLASS A SHARES AT NAV(2) 60.78% 1.17% 6/28/06 CLASS A SHARES AT POP(3, 4) 51.53 -0.41 6/28/06 CLASS C SHARES AT NAV AND WITH CDSC(4) 59.74 0.44 6/28/06 CLASS I SHARES AT NAV 61.32 1.44 6/28/06 S&P 500(R) INDEX 49.77 0.48(5) --(5) RUSSELL 2000(R) VALUE INDEX 65.07 -0.03(5) --(5) FUND EXPENSE RATIOS(6): A SHARES: GROSS 1.84%, NET 1.45%; C SHARES: GROSS 2.59%, NET 2.19%; I SHARES: GROSS 1.59%, NET 1.19%. ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT VIRTUS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE INDEX RETURNS ARE FROM THE FUND'S INCEPTION DATE. (6) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. NET EXPENSE: EXPENSES REDUCED BY A VOLUNTARY FEE WAIVER. GROSS EXPENSE: DOES NOT REFLECT THE EFFECT OF VOLUNTARY FEE WAIVER. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 ------------------------------------------------------------------------------------------------------------------------------------ This chart assumes an initial investment of $10,000 made on June 28, 2006, (inception date of the Fund) for Class A, Class C and Class I shares including any applicable sales charges or fees. Performance assumes reinvestment of dividends and capital gain distributions. (PERFORMANCE GRAPH) Share Share Share S&P 500(R) Russell 2000(R) Class A Class C Class I Index Value Index ------------------------------------------------------------------------------------------------------------------------------------ 6/28/2006 9425 10000 10000 10000 10000 3/30/2007 10960 11568 11654 11568 11914 3/31/2008 9248 9688 9861 10980 9902 3/31/2009 6125 6366 6541 6798 6051 3/31/2010 9847 10168 10553 10182 9989 For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 15
TICKER SYMBOLS: A Share: PKSAX SMALL-CAP CORE FUND B Share: PKSBX C Share: PKSCX I Share: PKSFX - SMALL-CAP CORE FUND (THE "FUND") is - The fiscal period experienced the THE PRECEDING INFORMATION IS THE OPINION diversified and has an investment outperformance of classic cyclical OF PORTFOLIO MANAGEMENT ONLY THROUGH THE objective to seek long-term capital sectors with consumer discretionary, END OF THE PERIOD OF THE REPORT AS STATED appreciation with dividend income a materials and processing, and energy ON THE COVER. ANY SUCH OPINIONS ARE secondary consideration. performing the best while defensive SUBJECT TO CHANGE AT ANY TIME BASED UPON sectors, such as utilities and MARKET CONDITIONS AND SHOULD NOT BE RELIED For the fiscal year ended March 31, consumer staples, lagged. ON AS INVESTMENT ADVICE. 2010, the Fund's Class A shares at NAV returned 58.23%, Class B shares - We believe the economic recovery is BECAUSE THE FUND HOLDS A LIMITED NUMBER OF returned 57.13%, Class C shares taking hold and the financial system SECURITIES, IT WILL BE IMPACTED BY EACH returned 57.06%, and Class I shares appears to have stabilized. However, SECURITY'S PERFORMANCE MORE THAN A FUND returned 58.68%. For the same period, we continue to operate in an WITH A LARGER NUMBER OF HOLDINGS. the S&P 500(R) Index, a broad-based environment where businesses are INVESTING IN THE SECURITIES OF SMALL AND equity index, returned 49.77%; and cautiously optimistic about future MID-SIZED COMPANIES INVOLVES GREATER RISKS the Russell 2000(R) Index, the Fund's growth but are still hesitant to AND PRICE VOLATILITY THAN INVESTING IN style-specific benchmark, returned commit to meaningful increases in LARGER, MORE ESTABLISHED COMPANIES. 62.77%. human and physical capital. Further, unemployment remains near a 26-year ------------------------------------------ ALL PERFORMANCE FIGURES ASSUME high, restraining ongoing consumer ASSET ALLOCATION REINVESTMENT OF DISTRIBUTIONS AND spending which makes up nearly three ---------------- EXCLUDE THE EFFECT OF SALES CHARGES. quarters of the U.S. economy. PERFORMANCE DATA QUOTED REPRESENTS The following table presents asset PAST RESULTS. PAST PERFORMANCE IS NO WHAT FACTORS AFFECTED THE FUND'S allocations within certain sectors as a GUARANTEE OF FUTURE RESULTS AND PERFORMANCE DURING ITS FISCAL YEAR? percentage of total investments at March CURRENT PERFORMANCE MAY BE HIGHER OR 31, 2010. LOWER THAN THE PERFORMANCE SHOWN. - Low-quality stocks, as measured by INVESTMENT RETURN AND PRINCIPAL VALUE companies with negative return on Industrials 25% WILL FLUCTUATE SO YOUR SHARES WHEN equity, outperformed companies with Information Technology 22 REDEEMED, MAY BE WORTH MORE OR LESS positive return on equity. Further, Health Care 14 THAN THEIR ORIGINAL COST. PLEASE stocks with below-investment-grade Consumer Discretionary 13 VISIT VIRTUS.COM FOR PERFORMANCE DATA credit ratings strongly outperformed Financials 12 CURRENT TO THE MOST RECENT MONTH-END. the index as companies that require Energy 5 higher financial leverage benefited Materials 2 HOW DID THE MARKET PERFORM DURING THE the most from the improvement in the Other (includes short-term FUND'S FISCAL YEAR? credit markets and continued low investments) 7 interest rates. With the --- - Investors experienced one of the underperformance of high-quality Total 100% strongest stock market recoveries in stocks, the Small-Cap Core Fund === history for the Fund's fiscal year underperformed the Russell 2000 Index ------------------------------------------ after experiencing one of the worst for the fiscal period. stock market performances in history in 2008. For the period, - An underweight in utilities and mid-capitalization stocks performed strong stock selection and an the strongest with the Russell Midcap underweight in energy contributed the Index returning 67.71%, followed by most to performance while negative small-cap stocks with the Russell stock selection in health care and 2000 Index increasing 62.77%, materials and processing detracted followed by large-cap stocks with the the most. S&P 500 Index increasing 49.77%. For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 16
SMALL-CAP CORE FUND (CONTINUED) AVERAGE ANNUAL TOTAL RETURN(1) for periods ended 3/31/10 ------------------------------------------------------------------------------------------------------------------------------------ Inception Inception 1 year 5 years 10 years to 3/31/10 Date ------------------------------------------------------------------------------------------------------------------------------------ CLASS A SHARES AT NAV(2) 58.23% 2.76% -- 5.12% 8/30/02 CLASS A SHARES AT POP(3, 4) 49.13 1.55 -- 4.30 8/30/02 CLASS B SHARES AT NAV(2) 57.13 2.02 -- 4.37 8/30/02 CLASS B SHARES WITH CDSC(4) 53.13 2.02 -- 4.37 8/30/02 CLASS C SHARES AT NAV AND WITH CDSC(4) 57.06 2.00 -- 4.37 8/30/02 CLASS I SHARES AT NAV(2) 58.68 3.01 5.18% -- -- S&P 500(R) INDEX 49.77 1.92 -0.68 5.34(5) --(5) RUSSELL 2000(R) INDEX 62.77 3.36 3.68 8.95(5) --(5) FUND EXPENSE RATIOS(6): A SHARES: 1.77%; B SHARES: 2.52%; C SHARES: 2.52%; I SHARES: 1.52%. ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT VIRTUS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CLASS B SHARES DECLINE FROM 5% TO 0% OVER A FIVE-YEAR PERIOD. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE INDEX RETURNS ARE FROM THE FUND'S INCEPTION DATE. (6) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 ------------------------------------------------------------------------------------------------------------------------------------ This chart assumes an initial investment of $10,000 made on March 31, 2000, for Class I shares including any applicable sales charges or fees. The performance of the other share classes will be greater or less than that shown based on differences in inception date, fees and sales charges. Performance assumes reinvestment of dividends and capital gain distributions. (PERFORMANCE GRAPH) Share S&P 500(R) Russell 2000(R) Class I Index Index ------------------------------------------------------------------------------------------------------------------------------------ 3/31/2000 10000 10000 10000 3/31/2001 11624 7815 8467 3/30/2002 13570 7834 9651 3/28/2003 9629 5895 7049 3/31/2004 13585 7965 11548 3/31/2005 14284 8496 12173 3/31/2006 16615 9493 15320 3/31/2007 18089 10616 16225 3/30/2008 14827 10077 14115 3/31/2009 10440 6239 8822 3/31/2010 16566 9344 14359 For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 17
SMALL-CAP GROWTH FUND TICKER SYMBOLS: A Share: PAMAX B Share: PSMGX C Share: PEMCX - SMALL-CAP GROWTH FUND (THE "FUND") is - Stocks continued to march to the beat - In the first quarter of 2010, diversified and has an investment of the economic recovery and posted a positive macro developments included objective to seek long-term growth of third consecutive quarter of gains. benign inflation readings, improved capital. Early expansion and highly manufacturing production, solid economically sensitive sectors retail sales, and further signs of For the fiscal year ended March 31, (consumer discretionary, technology, house price stabilization. The 2010, the Fund's Class A shares at etc.), the leaders since the March unemployment picture has stabilized, NAV returned 58.95%, Class B shares '09 lows, were joined by but remained relatively high. returned 57.75%, and Class C shares traditionally later cycle sectors returned 57.79%. For the same period, (materials, industrials, etc.). THE PRECEDING INFORMATION IS THE OPINION the S&P 500(R) Index, a broad-based OF PORTFOLIO MANAGEMENT ONLY THROUGH THE equity index, returned 49.77%; and - The first quarter of 2010 closed with END OF THE PERIOD OF THE REPORT AS STATED the Russell 2000(R) Growth Index, the equity indices sitting at cycle ON THE COVER. ANY SUCH OPINIONS ARE Fund's style-specific benchmark, highs. A strengthening U.S. dollar SUBJECT TO CHANGE AT ANY TIME BASED UPON returned 60.32%. and rising yields were new MARKET CONDITIONS AND SHOULD NOT BE RELIED developments. From December '09 ON AS INVESTMENT ADVICE. ALL PERFORMANCE FIGURES ASSUME through the end of this quarter, the REINVESTMENT OF DISTRIBUTIONS AND U.S. dollar increased by over 10% INVESTING IN THE SECURITIES OF SMALL AND EXCLUDE THE EFFECT OF SALES CHARGES. versus a basket of major foreign MID-SIZED COMPANIES INVOLVES GREATER RISKS PERFORMANCE DATA QUOTED REPRESENTS currencies as yields on longer dated AND PRICE VOLATILITY THAN INVESTING IN PAST RESULTS. PAST PERFORMANCE IS NO maturities reached 12-month highs. LARGER, MORE ESTABLISHED COMPANIES. GUARANTEE OF FUTURE RESULTS AND Both developments ignited debates BECAUSE THE FUND IS HEAVILY WEIGHTED IN A CURRENT PERFORMANCE MAY BE HIGHER OR over the implications and added to SINGLE SECTOR, IT WILL BE IMPACTED BY THAT LOWER THAN THE PERFORMANCE SHOWN. volatility. SECTOR'S PERFORMANCE MORE THAN A FUND WITH INVESTMENT RETURN AND PRINCIPAL VALUE A BROADER SECTOR DIVERSIFICATION. WILL FLUCTUATE SO YOUR SHARES WHEN WHAT FACTORS AFFECTED THE FUND'S REDEEMED, MAY BE WORTH MORE OR LESS PERFORMANCE DURING ITS FISCAL YEAR? ------------------------------------------ THAN THEIR ORIGINAL COST. PLEASE ASSET ALLOCATION VISIT VIRTUS.COM FOR PERFORMANCE DATA - Improved credit conditions and ---------------- CURRENT TO THE MOST RECENT MONTH-END. accelerating economic growth contributed to the Fund's strong The following table presents asset HOW DID THE MARKET PERFORM DURING THE absolute returns. allocations within certain sectors as a FUND'S FISCAL YEAR? percentage of total investments at March - Significant profit revisions helped 31, 2010. - The market posted strong returns to fuel the relative strength in during the Fund's fiscal year. small cap growth stocks, a focus of Information Technology 33% the Fund. Health Care 23 - Risk assets (including stocks) Industrials 14 rebounded significantly following the - Cyclical positioning within the Fund Consumer Discretionary 13 prior year's sell-off. contributed to performance. Energy 7 Financials 5 - Improved credit conditions and - In the second quarter of 2009, market Materials 2 accelerating economic growth returns were supported by encouraging Other (includes short-term contributed to the strong returns. reads such as the ISM Manufacturing investments) 3 Index (five months of consecutive --- - Fueled by signs of economic increases), stronger than expected Total 100% stability, equity markets rallied Durable Goods orders, an increase in === substantially in the second quarter the Conference Board Leading Economic ------------------------------------------ of 2009. The broader market returns Index and signs of stability within were the largest in almost ten years the housing market. Profit (earnings) and were based on hopes of an upswing revisions turned positive for the in economic activity. Investors first time in well over a year. responded by ratcheting up their risk. Given prevailing market levels - Stocks reacted positively in the and poor sentiment, the impact on third quarter to further signs of equity market returns was economic stability, highlighted by an significant. Broadly speaking, risk increase in leading indicators, house assets performed exceptionally well, price stability, gains in consumer with equities significantly confidence, and better than expected outperforming bonds, emerging markets profit reports and forecasts. The significantly outperforming developed dollar weakened in the fourth quarter markets, and small caps significantly 2009, which helped the Fund's outperforming large caps. positioning in growth cyclical and reflation focused stocks. Profit - For the third quarter, the stock revisions continued their upward market posted its 3rd best trajectory as corporations exhibited performance since 1960. The considerable operating leverage after exceptional amount of monetary and multiple quarters of aggressive fiscal stimulus, anchored by the expense reductions. largest and broadest easing cycle in history, continued to work its way - Driven by signs the recovery was through the system and provide the picking up momentum as well as a support investors needed to robust earnings reporting season, circumvent nagging secular concerns stocks closed 2009 near yearly highs (credit contraction, high savings and well off the bottom set earlier rates, unemployment, etc.). in the year. At this point, the index of economic leading indicators has improved every month since March, GDP growth has resumed, and structural problems (credit, housing, unemployment, etc.) all have some shown signs of a recovery. For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 18
SMALL-CAP GROWTH FUND (CONTINUED) AVERAGE ANNUAL TOTAL RETURN(1) for periods ended 3/31/10 1 year 5 years 10 years CLASS A SHARES AT NAV(2) 58.95% -0.38% -6.27% CLASS A SHARES AT POP(3,4) 49.81 -1.55 -6.82 CLASS B SHARES AT NAV(2) 57.75 -1.13 -6.97 CLASS B SHARES WITH CDSC(4) 53.75 -1.13 -6.97 CLASS C SHARES AT NAV AND WITH CDSC(4) 57.79 -1.13 -6.97 S&P 500(R) INDEX 49.77 1.92 -0.68 RUSSELL 2000(R) GROWTH INDEX 50.32 3.82 -1.53 FUND EXPENSE RATIOS(5): A SHARES: GROSS 2.09%, NET 1.84%; B SHARES: GROSS 2.84%, NET 2.59%; C SHARES: GROSS 2.84%, NET 2.59%. ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT VIRTUS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CLASS B SHARES DECLINE FROM 5% TO 0% OVER A FIVE-YEAR PERIOD. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 This chart assumes an initial investment of $10,000 made on March 31, 2000, for Class A, Class B and Class C shares including any applicable sales charges of fees. Performance assumes reinvestment of dividends and capital gain distributions. Share Class A Share Class B Share Class C S&P 500(R) Index Russell 2000(R) Growth Index ------------- ------------- ------------- ---------------- --------------- ------------ 3/31/2000 9425 10000 10000 10000 10000 3/31/2001 4802 5057 5056 7815 6019 3/30/2002 4587 4794 4795 7834 6317 3/28/2003 3215 3335 3335 5895 4319 3/31/2004 5328 5486 5487 7965 7047 3/31/2005 5028 5138 5139 8496 7109 3/31/2006 6533 6625 6627 9493 9088 3/31/2007 6433 6474 6476 10616 9230 3/30/2008 5518 5512 5513 10077 8405 3/31/2009 3103 3077 3077 6239 5348 3/31/2010 4933 4854 4855 9344 8575 For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 19
SMALL-CAP SUSTAINABLE GROWTH FUND TICKER SYMBOLS: A Share: PSGAX C Share: PSGCX I Share: PXSGX - SMALL-CAP SUSTAINABLE GROWTH FUND - The fiscal period experienced the THE PRECEDING INFORMATION IS THE OPINION (THE "FUND") is diversified and has outperformance of classic cyclical OF PORTFOLIO MANAGEMENT ONLY THROUGH THE an investment objective to seek sectors with consumer END OF THE PERIOD OF THE REPORT AS long-term capital appreciation. discretionary, materials and STATED ON THE COVER. ANY SUCH OPINIONS processing, and technology ARE SUBJECT TO CHANGE AT ANY TIME BASED For the fiscal year ended March 31, performing the best while defensive UPON MARKET CONDITIONS AND SHOULD NOT BE 2010, the Fund's Class A shares at sectors, such as utilities and RELIED ON AS INVESTMENT ADVICE. NAV returned 53.39%, Class C shares consumer staples, lagged. returned 52.48%, and Class I shares BECAUSE THE FUND HOLDS A LIMITED NUMBER returned 54.05%. For the same period, - We believe the economic recovery is OF SECURITIES, IT WILL BE IMPACTED BY the S&P 500(R) Index, a broad-based taking hold and the financial EACH SECURITY'S PERFORMANCE MORE THAN A equity index, returned 49.77%; and system appears to have stabilized. FUND WITH A LARGER NUMBER OF HOLDINGS. the Russell 2000(R) Growth Index, the However, we continue to operate in INVESTING IN THE SECURITIES OF SMALL AND Fund's style-specific benchmark, an environment where businesses are MID-SIZED COMPANIES INVOLVES GREATER returned 60.32%. cautiously optimistic about future RISKS AND PRICE VOLATILITY THAN growth but are still hesitant to INVESTING IN LARGER, MORE ESTABLISHED ALL PERFORMANCE FIGURES ASSUME commit to meaningful increases in COMPANIES. BECAUSE THE FUND IS HEAVILY REINVESTMENT OF DISTRIBUTIONS AND human and physical capital. WEIGHTED IN A SINGLE SECTOR, IT WILL BE EXCLUDE THE EFFECT OF SALES Further, unemployment remains near IMPACTED BY THAT SECTOR'S PERFORMANCE CHARGES. PERFORMANCE DATA QUOTED a 26-year high, restraining ongoing MORE THAN A FUND WITH A BROADER SECTOR REPRESENTS PAST RESULTS. PAST consumer spending which makes up DIVERSIFICATION. PERFORMANCE IS NO GUARANTEE OF nearly three quarters of the U.S. FUTURE RESULTS AND CURRENT economy. ------------------------------------------ PERFORMANCE MAY BE HIGHER OR LOWER ASSET ALLOCATION THAN THE PERFORMANCE SHOWN. WHAT FACTORS AFFECTED THE FUND'S ---------------- INVESTMENT RETURN AND PRINCIPAL PERFORMANCE DURING ITS FISCAL YEAR? VALUE WILL FLUCTUATE SO YOUR SHARES The following table presents asset WHEN REDEEMED, MAY BE WORTH MORE OR - Low-quality stocks, as measured by allocations within certain sectors as a LESS THAN THEIR ORIGINAL COST. S&P Quality Rankings, outperformed percentage of total investments at March PLEASE VISIT VIRTUS.COM FOR high-quality companies (those with 31, 2010. PERFORMANCE DATA CURRENT TO THE a stock ranking above B+). Further, MOST RECENT MONTH-END. stocks with below-investment-grade Information Technology 29% credit ratings strongly Health Care 22 HOW DID THE MARKET PERFORM DURING THE outperformed the index as companies Consumer Discretionary 17 FUND'S FISCAL YEAR? that require higher financial Industrials 13 leverage benefited the most from Financials 8 - Investors experienced one of the the improvement in the credit Consumer Staples 4 strongest stock market recoveries markets and continued low interest Other (includes short-term in history for the Fund's fiscal rates. With the underperformance of investments) 7 year after experiencing one of the high-quality stocks, the Small-Cap --- worst stock market performances in Sustainable Growth Fund Total 100% history in 2008. For the period, underperformed the Russell 2000 === mid-capitalization stocks performed Growth Index for the fiscal period. ------------------------------------------ the strongest with the Russell Midcap Index returning 67.71%, - Strong stock selection and an followed by small-cap stocks with underweight in energy and the Russell 2000 Index increasing technology contributed the most to 62.77%, followed by large-cap performance while negative stock stocks with the S&P 500 Index selection and an underweight in increasing 49.77%. consumer discretionary and negative stock selection in health care detracted the most. For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 20
SMALL-CAP SUSTAINABLE GROWTH FUND (CONTINUED) AVERAGE ANNUAL TOTAL RETURN(1) for periods ended 3/31/10 Inception Inception 1 year to 3/31/10 Date CLASS A SHARES AT NAV(2) 53.39% -1.33% 6/28/06 CLASS A SHARES AT POP(3) 44.57 -2.87 6/28/06 CLASS C SHARES AT NAV AND WITH CDSC(4) 52.48 -2.08 6/28/06 CLASS I SHARES AT NAV 54.05 -1.30 6/28/06 S&P 500(R) INDEX 49.77 0.48 (5) -- (5) RUSSELL 2000(R) GROWTH INDEX 60.32 1.94 (5) -- (5) FUND EXPENSE RATIOS(6): A SHARES: GROSS 2.32%, NET 1.44%; C SHARES: GROSS 3.07%, NET 2.22%; I SHARES: GROSS 2.07%, NET 1.23%. ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT VIRTUS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE INDEX RETURNS ARE FROM THE FUND'S INCEPTION DATE. (6) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. NET EXPENSE: EXPENSES REDUCED BY A VOLUNTARY FEE WAIVER. GROSS EXPENSE: DOES NOT REFLECT THE EFFECT OF VOLUNTARY FEE WAIVER. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 This chart assumes an initial investment of $10,000 made on June 28, 2006, (inception date of the Fund) for Class A, Class C and Class I shares including any applicable sales charges or fees. Performance assumes reinvestment of dividends and capital gain distributions. Share Class A Share Class C Share Class I S&P 500(R) Index Russell 2000(R) Growth Index ------------- ------------- ------------- ---------------- --------------- ------------ 6/28/2006 9425 10000 10000 10000 10000 3/30/2007 9727 10260 10330 11568 11570 3/31/2008 8624 9030 9190 10980 10535 3/31/2009 5844 6060 6180 6798 6704 3/31/2010 8963 9240 9520 10182 10749 For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 21
TICKER SYMBOLS: STRATEGIC GROWTH FUND A Share: PSTAX B Share: PBTHX C Share: SSTFX I Share: PLXGX - STRATEGIC GROWTH FUND (THE "FUND") is - Stocks continued to march to the beat - In the first quarter of 2010, diversified and has an investment of the economic recovery and posted a positive macro developments included objective to seek long-term capital third consecutive quarter of gains. benign inflation readings, improved growth. Early expansion and highly manufacturing production, solid economically sensitive sectors retail sales, and further signs of For the fiscal year ended March 31, (consumer discretionary, technology, house price stabilization. The 2010, the Fund's Class A shares at etc.), the leaders since the March unemployment picture has stabilized, NAV returned 46.71%, Class B shares '09 lows, were joined by but remained relatively high. returned 45.70%, Class C shares traditionally later cycle sectors returned 45.70%, and Class I shares (materials, industrials, etc.). THE PRECEDING INFORMATION IS THE OPINION returned 47.08%. For the same period, OF PORTFOLIO MANAGEMENT ONLY THROUGH THE the S&P 500(R) Index, a broad-based - The first quarter of 2010 closed with END OF THE PERIOD OF THE REPORT AS STATED equity index, returned 49.77%; and equity indices sitting at cycle ON THE COVER. ANY SUCH OPINIONS ARE the Russell 1000(R) Growth Index, the highs. A strengthening U.S. dollar SUBJECT TO CHANGE AT ANY TIME BASED UPON Fund's style-specific benchmark, and rising yields were new MARKET CONDITIONS AND SHOULD NOT BE RELIED returned 49.75%. developments. From December '09 ON AS INVESTMENT ADVICE. through the end of this quarter, the ALL PERFORMANCE FIGURES ASSUME U.S. dollar increased by over 10% BECAUSE THE FUND IS HEAVILY WEIGHTED IN A REINVESTMENT OF DISTRIBUTIONS AND versus a basket of major foreign SINGLE SECTOR, IT WILL BE IMPACTED BY THAT EXCLUDE THE EFFECT OF SALES CHARGES. currencies as yields on longer dated SECTOR'S PERFORMANCE MORE THAN A FUND WITH PERFORMANCE DATA QUOTED REPRESENTS maturities reached 12-month highs. A BROADER SECTOR DIVERSIFICATION. PAST RESULTS. PAST PERFORMANCE IS NO Both developments ignited debates INVESTING IN THE SECURITIES OF SMALL AND GUARANTEE OF FUTURE RESULTS AND over the implications and added to MID-SIZED COMPANIES INVOLVES GREATER RISKS CURRENT PERFORMANCE MAY BE HIGHER OR volatility. AND PRICE VOLATILITY THAN INVESTING IN LOWER THAN THE PERFORMANCE SHOWN. LARGER, MORE ESTABLISHED COMPANIES. INVESTMENT RETURN AND PRINCIPAL VALUE WHAT FACTORS AFFECTED THE FUND'S WILL FLUCTUATE SO YOUR SHARES WHEN PERFORMANCE DURING ITS FISCAL YEAR? ------------------------------------------ REDEEMED, MAY BE WORTH MORE OR LESS ASSET ALLOCATION THAN THEIR ORIGINAL COST. PLEASE - Improved credit conditions and ---------------- VISIT virtus.com FOR PERFORMANCE DATA accelerating economic growth CURRENT TO THE MOST RECENT MONTH-END. contributed to the Fund's strong The following table presents asset absolute returns. allocations within certain sectors as a HOW DID THE MARKET PERFORM DURING THE percentage of total investments at March FUND'S FISCAL YEAR? - Significant profit revisions helped 31, 2010. to fuel the relative strength in - The market posted strong returns large cap growth stocks, a focus of Information Technology 37% during the Fund's fiscal year. the Fund. Consumer Staples 13 Health Care 13 - Risk assets (including stocks) - Cyclical positioning within the Fund Consumer Discretionary 9 rebounded significantly following the contributed to performance. Industrials 9 prior year's sell-off. Energy 7 - In the second quarter of 2009, market Materials 6 - Improved credit conditions and returns were supported by encouraging Other (includes accelerating economic growth reads such as the ISM Manufacturing short-term investments) 6 contributed to the strong returns. Index (five months of consecutive --- increases), stronger than expected Total 100% - Fueled by signs of economic Durable Goods orders, an increase in === stability, equity markets rallied the Conference Board Leading Economic ------------------------------------------ substantially in the second quarter Index and signs of stability within of 2009. The broader market returns the housing market. Profit (earnings) were the largest in almost ten years revisions turned positive for the and were based on hopes of an upswing first time in well over a year. in economic activity. Investors responded by ratcheting up their - Stocks reacted positively in the risk. Given prevailing market levels third quarter to further signs of and poor sentiment, the impact on economic stability, highlighted by an equity market returns was increase in leading indicators, house significant. Broadly speaking, risk price stability, gains in consumer assets performed exceptionally well, confidence, and better than expected with equities significantly profit reports and forecasts. The outperforming bonds, emerging markets dollar weakened in the fourth quarter significantly outperforming developed 2009, which helped the Fund's markets, and small caps significantly positioning in growth cyclical and outperforming large caps. reflation focused stocks. Profit revisions continued their upward - For the third quarter, the stock trajectory as corporations exhibited market posted its 3rd best considerable operating leverage after performance since 1960. The multiple quarters of aggressive exceptional amount of monetary and expense reductions. fiscal stimulus, anchored by the largest and broadest easing cycle in - Driven by signs the recovery was history, continued to work its way picking up momentum as well as a through the system and provide the robust earnings reporting season, support investors needed to stocks closed 2009 near yearly highs circumvent nagging secular concerns and well off the bottom set earlier (credit contraction, high savings in the year. At this point, the index rates, unemployment, etc.). of economic leading indicators has improved every month since March, GDP growth has resumed, and structural problems (credit, housing, unemployment, etc.) all have some shown signs of a recovery. For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 22
STRATEGIC GROWTH FUND (CONTINUED) AVERAGE ANNUAL TOTAL RETURN(1) for periods ended 3/31/10 --------------------------------------------------------------------------------------------------------------------------------- Inception Inception 1 year 5 years 10 years to 3/31/10 Date --------------------------------------------------------------------------------------------------------------------------------- CLASS A SHARES AT NAV(2) 46.71% -0.94% -7.79% -- -- CLASS A SHARES AT POP(3, 4) 38.28 -2.11 -8.33 -- -- CLASS B SHARES AT NAV(2) 45.70 -1.68 -8.48 -- -- CLASS B SHARES WITH CDSC(4) 41.70 -1.68 -8.48 -- -- CLASS C SHARES AT NAV AND WITH CDSC(4) 45.70 -1.71 -8.48 -- -- CLASS I SHARES AT NAV(2) 47.08 -- -- -2.22% 9/29/06 S&P 500(R) INDEX 49.77 1.92 -0.68 -1.60(5) --(5) RUSSELL 1000(R) GROWTH INDEX 49.75 3.42 -4.21 1.32(5) --(5) --------------------------------------------------------------------------------------------------------------------------------- FUND EXPENSE RATIOS(6): A SHARES: 1.53%, B SHARES: 2.28%, C SHARES: 2.28%, I SHARES: 1.28%. ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT VIRTUS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CLASS B SHARES DECLINE FROM 5% TO 0% OVER A FIVE-YEAR PERIOD. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE INDEX RETURNS ARE FROM THE CLASS I SHARES INCEPTION DATE. (6) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 ------------------------------------------------------------------------------------------------------------------------------------ This chart assumes an initial investment of $10,000 made on March 31, 2000, for Class A, Class B shares and Class C shares including any applicable sales charges or fees. The performance of the other share class will be greater or less than that shown based on differences in inception date, fees and sales charges. Performance assumes reinvestment of dividends and capital gain distributions. (PERFORMANCE GRAPH) Russell S&P 1000(R) Share Share Share 500(R) Growth Class A Class B Class C Index Index ------- ------- ------- ------ -------- 3/31/2000 9425 10000 10000 10000 10000 3/31/2001 5496 5784 5787 7815 5728 3/30/2002 4832 5052 5050 7834 5614 3/28/2003 3231 3350 3354 5895 4111 3/31/2004 4352 4483 4481 7965 5434 3/31/2005 4392 4488 4492 8496 5498 3/31/2006 4757 4820 4823 9493 6220 3/31/2007 4777 4809 4812 10616 6659 3/30/2008 4693 4687 4691 10077 6609 3/31/2009 2855 2830 2829 6239 4343 3/31/2010 4189 4123 4122 9344 6504 For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 23
TICKER SYMBOLS: TACTICAL ALLOCATION FUND A Share: NAINX B Share: NBINX C Share: POICX - TACTICAL ALLOCATION FUND (THE "FUND") these stocks. Thus, the Fund manager downward price spiral, and is diversified and has a primary generally avoided stocks within the precipitate a rally that lasted investment objective of investing in Financial sector. Another area that throughout the year. a diversified group of securities looked like the road to recovery that are selected for current yield would be extended was Consumer - Sector allocation also proved consistent with the preservation of Discretionary. The American consumer, beneficial in the securitized capital. The Fund has a secondary with massive debt, concern about job products sector. The Fund reduced its investment objective to achieve loss, and squeezed by both lower exposure to agency mortgage-backed capital appreciation when it's wages and at the pump, seemed ill securities (which performed poorly), consistent with the Fund's primary equipped to spend money on anything and simultaneously increased its objective. other than necessities. As a result, weighting to commercial the Fund manager deployed the mortgage-backed securities. CMBS, For the fiscal year ended March 31, portfolio into Consumer Staples, some which had suffered dramatically in 2010, the Fund's Class A shares at Health Care, a variety of Industrial late 2008, rebounded strongly NAV returned 32.29%, Class B shares stocks, Technology (with a business throughout the subsequent year, returned 31.34%, and Class C shares bent), Energy and Materials. Areas enhancing the contribution made by returned 31.41%. For the same period, that were underweight versus the S&P securitized bonds to the Fund's the Barclays Capital U.S. Aggregate were Financials, Consumer performance. Bond Index, a broad-based fixed Discretionary and Utilities. income index, returned 7.69%, the S&P THE PRECEDING INFORMATION IS THE OPINION 500(R) Index, a broad-based equity - Overall the Fund beat its peer group, OF PORTFOLIO MANAGEMENT ONLY THROUGH THE index, returned 49.77%; and the but fell slightly short of the S&P END OF THE PERIOD OF THE REPORT AS STATED Tactical Allocation Fund CompositE 500 Index, its benchmark over the ON THE COVER. ANY SUCH OPINIONS ARE Index, the Fund's style-specific full year. The more conservative SUBJECT TO CHANGE AT ANY TIME BASED UPON benchmark, returned 27.40%. strategy worked for several months, MARKET CONDITIONS AND SHOULD NOT BE RELIED however, as the recovery took hold ON AS INVESTMENT ADVICE. ALL PERFORMANCE FIGURES ASSUME and many bank stocks, retail stocks, REINVESTMENT OF DISTRIBUTIONS AND and leisure stocks began to recover. INVESTING INTERNATIONALLY, ESPECIALLY IN EXCLUDE THE EFFECT OF SALES CHARGES. On an absolute basis it was still a EMERGING MARKETS, INVOLVES ADDITIONAL PERFORMANCE DATA QUOTED REPRESENTS tremendous year for the Fund, and RISKS SUCH AS CURRENCY, POLITICAL, PAST RESULTS. PAST PERFORMANCE IS NO overall we are pleased with ACCOUNTING ECONOMIC AND MARKET RISK. THE GUARANTEE OF FUTURE RESULTS AND performance. The Fund tends to have a FUND MAY INVEST IN HIGH-YIELD BONDS, WHICH CURRENT PERFORMANCE MAY BE HIGHER OR lower price-to-earnings ratio than MAY BE SUBJECT TO GREATER CREDIT AND LOWER THAN THE PERFORMANCE SHOWN. the S&P 500 Index, which in the MARKET RISKS. AS INTEREST RATES RISE, INVESTMENT RETURN AND PRINCIPAL VALUE opinion of the manager, tends to mean EXISTING BOND PRICES FALL AND CAN CAUSE WILL FLUCTUATE SO YOUR SHARES WHEN a less risky portfolio. THE VALUE OF AN INVESTMENT IN A FUND TO REDEEMED, MAY BE WORTH MORE OR LESS DECLINE. CHANGES IN INTEREST RATES WILL THAN THEIR ORIGINAL COST. PLEASE HOW DID THE FIXED INCOME MARKET PERFORM AFFECT THE VALUE OF LONGER-TERM FIXED VISIT virtus.com FOR PERFORMANCE DATA DURING THE FUND'S FISCAL YEAR? INCOME SECURITIES MORE THAN SHORTER-TERM CURRENT TO THE MOST RECENT MONTH-END. SECURITIES. INVESTING IN THE SECURITIES OF - Beginning in March 2009, the bond SMALL AND MID-SIZED COMPANIES INVOLVES HOW DID THE EQUITY MARKET PERFORM DURING market experienced an explosive GREATER RISKS AND PRICE VOLATILITY THAN THE FUND'S FISCAL YEAR? rally, particularly in the area of INVESTING IN LARGER, MORE ESTABLISHED corporate credit. The rally was COMPANIES. - The broad market was incredibly driven by the extraordinary measures strong for the year ended March 31, initiated by the world's central --------------------------------------- 2010. The U.S. stock market made a banks to control the 2008 financial ASSET ALLOCATION major bottom in early March of 2009, crisis. During the period, the ---------------- and enjoyed a powerful bull market riskiest assets performed best. through the end of the fiscal year. Distressed corporate bonds doubled in The following table presents asset The combination of easy monetary value while risk-free Treasuries allocations within certain sectors as a policy and massive fiscal stimulus actually fell in price. High-yield percentage of total investments at March alleviated investor concerns about corporate bonds produced a 56% total 31, 2010. corporate bankruptcies. Many U.S. return over the period, while companies, in the meantime, had cut commercial mortgage-backed securities Common Stocks 54% costs dramatically, repaired balance returned 40%. Even high-grade Energy 11% sheets, and pushed hard to increase corporate bonds performed strongly, Information Technology 10 worker productivity. This vigilance producing a 25% total return. Industrials 7 led to greater profitability and All other sectors in higher share prices in a variety of - The only bonds to exhibit a negative common stock 26 different stocks. return were U.S. Treasuries, as Corporate Bonds 21 interest rates rose by over 100 basis Mortgage-Backed Securities 16 WHAT FACTORS AFFECTED THE FUND'S EQUITY points. Government related bonds also U.S. Government Securities 7 PORTFOLIO PERFORMANCE DURING ITS FISCAL lagged, with agencies and agency Other (includes short-term YEAR? mortgage-backed securities each investments) 2 producing a dismal 3%. --- - Given the strife the market had Total 100% encountered in 2008 and early 2009, WHAT FACTORS AFFECTED THE FUND'S FIXED === the Fund manager believed that the INCOME PORTFOLIO PERFORMANCE DURING ITS --------------------------------------- prudent strategy was to position the FISCAL YEAR? Fund into stocks that offered the best relative value. They believed - The fixed income portfolio that the best play was to be found in outperformed its benchmark by 11.06% companies with tangible assets and over the fiscal year, benefiting earnings visibility. Two sectors that substantially from its overweight to contained companies exhibiting those corporate credit. Both qualities were Energy and Materials. investment-grade and high-yield Also, there was still great corporate bonds contributed to uncertainty in the spring of 2009, performance, with financials taking which persisted well into the fall, the lead role. Throughout 2009, the whether or not banks would be able to Federal Government made a concerted survive, and what the financial effort to support the banking system, services industry would look like. first by lowering interest rates and Furthermore, the massive government later by injecting capital directly. involvement created a great deal of In so doing, the Federal Government doubt as to what would be left for was able to arrest the sector's shareholders of For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 24
TACTICAL ALLOCATION FUND (CONTINUED) AVERAGE ANNUAL TOTAL RETURN(1) for periods ended 3/31/10 ------------------------------------------------------------------------------------------------------------------------------------ 1 year 5 years 10 years ------------------------------------------------------------------------------------------------------------------------------------ CLASS A SHARES AT NAV(2) 32.29% 3.10% 2.64% CLASS A SHARES AT POP(3) 24.68 1.89 2.03 CLASS B SHARES AT NAV(2) 31.34 2.36 1.89 CLASS B SHARES WITH CDSC(4) 27.34 2.36 1.89 CLASS C SHARES AT NAV AND WITH CDSC(4) 31.41 2.34 1.87 S&P 500(R) INDEX 49.77 1.92 -0.68 BARCLAYS CAPITAL U.S. AGGREGATE BOND INDEX 7.69 5.44 6.29 TACTICAL ALLOCATION FUND COMPOSITE INDEX 27.40 4.00 3.11 ------------------------------------------------------------------------------------------------------------------------------------ FUND EXPENSE RATIOS(5): A SHARES: 1.33%; B SHARES: 2.08%; C SHARES: 2.08%. ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT VIRTUS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) "CDSC" (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CLASS B SHARES DECLINE FROM 5% TO 0% OVER A FIVE-YEAR PERIOD. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH IN THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 ------------------------------------------------------------------------------------------------------------------------------------ This chart assumes an initial investment of $10,000 made on March 31, 2000, for Class A, Class B and Class C shares including any applicable sales charges or fees. Performance assumes reinvestment of dividends and capital gain distributions. (PERFORMANCE GRAPH) Barclays Capital U.S. Share Share Share S&P 500(R) Aggregate Composite Class A Class B Class C Index Bond Index Index ------- ------- ------- ---------- ------------ --------- 3/31/2000 9425 10000 10000 10000 10000 10000 3/31/2001 8931 9399 9404 7815 11253 9417 3/31/2002 9239 9645 9648 7834 11855 9721 3/31/2003 8402 8709 8708 5895 13241 8977 3/31/2004 10154 10459 10455 7965 13956 10737 3/31/2005 10497 10728 10722 8496 14117 11163 3/31/2006 11117 11271 11272 9493 14435 11942 3/31/2007 12158 12240 12233 10616 15387 13045 3/31/2008 12031 12010 12006 10077 16567 13216 3/31/2009 9244 9177 9158 6239 17084 10663 3/31/2010 12228 12053 12034 9344 18399 13585 For information regarding the indexes and certain investment terms, see Key Investment Terms starting on page 2. 25
VIRTUS GROWTH & INCOME FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE SHARES VALUE ------- --------- ------- --------- ------- --------- COMMON STOCKS--97.2% INDUSTRIALS--12.6% EXCHANGE TRADED FUNDS--2.2% CONSUMER DISCRETIONARY--2.3% Caterpillar, Inc. 49,000 $ 3,080 PowerShares Deutsche McDonald's Corp. 48,000 $ 3,203 Continental Airlines, Bank Agriculture --------- Inc. Class B(2) 150,000 3,295 Fund(2) 126,000 $ 3,054 DryShips, Inc.(2) 480,000 2,803 ------------------------------------------ CONSUMER STAPLES--13.4% Foster Wheeler AG(2) 98,000 2,660 TOTAL EXCHANGE TRADED FUNDS Altria Group, Inc. 156,000 3,201 L-3 Communications (IDENTIFIED COST $3,132) 3,054 Bunge Ltd. 50,600 3,119 Holdings, Inc. 32,000 2,932 ------------------------------------------ Clorox Co. (The) 50,000 3,207 Union Pacific Corp. 42,000 3,079 TOTAL LONG-TERM Costco Wholesale Corp. 48,000 2,866 --------- INVESTMENTS--99.4% PepsiCo, Inc. 51,000 3,374 17,849 (IDENTIFIED COST Philip Morris --------- $103,788) 140,285 International, Inc. 61,000 3,182 ------------------------------------------ --------- INFORMATION TECHNOLOGY--17.6% 18,949 Cisco Systems, Inc.(2) 121,000 3,149 SHORT-TERM INVESTMENTS--0.7% --------- Corning, Inc. 159,000 3,213 Hewlett-Packard Co. 59,000 3,136 MONEY MARKET MUTUAL FUNDS--0.7% ENERGY--18.9% International Business BlackRock Liquidity Funds Chesapeake Energy Corp. 115,000 2,719 Machines Corp. 23,000 2,950 TempFund Portfolio - Chevron Corp. 39,000 2,957 Microsoft Corp. 103,000 3,015 Institutional Shares ConocoPhillips 56,000 2,865 Nokia Oyj Sponsored ADR 207,000 3,217 (seven-day effective Halliburton Co. 99,000 2,983 QUALCOMM, Inc. 74,400 3,124 yield 0.119%) 1,010,532 1,011 Massey Energy Co. 58,000 3,033 Research In Motion ------------------------------------------ Occidental Petroleum Ltd.(2) 41,000 3,032 TOTAL SHORT-TERM INVESTMENTS Corp. 37,000 3,128 --------- (IDENTIFIED COST $1,011) 1,011 Petroleo Brasileiro 24,836 ------------------------------------------ SA ADR 64,000 2,847 --------- Valero Energy Corp. 158,000 3,113 TOTAL INVESTMENTS--100.1% Williams Cos., Inc. MATERIALS--9.0% (IDENTIFIED COST (The) 134,000 3,095 Alcoa, Inc. 217,000 3,090 $104,799) 141,296(1) --------- Freeport-McMoRan Other assets and 26,740 Copper & Gold, Inc. 42,000 3,509 liabilities, --------- Nucor Corp. 67,000 3,040 net--(0.1)% (196) Potash Corp. of --------- FINANCIALS--4.3% Saskatchewan, Inc. 26,000 3,103 NET ASSETS--100.0% $ 141,100 Goldman Sachs Group, --------- ========= Inc. (The) 16,000 2,730 12,742 Hudson City Bancorp, --------- ABBREVIATIONS: Inc. 235,100 3,329 --------- TELECOMMUNICATION SERVICES--4.3% ADR American Depositary Receipt 6,059 AT&T, Inc. 115,000 2,972 --------- Verizon Communications, COUNTRY WEIGHTINGS as of 3/31/10+ Inc. 100,000 3,102 ------------------------------------------ HEALTH CARE--12.8% --------- United States Biogen Idec, Inc.(2) 53,000 3,040 6,074 (includes short-term Gilead Sciences, Inc.(2) 62,000 2,820 --------- investments) 81% Johnson & Johnson 46,000 2,999 Canada 5 Shire plc ADR 46,000 3,034 UTILITIES--2.0% Bermuda 4 St. Jude Medical, Exelon Corp. 63,000 2,760 Brazil 2 Inc.(2) 80,000 3,284 ------------------------------------------ Finland 2 UnitedHealth Group, Inc. 87,000 2,842 TOTAL COMMON STOCKS Switzerland 2 --------- (IDENTIFIED COST United Kingdom 2 18,019 $100,656) 137,231 Other 2 --------- ------------------------------------------ ------------------------------------------ Total 100% ------------------------------------------ + % of total investments as of March 31, 2010 The following table provides a summary of inputs used to value the Fund's net assets as of March 31, 2010 (see Security Valuation Note 2A in the Notes to Financial Statements): Total Value at Level 1 - March 31, 2010 Quoted Prices -------------- ------------- INVESTMENT IN SECURITIES: Equity Securities: Common Stocks $137,231 $137,231 Exchange-Traded Funds 3,054 3,054 Short-Term Investments 1,011 1,011 -------- -------- Total Investments $141,296 $141,296 ======== ======== There are no Level 2 (significant observable inputs) or Level 3 (significant unobservable inputs) priced securities. Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 26
VIRTUS MID-CAP CORE FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE SHARES VALUE ------- --------- ------- --------- ------- --------- COMMON STOCKS--100.5% INDUSTRIALS--24.1% SHORT-TERM INVESTMENTS--2.2% Copart, Inc.(2) 470 $ 17 CONSUMER DISCRETIONARY--9.8% Equifax, Inc. 905 32 MONEY MARKET MUTUAL FUNDS--2.2% Choice Hotels Expeditors International BlackRock Liquidity International, Inc. 645 $ 22 of Washington, Inc. 355 13 Funds ITT Educational Graco, Inc. 860 28 TempFund Portfolio - Services, Inc.(2) 95 11 Jacobs Engineering Institutional Shares John Wiley & Sons, Inc. Group, Inc.(2) 535 24 (seven-day effective Class A 670 29 Robinson (C.H.) yield 0.119%) 14,102 $ 14 --------- Worldwide, Inc. 210 12 ------------------------------------------ 62 Rockwell Collins, Inc. 420 26 TOTAL SHORT-TERM INVESTMENTS --------- --------- (IDENTIFIED COST $14) 14 152 ------------------------------------------ CONSUMER STAPLES--11.4% --------- TOTAL INVESTMENTS--102.7% Brown-Forman Corp. (IDENTIFIED COST $550) 648(1) Class B 325 19 INFORMATION Church & Dwight Co., Inc. 280 19 TECHNOLOGY--16.3% Other assets and McCormick & Co., Inc. 360 14 Adobe Systems, Inc.(2) 805 29 liabilities, SYSCO Corp. 675 20 Dolby Laboratories, Inc. net--(2.7)% (17) --------- Class A(2) 450 26 --------- 72 Intuit, Inc.(2) 875 30 NET ASSETS--100.0% $ 631 --------- Microchip Technology, ========= Inc. 635 18 ENERGY--2.9% --------- Dresser-Rand Group, 103 Inc.(2) 580 18 --------- --------- MATERIALS--4.1% Sigma-Aldrich Corp. 480 26 FINANCIALS--15.1% --------- Brown & Brown, Inc. 1,325 24 UTILITIES--4.1% Federated Investors, Inc. EQT Corp. 630 26 Class B 840 22 ------------------------------------------ Realty Income Corp. 935 29 TOTAL COMMON STOCKS T. Rowe Price Group, Inc. 360 20 (IDENTIFIED COST $536) 634 --------- ------------------------------------------ 95 TOTAL LONG-TERM --------- INVESTMENTS--100.5% (IDENTIFIED COST $536) 634 HEALTH CARE--12.7% ------------------------------------------ Bard (C.R.), Inc. 350 30 DENTSPLY International, Inc. 650 23 Waters Corp.(2) 405 27 --------- 80 --------- The following table provides a summary of inputs used to value the Fund's net assets as of March 31, 2010 (see Security Valuation Note 2A in the Notes to Financial Statements): Total Value at Level 1 - March 31, 2010 Quoted Prices -------------- ------------- INVESTMENT IN SECURITIES: Equity Securities: Common Stocks $634 $634 Short-Term Investments 14 14 ---- ---- Total Investments $648 $648 ==== ==== There are no Level 2 (significant observable inputs) or Level 3 (significant unobservable inputs) priced securities. Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 27
VIRTUS MID-CAP GROWTH FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE SHARES VALUE ------- --------- ------- --------- ------- --------- COMMON STOCKS--99.1% HEALTH CARE--CONTINUED TELECOMMUNICATION SERVICES--CONTINUED CONSUMER DISCRETIONARY--16.4% Valeant Pharmaceuticals Telephone & Data Advance Auto Parts, Inc. 19,100 $ 801 International(2) 40,600 $ 1,742 Systems, Inc. 17,300 $ 585 Aeropostale, Inc.(2) 39,750 1,146 Waters Corp.(2) 13,800 932 tw telecom, Inc.(2) 54,800 995 Collective Brands, Watson Pharmaceuticals, --------- Inc.(2) 29,300 666 Inc.(2) 31,400 1,312 4,267 DeVry, Inc. 9,500 619 --------- --------- Expedia, Inc. 21,100 527 14,445 Gap, Inc. (The) 52,500 1,213 --------- UTILITIES--2.0% Guess?, Inc. 20,500 963 Energen Corp. 17,500 814 H&R Block, Inc. 61,300 1,091 INDUSTRIALS--14.6% UGI Corp. 36,900 980 Hanesbrands, Inc.(2) 36,900 1,027 Carlisle Cos., Inc. 47,100 1,795 --------- John Wiley & Sons, Inc. Delta Air Lines, Inc.(2) 44,600 651 1,794 Class A 16,400 710 Dover Corp. 32,600 1,524 ------------------------------------------ Liberty Global, Inc. Goodrich Corp. 20,000 1,410 TOTAL COMMON STOCKS Class A(2) 30,600 892 ITT Corp. 15,800 847 (IDENTIFIED COST Limited Brands, Inc. 44,200 1,088 Manpower, Inc. 30,500 1,742 $70,826) 88,163 Panera Bread Co. Navistar International ------------------------------------------ Class A(2) 9,900 757 Corp.(2) 17,800 796 TOTAL LONG-TERM INVESTMENTS--99.1% Ross Stores, Inc. 30,100 1,609 Northrop Grumman Corp. 14,300 938 (IDENTIFIED COST Scripps Networks Shaw Group, Inc. $70,826) 88,163 Interactive, Inc. (The)(2) 18,200 626 ------------------------------------------ Class A 20,100 891 Thomas & Betts Corp.(2) 37,500 1,472 TJX Cos., Inc. (The) 14,460 615 Toro Co. (The) 23,800 1,170 SHORT-TERM INVESTMENTS--1.0% --------- --------- 14,615 12,971 MONEY MARKET MUTUAL FUNDS--1.0% --------- --------- BlackRock Liquidity Funds CONSUMER STAPLES--3.0% INFORMATION TECHNOLOGY--26.8% TempFund Portfolio - Coca-Cola Enterprises, ANSYS, Inc.(2) 26,300 1,135 Institutional Shares Inc. 45,000 1,245 Arrow Electronics, (seven-day effective Dean Foods Co.(2) 59,200 929 Inc.(2) 50,500 1,521 yield 0.119%) 876,168 876 Herbalife Ltd. 10,000 461 Avnet, Inc.(2) 60,100 1,803 ------------------------------------------ --------- BMC Software, Inc.(2) 22,200 844 TOTAL SHORT-TERM 2,635 Compuware Corp.(2) 60,000 504 INVESTMENTS --------- Cree, Inc.(2) 17,300 1,215 (IDENTIFIED COST $876) 876 Cypress Semiconductor ------------------------------------------ ENERGY--3.0% Corp.(2) 127,400 1,465 Atwood Oceanics, Inc.(2) 18,700 647 F5 Networks, Inc.(2) 26,800 1,648 TOTAL INVESTMENTS--100.1% EXCO Resources, Inc. 72,900 1,340 Global Payments, Inc. 39,400 1,795 (IDENTIFIED COST Oceaneering Hewitt Associates, Inc. $71,702) 89,039(1) International, Class A(2) 26,400 1,050 Other assets and Inc.(2) 10,500 667 Lender Processing liabilities, --------- Services, Inc. 27,400 1,034 net--(0.1)% (94) 2,654 Marvell Technology Group --------- --------- Ltd.(2) 34,500 703 NET ASSETS--100.0% $ 88,945 Micron Technology, ========= FINANCIALS--6.0% Inc.(2) 44,200 459 AmeriCredit Corp.(2) 45,900 1,091 NetApp, Inc.(2) 25,300 824 The following table provides a summary of Aspen Insurance Holdings ON Semiconductor inputs used to value the Fund's net assets Ltd. 24,100 695 Corp.(2) 68,000 544 as of March 31, 2010 (see Security Digital Realty Trust, Red Hat, Inc.(2) 59,200 1,733 Valuation Note 2A in the Notes to Inc. 20,500 1,111 Seagate Technology(2) 39,300 718 Financial Statements): Genworth Financial, Inc. Symantec Corp.(2) 102,700 1,738 Class A(2) 57,800 1,060 Teradata Corp.(2) 51,300 1,482 Total Reinsurance Group of Western Digital Corp.(2) 41,100 1,602 Value at Level 1 - America, Inc. 26,300 1,381 --------- March 31, Quoted --------- 23,817 2010 Prices 5,338 --------- --------- --------- --------- MATERIALS--6.3% INVESTMENT IN SECURITIES: HEALTH CARE--16.2% Crown Holdings, Inc.(2) 71,600 1,930 Equity Securities: AmerisourceBergen Corp. 12,500 362 Nalco Holding Co. 81,600 1,985 Common Stocks $88,163 $88,163 Biogen Idec, Inc.(2) 12,500 717 Reliance Steel & Short-Term Investments 876 876 Community Health Aluminum Co. 16,400 808 ------- ------- Systems, Inc.(2) 22,100 816 Walter Energy, Inc. 9,800 904 Total Investments $89,039 $89,039 Coventry Health Care, --------- ======= ======= Inc.(2) 50,500 1,248 5,627 DaVita, Inc.(2) 6,900 437 --------- There are no Level 2 (significant Forest Laboratories, observable inputs) or Level 3 (significant Inc.(2) 15,400 483 TELECOMMUNICATION SERVICES--4.8% unobservable inputs) priced securities. Hologic, Inc.(2) 44,600 827 NII Holdings, Inc.(2) 35,400 1,475 Hospira, Inc.(2) 30,900 1,751 SBA Communications Corp. Humana, Inc.(2) 7,490 350 Class A(2) 33,600 1,212 Kinetic Concepts, Inc.(2) 24,400 1,167 Mednax, Inc.(2) 12,600 733 Quest Diagnostics, Inc. 26,900 1,568 Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 28
VIRTUS QUALITY LARGE-CAP VALUE FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE SHARES VALUE ------- --------- ------- --------- ------- --------- COMMON STOCKS--98.9% HEALTH CARE--6.1% SHORT-TERM INVESTMENTS--1.1% Alcon, Inc. 10,000 $ 1,616 MONEY MARKET MUTUAL CONSUMER DISCRETIONARY--10.5% Johnson & Johnson 20,400 1,330 FUNDS--1.1% Genuine Parts Co. 55,800 $ 2,357 --------- BlackRock Liquidity Funds TJX Cos., Inc. (The) 33,500 1,425 2,946 TempFund Portfolio - VF Corp. 15,600 1,250 --------- Institutional Shares --------- (seven-day effective 5,032 INDUSTRIALS--11.2% yield 0.119%) 504,400 $ 504 --------- 3M Co. 23,100 1,930 ------------------------------------------ Honeywell International, TOTAL SHORT-TERM INVESTMENTS CONSUMER STAPLES--14.2% Inc. 44,800 2,028 (IDENTIFIED COST $504) 504 Clorox Co. (The) 21,600 1,386 Union Pacific Corp. 19,000 1,393 ------------------------------------------ Coca-Cola Co. (The) 25,200 1,386 --------- Heinz (H.J.) Co. 29,300 1,336 5,351 TOTAL INVESTMENTS--100.0% Kimberly-Clark Corp. 26,400 1,660 --------- (IDENTIFIED COST $42,513) 47,900(1) SYSCO Corp. 35,700 1,053 --------- INFORMATION TECHNOLOGY--13.1% Other assets and 6,821 Microchip Technology, liabilities, --------- Inc. 39,100 1,101 net--0.0% (20) Microsoft Corp. 54,000 1,581 --------- ENERGY--13.9% Paychex, Inc. 45,900 1,409 NET ASSETS--100.0% $ 47,880 Apache Corp. 10,900 1,106 Western Union Co. (The) 127,600 2,164 ========= BP plc Sponsored ADR 35,400 2,020 --------- Exxon Mobil Corp. 15,000 1,005 6,255 ABBREVIATIONS: National Oilwell Varco, --------- Inc. 26,600 1,080 ADR American Depositary Receipt Schlumberger Ltd. 22,500 1,428 MATERIALS--4.4% --------- Barrick Gold Corp. 23,700 909 COUNTRY WEIGHTINGS as of 3/31/10+ 6,639 Nucor Corp. 26,800 1,216 ------------------------------------------ --------- --------- United States 2,125 (includes short-term FINANCIALS--20.6% --------- investments) 91% Bank of New York Mellon United Kingdom 4 Corp. (The) 58,700 1,813 TELECOMMUNICATION SERVICES--2.0% Netherlands 3 Franklin Resources, Inc. 13,900 1,541 AT&T, Inc. 36,400 940 Canada 2 JPMorgan Chase & Co. 49,700 2,224 --------- ------------------------------------------ PNC Financial Services Total 100% Group, Inc. 39,100 2,334 UTILITIES--2.9% ------------------------------------------ Travelers Cos., Inc. AGL Resources, Inc. 36,100 1,395 (The) 36,700 1,980 ------------------------------------------ + % of total investments as of March --------- TOTAL COMMON STOCKS 31, 2010 9,892 (IDENTIFIED COST $42,009) 47,396 --------- ------------------------------------------ TOTAL LONG-TERM INVESTMENTS--98.9% (IDENTIFIED COST $42,009) 47,396 ------------------------------------------ The following table provides a summary of inputs used to value the Fund's net assets as of March 31, 2010 (see Security Valuation Note 2A in the Notes to Financial Statements): Total Value at Level 1 - March 31, 2010 Quoted Prices -------------- ------------- INVESTMENT IN SECURITIES: Equity Securities: Common Stocks $47,396 $47,396 Short-Term Investments 504 504 ------- ------- Total Investments $47,900 $47,900 ======= ======= There are no Level 2 (significant observable inputs) or Level 3 (significant unobservable inputs) priced securities. Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 29
VIRTUS QUALITY SMALL-CAP FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE SHARES VALUE ------- --------- ------- --------- ------- --------- INDUSTRIALS--27.2% COMMON STOCKS--91.2% ABM Industries, Inc. 243,900 $ 5,171 SHORT-TERM INVESTMENTS--8.0% CLARCOR, Inc. 90,100 3,108 CONSUMER DISCRETIONARY--8.2% Graco, Inc. 85,300 2,730 MONEY MARKET MUTUAL FUNDS--8.0% Matthews International Landstar System, Inc. 91,100 3,824 BlackRock Liquidity Corp. Lincoln Electric Funds TempFund Class A 92,900 $ 3,298 Holdings, Inc. 77,900 4,232 Portfolio - Tempur-Pedic McGrath RentCorp 162,100 3,928 Institutional International, Roper Industries, Inc. 61,800 3,574 Shares (seven-day Inc.(2) 158,000 4,765 --------- effective --------- 26,567 yield 0.119%) 7,864,882 $ 7,865 8,063 --------- ------------------------------------------ --------- TOTAL SHORT-TERM INVESTMENTS INFORMATION TECHNOLOGY--8.5% (IDENTIFIED COST $7,865) 7,865 CONSUMER STAPLES--3.5% Cass Information ------------------------------------------ WD-40 Co. 103,500 3,398 Systems, Inc. 66,317 2,066 --------- Computer Services, Inc. 52,100 2,136 TOTAL INVESTMENTS--99.2% Syntel, Inc. 106,100 4,081 (IDENTIFIED COST $80,665) 97,069(1) ENERGY--9.9% --------- Other assets and CARBO Ceramics, Inc. 83,500 5,205 8,283 liabilities, net--0.8% 763 World Fuel Services Corp.168,000 4,476 --------- --------- --------- NET ASSETS--100.0% $ 97,832 9,681 MATERIALS--2.6% ========= --------- Balchem Corp. 105,150 2,592 ------------------------------------------ FINANCIALS--20.1% TOTAL COMMON STOCKS Ares Capital Corp. 377,066 5,596 (IDENTIFIED COST $72,800) 89,204 Entertainment Properties ------------------------------------------ Trust 125,900 5,178 TOTAL LONG-TERM INVESTMENTS--91.2% Federated Investors, (IDENTIFIED COST $72,800) 89,204 Inc. ------------------------------------------ Class B 181,200 4,780 RLI Corp. 56,900 3,245 Suffolk Bancorp 27,000 829 --------- 19,628 --------- HEALTH CARE--11.2% Landauer, Inc. 74,900 4,885 Owens & Minor, Inc. 97,100 4,505 Young Innovations, Inc. 56,900 1,602 --------- 10,992 --------- The following table provides a summary of inputs used to value the Fund's net assets as of March 31, 2010 (see Security Valuation Note 2A in the Notes to Financial Statements): Total Value at Level 1 - March 31, 2010 Quoted Prices -------------- ------------- INVESTMENT IN SECURITIES: Equity Securities: Common Stocks $89,204 $89,204 Short-Term Investments 7,865 7,865 ------- ------- Total Investments $97,069 $97,069 ======= ======= There are no Level 2 (significant observable inputs) or Level 3 (significant unobservable inputs) priced securities. Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 30
VIRTUS SMALL-CAP CORE FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE SHARES VALUE ------- --------- ------- --------- ------- --------- COMMON STOCKS--93.2% INDUSTRIALS--24.9% SHORT-TERM INVESTMENTS--6.8% Advisory Board Co. CONSUMER DISCRETIONARY--12.8% (The)(2) 35,025 $ 1,103 MONEY MARKET MUTUAL FUNDS--6.8% Pool Corp. 120,100 $ 2,719 Exponent, Inc.(2) 35,500 1,013 BlackRock Liquidity Funds Steiner Leisure Ltd.(2) 48,800 2,163 Forward Air Corp. 67,000 1,762 TempFund Portfolio - Tempur-Pedic HEICO Corp. Class A 49,300 1,956 Institutional Shares International, Lincoln Electric (seven-day effective Inc.(2) 66,630 2,009 Holdings, Inc. 38,500 2,092 yield 0.119%) 3,637,677 $ 3,638 --------- RBC Bearings, Inc.(2) 65,600 2,091 ------------------------------------------ 6,891 Rollins, Inc. 36,900 800 TOTAL SHORT-TERM INVESTMENTS --------- Roper Industries, Inc. 43,900 2,539 (IDENTIFIED COST $3,638) 3,638 --------- ------------------------------------------ ENERGY--4.5% 13,356 CARBO Ceramics, Inc. 39,000 2,431 --------- --------- INFORMATION TECHNOLOGY--22.5% TOTAL INVESTMENTS--100.0% FINANCIALS--12.5% ANSYS, Inc.(2) 59,250 2,556 (IDENTIFIED COST $40,952) 53,742(1) Brown & Brown, Inc. 143,500 2,572 Blackbaud, Inc. 115,372 2,906 Other assets and Cohen & Steers, Inc. 65,700 1,640 FactSet Research liabilities, Federated Investors, Systems, Inc. 37,700 2,766 net--0.0% 6 Inc. Jack Henry & Associates, --------- Class B 94,400 2,490 Inc. 106,615 2,565 NET ASSETS--100.0% $ 53,748 --------- ScanSource, Inc.(2) 45,509 1,310 ========= 6,702 --------- --------- 12,103 --------- HEALTH CARE--14.1% Abaxis, Inc.(2) 77,400 2,104 MATERIALS--1.9% Computer Programs & AptarGroup, Inc. 26,100 1,027 Systems, Inc. 39,300 1,536 ------------------------------------------ Haemonetics Corp.(2) 31,400 1,795 TOTAL COMMON STOCKS Techne Corp. 33,900 2,159 (IDENTIFIED COST $37,314) 50,104 --------- ------------------------------------------ 7,594 TOTAL LONG-TERM INVESTMENTS--93.2% --------- (IDENTIFIED COST $37,314) 50,104 ------------------------------------------ The following table provides a summary of inputs used to value the Fund's net assets as of March 31, 2010 (see Security Valuation Note 2A in the Notes to Financial Statements): Total Value at Level 1 - March 31, 2010 Quoted Prices -------------- ------------- INVESTMENT IN SECURITIES: Equity Securities: Common Stocks $50,104 $50,104 Short-Term Investments 3,638 3,638 ------- ------- Total Investments $53,742 $53,742 ======= ======= There are no Level 2 (significant observable inputs) or Level 3 (significant unobservable inputs) priced securities. Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 31
VIRTUS SMALL-CAP GROWTH FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE SHARES VALUE ------- --------- ------- --------- ------- --------- COMMON STOCKS--99.3% HEALTH CARE--CONTINUED INFORMATION TECHNOLOGY--CONTINUED CONSUMER DISCRETIONARY--12.8% SXC Health Solutions SuccessFactors, Inc.(2) 52,300 $ 996 Chico's FAS, Inc. 62,500 $ 901 Corp.(2) 16,500 $ 1,110 Zebra Technologies Corp. Children's Place Retail Thoratec Corp.(2) 31,200 1,044 Class A(2) 23,900 707 Stores, Inc. (The)(2) 22,300 993 United Therapeutics --------- Genesco, Inc.(2) 32,600 1,011 Corp.(2) 13,700 758 20,264 Guess?, Inc. 19,900 935 Vivus, Inc.(2) 61,000 532 --------- Jack in the Box, Inc.(2) 43,600 1,027 --------- LKQ Corp.(2) 43,883 891 14,084 MATERIALS--2.5% Pep Boys - Manny Moe & --------- FMC Corp. 15,300 926 Jack (The) 120,700 1,213 Intrepid Potash, Inc.(2) 19,300 586 Tractor Supply Co. 15,500 900 INDUSTRIALS--13.8% --------- --------- Altra Holdings, Inc.(2) 49,200 676 1,512 7,871 American Superconductor --------- --------- Corp.(2) 30,101 870 Astec Industries, TELECOMMUNICATION SERVICES--0.2% CONSUMER STAPLES--1.6% Inc.(2) 21,000 608 Neutral Tandem, Inc.(2) 7,000 112 Herbalife Ltd. 21,500 991 Atlas Air Worldwide ------------------------------------------ --------- Holdings, Inc.(2) 12,300 653 TOTAL COMMON STOCKS Bucyrus International, (IDENTIFIED COST $48,382) 60,882 ENERGY--7.4% Inc. 14,400 950 ------------------------------------------ Brigham Exploration Graham Corp. 32,500 585 TOTAL LONG-TERM INVESTMENTS--99.3% Co.(2) 60,200 960 Harsco Corp. 20,100 642 (IDENTIFIED COST $48,382) 60,882 Dril-Quip, Inc.(2) 15,000 913 II-VI, Inc.(2) 29,384 994 ------------------------------------------ Helix Energy Solutions Owens Corning, Inc.(2) 24,600 626 Group, Inc.(2) 72,000 938 Timken Co. (The) 33,800 1,014 SHORT-TERM INVESTMENTS--1.0% Rosetta Resources, Yingli Green Energy Inc.(2) 29,000 683 Holding Co. Ltd. MONEY MARKET MUTUAL FUNDS--1.0% Swift Energy Co.(2) 33,700 1,036 ADR(2) 67,600 861 BlackRock Liquidity Funds --------- --------- TempFund Portfolio - 4,530 8,479 Institutional Shares --------- --------- (seven-day effective yield 0.119%) 629,699 630 FINANCIALS--5.0% INFORMATION TECHNOLOGY--33.0% ------------------------------------------ Knight Capital Group, Advanced Energy TOTAL SHORT-TERM INVESTMENTS Inc. Industries, Inc.(2) 69,400 1,149 (IDENTIFIED COST $630) 630 Class A(2) 68,600 1,046 ArcSight, Inc.(2) 23,900 673 ------------------------------------------ Lazard Ltd. Class A 27,900 996 AsiaInfo Holdings, MF Global Holdings Inc.(2) 33,500 887 TOTAL INVESTMENTS--100.3% Ltd.(2) 123,500 997 Atheros Communications, (IDENTIFIED COST $49,012) 61,512(1) --------- Inc.(2) 24,600 952 3,039 Cavium Networks, Inc.(2) 34,800 865 Other assets and --------- CommScope, Inc.(2) 22,200 622 liabilities, CommVault Systems, net--(0.3)% (177) HEALTH CARE--23.0% Inc.(2) 38,300 818 --------- Alexion Pharmaceuticals, Cybersource Corp.(2) 56,700 1,000 NET ASSETS--100.0% $ 61,335 Inc.(2) 18,700 1,017 Dolby Laboratories, Inc. ========= BioMarin Pharmaceutical, Class A(2) 18,200 1,068 Inc.(2) 39,400 921 Emulex Corp.(2) 43,000 571 ABBREVIATIONS: Clinical Data, Inc.(2) 31,100 603 GSI Commerce, Inc.(2) 42,000 1,162 ev3, Inc.(2) 55,100 874 Isilon Systems, Inc.(2) 132,000 1,137 ADR American Depositary Receipt HMS Holdings Corp.(2) 23,000 1,173 MercadoLibre, Inc.(2) 20,100 969 Impax Laboratories, Netezza Corp.(2) 91,500 1,170 COUNTRY WEIGHTINGS as of 3/31/10+ Inc.(2) 36,500 653 ON Semiconductor ------------------------------------------ Luminex Corp.(2) 71,800 1,208 Corp.(2) 88,000 704 United States Myriad Genetics, Inc.(2) 38,400 923 Plantronics, Inc. 23,800 744 (includes short-term Neogen Corp.(2) 48,072 1,206 PMC-Sierra, Inc.(2) 83,000 740 investments) 94% NuVasive, Inc.(2) 25,523 1,154 Rovi Corp.(2) 21,400 795 Bermuda 2 Onyx Pharmaceuticals, Silicon Laboratories, Canada 2 Inc.(2) 30,000 908 Inc.(2) 18,300 872 Argentina 1 SonicWALL, Inc.(2) 105,700 919 Cayman Islands 1 Sourcefire, Inc.(2) 32,400 744 ------------------------------------------ Total 100% ------------------------------------------ + % of total investments as of March 31, 2010 The following table provides a summary of inputs used to value the Fund's net assets as of March 31, 2010 (see Security Valuation Note 2A in the Notes to Financial Statements): Total Value at Level 1 - March 31, 2010 Quoted Prices -------------- ------------- INVESTMENT IN SECURITIES: Equity Securities: Common Stocks $60,882 $60,882 Short-Term Investments 630 630 ------- ------- Total Investments $61,512 $61,512 ======= ======= There are no Level 2 (significant observable inputs) or Level 3 (significant unobservable inputs) priced securities. Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 32
VIRTUS SMALL-CAP SUSTAINABLE GROWTH FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE SHARES VALUE ------- --------- ------- --------- ------- --------- COMMON STOCKS--93.4% INDUSTRIALS--12.9% SHORT-TERM INVESTMENTS--7.1% Copart, Inc.(2) 7,650 $ 272 CONSUMER DISCRETIONARY--17.2% Forward Air Corp. 8,100 213 MONEY MARKET MUTUAL FUNDS--7.1% HEICO Corp. Class A 4,400 175 BlackRock Liquidity Funds Aaron Rents, Inc. 7,050 $ 235 Omega Flex, Inc. 6,532 68 TempFund Portfolio - Morningstar, Inc.(2) 4,800 231 --------- Institutional Shares Pool Corp. 9,350 212 728 (seven-day effective Strayer Education, Inc. 1,200 292 --------- yield 0.119%) 402,834 $ 403 --------- ------------------------------------------ 970 INFORMATION TECHNOLOGY--29.5% TOTAL SHORT-TERM INVESTMENTS --------- ANSYS, Inc.(2) 7,350 317 (IDENTIFIED COST $403) 403 Blackbaud, Inc. 12,600 317 ------------------------------------------ CONSUMER STAPLES--3.7% FactSet Research Hansen Natural Corp.(2) 4,750 206 Systems, Inc. 3,550 261 TOTAL INVESTMENTS--100.5% --------- FLIR Systems, Inc.(2) 9,950 281 (IDENTIFIED COST $4,372) 5,668(1) Hittite Microwave FINANCIALS--8.0% Corp.(2) 7,150 314 Other assets and Cohen & Steers, Inc. 12,300 307 Loopnet, Inc.(2) 96 1 liabilities, World Acceptance ScanSource, Inc.(2) 5,970 172 net--(0.5)% (31) Corp.(2) 3,970 143 --------- --------- --------- 1,663 NET ASSETS--100.0% $ 5,637 450 ------------------------------------------ ========= --------- TOTAL COMMON STOCKS (IDENTIFIED COST $3,969) 5,265 HEALTH CARE--22.1% ------------------------------------------ Abaxis, Inc.(2) 10,600 288 TOTAL LONG-TERM INVESTMENTS--93.4% Meridian Bioscience, (IDENTIFIED COST $3,969) 5,265 Inc. 9,400 191 ------------------------------------------ National Research Corp. 11,400 289 Quality Systems, Inc. 3,350 206 Techne Corp. 4,300 274 --------- 1,248 --------- The following table provides a summary of inputs used to value the Fund's net assets as of March 31, 2010 (see Security Valuation Note 2A in the Notes to Financial Statements): Total Value at Level 1 - March 31, 2010 Quoted Prices -------------- ------------- INVESTMENT IN SECURITIES: Equity Securities: Common Stocks $5,265 $5,265 Short-Term Investments 403 403 ------ ------ Total Investments $5,668 $5,668 ====== ====== There are no Level 2 (significant observable inputs) or Level 3 (significant unobservable inputs) priced securities. Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 33
VIRTUS STRATEGIC GROWTH FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE SHARES VALUE ------- --------- ------- --------- ------- --------- COMMON STOCKS--99.7% INDUSTRIALS--9.5% SHORT-TERM INVESTMENTS--0.5% ABB Ltd. Sponsored ADR 337,230 $ 7,365 CONSUMER DISCRETIONARY--9.6% Atlas Air Worldwide MONEY MARKET MUTUAL FUNDS--0.5% Amazon.com, Inc.(2) 32,690 $ 4,437 Holdings, Inc.(2) 87,100 4,621 BlackRock Liquidity Funds American Eagle Illinois Tool Works, TempFund Portfolio - Outfitters, Inc. 248,385 4,600 Inc 114,800 5,437 Institutional Shares Chico's FAS, Inc. 324,200 4,675 Joy Global, Inc. 95,490 5,405 (seven-day effective DreamWorks Animation Norfolk Southern Corp. 120,910 6,758 yield 0.119%) 2,349,288 $ 2,349 SKG, Inc. Class A(2) 105,630 4,161 Parker Hannifin Corp. 85,500 5,535 ------------------------------------------ Lowe's Cos., Inc. 288,100 6,984 United Technologies TOTAL SHORT-TERM INVESTMENTS McDonald's Corp. 113,170 7,551 Corp. 87,030 6,406 (IDENTIFIED COST $2,349) 2,349 Panera Bread Co. Class --------- ------------------------------------------ A(2) 55,500 4,245 41,527 Yum! Brands, Inc. 138,910 5,324 --------- TOTAL INVESTMENTS--100.2% --------- (IDENTIFIED COST $354,635) 440,149(1) 41,977 INFORMATION TECHNOLOGY--36.7% Other assets and liabilities, --------- Adobe Systems, Inc.(2) 205,100 7,254 net--(0.2)% (748) Apple, Inc.(2) 71,160 16,718 --------- CONSUMER STAPLES--13.0% Applied Materials, Inc. 383,600 5,171 NET ASSETS--100.0% $ 439,401 Colgate-Palmolive Co. 105,010 8,953 Broadcom Corp. Class A 227,780 7,558 ========= CVS Caremark Corp. 224,260 8,199 Cisco Systems, Inc.(2) 465,050 12,105 General Mills, Inc. 89,360 6,326 CommScope, Inc.(2) 106,900 2,995 ABBREVIATIONS: Herbalife Ltd. 201,575 9,297 Cree, Inc.(2) 42,000 2,949 Molson Coors Brewing Co. EMC Corp.(2) 413,120 7,453 ADR American Depositary Receipt Class B 100,000 4,206 Emulex Corp.(2) 404,730 5,375 PepsiCo, Inc. 103,350 6,837 Google, Inc. Class A(2) 23,125 13,112 COUNTRY WEIGHTINGS as of 3/31/10+ Philip Morris Hewlett-Packard Co. 207,580 11,033 ------------------------------------------ International, Inc. 126,830 6,615 International Business United States Safeway, Inc. 264,800 6,583 Machines Corp. 72,120 9,249 (includes short-term investments) 88% --------- Juniper Networks, Switzerland 4 57,016 Inc.(2) 78,277 2,401 Bermuda 3 --------- Marvell Technology Group Canada 3 Ltd.(2) 356,480 7,265 Cayman Islands 2 ENERGY--6.7% McAfee, Inc.(2) 104,940 4,211 ------------------------------------------ Halliburton Co. 252,700 7,614 Microsoft Corp. 411,200 12,036 Total 100% Noble Corp. 101,200 4,232 Oracle Corp. 397,500 10,212 ------------------------------------------ Pioneer Natural QUALCOMM, Inc. 174,470 7,326 Resources Co. 164,800 9,282 Research In Motion + % of total investments as of March 31, Transocean Ltd.(2) 93,913 8,112 Ltd.(2) 73,880 5,463 2010 --------- Silicon Laboratories, 29,240 Inc.(2) 126,800 6,045 The following table provides a summary of --------- Sybase, Inc.(2) 119,060 5,551 inputs used to value the Fund's net assets --------- as of March 31, 2010 (see Security FINANCIALS--4.2% 161,482 Valuation Note 2A in the Notes to Financial BlackRock, Inc. 23,950 5,215 --------- Statements): Goldman Sachs Group, Inc. (The) 44,390 7,574 MATERIALS--5.7% Total Invesco Ltd. 267,200 5,855 Agrium, Inc. 85,900 6,067 Value at Level 1 - --------- FMC Corp. 49,210 2,979 March 31, Quoted 18,644 Freeport-McMoRan 2010 Prices --------- Copper & Gold, Inc. 67,390 5,630 --------- --------- Monsanto Co. 65,340 4,667 INVESTMENT IN SECURITIES: HEALTH CARE--12.7% United States Steel Equity Securities: Abbott Laboratories 129,370 6,815 Corp. 89,900 5,710 Common Stocks $437,800 $437,800 Allergan, Inc. 119,280 7,791 --------- Short-Term Investments 2,349 2,349 Amgen, Inc.(2) 108,010 6,455 25,053 -------- -------- Bristol-Myers Squibb Co. 298,060 7,958 --------- Total Investments $440,149 $440,149 Celgene Corp.(2) 137,090 8,494 ======== ======== Genzyme Corp.(2) 76,240 3,952 TELECOMMUNICATION SERVICES--1.6% Gilead Sciences, Inc.(2) 105,780 4,811 American Tower Corp. There are no Level 2 (significant Mylan, Inc.(2) 232,500 5,280 Class A(2) 162,870 6,940 observable inputs) or Level 3 (significant Myriad Genetics, Inc.(2) 181,500 4,365 ------------------------------------------ unobservable inputs) priced securities. --------- TOTAL COMMON STOCKS 55,921 (IDENTIFIED COST $352,286) 437,800 --------- ------------------------------------------ TOTAL LONG-TERM INVESTMENTS--99.7% (IDENTIFIED COST $352,286) 437,800 ------------------------------------------ Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 34
VIRTUS TACTICAL ALLOCATION FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) PAR PAR PAR VALUE VALUE VALUE VALUE VALUE VALUE ------- --------- ------- --------- ------- --------- U.S. GOVERNMENT SECURITIES--6.8% NON-AGENCY--3.5% CORPORATE BONDS--20.7% U.S. Treasury Bond Banc of America 3.500%, 2/15/39 $ 3,810 $ 3,083 Commercial Mortgage, CONSUMER DISCRETIONARY--2.7% U.S. Treasury Note Inc. Affinion Group, Inc. 1.000%, 12/31/11 240 241 05-1, A4 10.125%, 10/15/13 $ 320 $ 330 2.625%, 6/30/14 1,925 1,953 5.039%, 11/10/42(3) $ 125 $ 130 Avis Budget Car Rental 3.250%, 12/31/16 2,315 2,318 04-6, A5 LLC/Avis Budget 4.750%, 8/15/17 1,195 1,307 4.811%, 12/10/42 175 179 Finance, Inc. 3.625%, 2/15/20 4,765 4,684 Bear Stearns Commercial 7.625%, 5/15/14 275 274 ------------------------------------------ Mortgage Securities Comcast Corp. TOTAL U.S. GOVERNMENT SECURITIES 04-T16, A6 5.700%, 7/1/19 895 935 (IDENTIFIED COST $13,521) 13,586 4.750%, 2/13/46 (3) 95 97 COX Communications, Inc. ------------------------------------------ Commercial Mortgage 144A 6.250%, Pass-Through 6/1/18 (4) 300 319 MORTGAGE-BACKED SECURITIES--15.7% Certificates Fortune Brands, Inc. 05-C6, A4 3.000%, 6/1/12 405 406 AGENCY--12.2% 5.168%, 6/10/44 140 147 Hasbro, Inc. FHLMC 07-C9, A4 6.300%, 9/15/17 275 294 R010-AB 5.816%, 12/10/49(3) 160 160 Nebraska Book Co., Inc. 5.500%, 12/15/19 175 183 Credit Suisse Mortgage 10.000%, 12/1/11 500 519 5.000%, 1/1/35 4,755 4,943 Capital Certificates Royal Caribbean Cruises FHLMC REMICs 06-C1, A3 Ltd. JA-2777 5.549%, 2/15/39(3) 45 47 7.250%, 6/15/16 340 337 4.500%, 11/15/17 157 163 06-C4, A3 Scientific Games CH-2904 5.467%, 9/15/39 955 918 International, Inc. 4.500%, 4/15/19 472 493 06-C5, A3 144A FNMA 5.311%, 12/15/39 195 184 9.250%, 6/15/19 (4) 105 112 4.500%, 12/1/18 510 530 Greenwich Capital Time Warner Cable, Inc. 4.000%, 7/1/19 425 440 Commercial Funding 3.500%, 2/1/15 65 65 4.500%, 11/1/20 776 806 Corp. 07-GG9, A4 5.850%, 5/1/17 160 171 6.000%, 11/1/31 197 214 5.444%, 3/10/39 940 914 5.000%, 2/1/20 420 414 5.500%, 7/1/34 1,429 1,514 Lehman Brothers - UBS UPC Germany GmbH 144A 6.000%, 11/1/34 3,093 3,338 Commercial Mortgage 8.125%, 12/1/17 (4) 505 523 5.500%, 3/1/36 1,357 1,435 Trust 06-C7, A3 Valassis Communications, 6.000%, 9/1/36 251 268 5.347%, 11/15/38 875 878 Inc. 5.500%, 11/1/36 951 1,004 Morgan Stanley Capital I 8.250%, 3/1/15 245 253 6.500%, 7/1/37 1,248 1,354 04-T15, A3 Videotron Ltee 6.000%, 9/1/37 380 404 5.030%, 6/13/41 220 228 6.375%, 12/15/15 225 228 6.000%, 2/1/38 333 354 06-T23, A4 WMG Holdings Corp. 6.500%, 3/1/38 2,421 2,669 5.811%, 8/12/41(3) 470 497 9.500%, 12/15/14(3) 220 223 5.500%, 4/1/38 190 200 07-T27, A4 --------- 5.500%, 6/1/38 1,014 1,070 5.649%, 6/11/42(3) 470 486 5,403 6.000%, 11/1/38 1,076 1,144 05-IQ9, A3 --------- 6.000%, 3/1/39 464 494 4.540%, 7/15/56 270 271 FNMA REMICs 03-42, HC Wachovia Bank Commercial CONSUMER STAPLES--2.3% 4.500%, 12/25/17 181 189 Mortgage Trust Alliance One GNMA 05-C19, A5 International, Inc. 6.500%, 11/15/23 88 95 4.661%, 5/15/44 1,400 1,439 144A 10.000%, 6.500%, 11/15/23 8 8 07-C34, A3 7/15/16 (4) 310 325 6.500%, 11/15/23 103 111 5.678%, 5/15/46 525 505 Altria Group, Inc. 6.500%, 11/15/23 49 53 --------- 9.250%, 8/6/19 805 978 6.500%, 12/15/23 87 94 7,080 Anheuser-Busch InBev 6.500%, 12/15/23 82 89 ------------------------------------------ Worldwide, Inc. 6.500%, 12/15/23 101 109 TOTAL MORTGAGE-BACKED SECURITIES 3.000%, 10/15/12 400 411 6.500%, 3/15/24 68 73 (IDENTIFIED COST $30,306) 31,398 ASG Consolidated LLC/ASG 6.500%, 4/15/24 41 45 ------------------------------------------ Finance, Inc. 6.500%, 7/15/24 400 432 11.500%, 11/1/11(3) 325 328 --------- ASSET-BACKED SECURITIES--0.1% B&G Foods, Inc. 24,318 Associates Manufactured 7.625%, 1/15/18 50 51 --------- Housing Pass-Through Delhaize Group Certificate 97-2, A6 6.500%, 6/15/17 465 514 7.075%, 3/15/28 (3) 149 149 Kraft Foods, Inc. ------------------------------------------ 5.625%, 11/1/11 465 494 TOTAL ASSET-BACKED SECURITIES 2.625%, 5/8/13 145 146 (IDENTIFIED COST $149) 149 6.125%, 2/1/18 245 268 ------------------------------------------ Lorillard Tobacco Co. 8.125%, 6/23/19 440 485 Reynolds American, Inc. 7.300%, 7/15/15 550 606 --------- 4,606 --------- Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 35
VIRTUS TACTICAL ALLOCATION FUND SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2010 ($ reported in thousands) PAR PAR PAR VALUE VALUE VALUE VALUE VALUE VALUE ------- --------- ------- --------- ------- --------- ENERGY--1.9% FINANCIALS--CONTINUED INDUSTRIALS--0.8% Aquilex Holdings LLC/ ING Capital Funding Corrections Corp. of Aquilex Finance Corp. Trust III America 144A 8.439%, 12/31/49(3) $ 475 $ 451 7.750%, 6/1/17 $ 465 $ 488 11.125%, 12/15/16 (4) $ 70 $ 76 International Lease Hutchison Whampoa Buckeye Partners LP Finance Corp. International Ltd. 6.050%, 1/15/18 75 80 144A 8.625%, 144A Enterprise Products 9/15/15(4) 45 46 5.750%, 9/11/19 (4) 185 192 Operating LLC 144A 8.750%, Pitney Bowes, Inc. 7.625%, 2/15/12 150 165 3/15/17(4) 190 195 4.750%, 5/15/18 450 454 Harvest Operations Corp. JPMorgan Chase & Co. Travelport LLC 7.875%, 10/15/11 410 418 5.125%, 9/15/14 380 401 9.875%, 9/1/14 435 457 Kinder Morgan Finance 3.700%, 1/20/15 265 267 --------- Co. 5.700%, 1/5/16 930 916 Series 1, 1,591 Petroleos Mexicanos 144A 7.900%, 12/31/49(3) 214 228 --------- 4.875%, 3/15/15 (4) 245 252 Macquarie Group Ltd. Petropower I Funding 144A 7.300%, INFORMATION TECHNOLOGY--0.7% Trust 144A 8/1/14 (4) 910 1,016 Fiserv, Inc. 7.360%, 2/15/14 (4) 757 746 Metropolitan Life Global 6.125%, 11/20/12 455 495 Plains All American Funding I 144A Intuit, Inc. Pipeline LP/PAA 2.875%, 9/17/12 (4) 540 549 5.750%, 3/15/17 80 85 Finance Corp. Morgan Stanley Viasat, Inc. 144A 4.250%, 9/1/12 90 93 6.000%, 4/28/15 435 466 8.875%, 9/15/16 (4) 45 46 Rowan Cos., Inc. 6.625%, 4/1/18 440 469 Xerox Corp. 7.875%, 8/1/19 160 183 Northern Trust Co. (The) 4.250%, 2/15/15 300 302 Shell International 6.500%, 8/15/18 250 280 6.750%, 2/1/17 385 425 Finance BV PNC Funding Corp. --------- 4.375%, 3/25/20 400 397 5.125%, 2/8/20 245 247 1,353 5.500%, 3/25/40 400 392 Prudential Financial, --------- --------- Inc. 3,718 3.625%, 9/17/12 640 658 MATERIALS--0.7% --------- Rabobank Nederland NV Ball Corp. 144A 11.000%, 6.750%, 9/15/20 120 123 FINANCIALS--8.5% 12/31/49 (3)(4) 400 515 Boise Paper Holdings American Express Co. Regions Financial Corp. LLC/Boise Co-Issuer 7.250%, 5/20/14 435 493 0.455%, 6/26/12(3) 865 791 Co. 144A Bank of America Corp. Royal Bank of Scotland 8.000%, 4/1/20 (4) 25 25 5.750%, 8/15/16 435 446 Group plc Dow Chemical Co. (The) 5.650%, 5/1/18 440 445 6.400%, 10/21/19 205 205 6.000%, 10/1/12 465 506 Bank of New York/Mellon Simon Property Group LP 5.900%, 2/15/15 405 439 Corp. (The) 6.750%, 5/15/14 470 514 Holcim U.S. Finance 4.950%, 11/1/12 370 401 SunTrust Banks, Inc. S.a.r.l. & Cie Barclays Bank plc 5.250%, 11/5/12 485 512 S.C.S. 144A Series 1, Teachers Insurance & 6.000%, 12/30/19 (4) 195 202 5.000%, 9/22/16 805 827 Annuity Association Huntsman International Bear Stearns Cos., Inc. of America 144A LLC 144A LLC (The) 6.850%, 12/16/39 (4) 220 239 8.625%, 3/15/20 (4) 55 55 7.250%, 2/1/18 330 381 UBS Preferred Funding Solutia, Inc. Capital One Capital VI Trust I 7.875%, 3/15/20 75 76 8.875%, 5/15/40 150 164 8.622%, 10/29/49(3) 265 262 --------- Capital One Financial Wachovia Bank NA 1,426 Corp. 7.375%, 5/23/14 455 520 5.000%, 8/15/15 250 259 --------- Citigroup, Inc. Wachovia Corp. 5.000%, 9/15/14 340 340 4.875%, 2/15/14 435 451 TELECOMMUNICATION SERVICES--2.0% 5.500%, 10/15/14 500 517 Westfield Capital Corp. Citizen Communications 4.875%, 5/7/15 225 222 Ltd./Westfield Co. Credit Suisse New York Finance Authority 6.250%, 1/15/13 235 238 5.000%, 5/15/13 330 355 144A France Telecom SA CVS Pass-Through Trust 5.125%, 11/15/14 (4) 420 432 4.375%, 7/8/14 155 163 144A 7.507%, --------- GCI, Inc. 144A 1/10/32 (4) 150 167 16,888 8.625%, 11/15/19 (4) 170 174 Ford Motor Credit Co. --------- Global Crossing Ltd. LLC 7.500%, 8/1/12 260 269 HEALTH CARE--0.6% 144A General Electric Capital Boston Scientific Corp. 12.000%, 9/15/15 (4) 235 262 Corp. 6.000%, 1/15/20 200 189 NII Capital Corp. 144A 2.800%, 1/8/13 615 622 Express Scripts, Inc. 8.875%, 12/15/19 (4) 415 432 5.500%, 1/8/20 515 525 5.250%, 6/15/12 465 496 Qwest Corp. GMAC, Inc. Novartis Capital Corp. 6.500%, 6/1/17 190 198 0.000%, 6/15/15 270 174 1.900%, 4/24/13 60 60 Sprint Capital Corp. Icahn Enterprises Talecris Biotherapeutics 8.375%, 3/15/12 730 763 LP/Icahn Enterprises Holdings Corp. 144A Telecom Italia Capital Finance Corp. 144A 7.750%, 11/15/16 (4) 280 283 SA 8.000%, 1/15/18 (4) 585 567 Thermo Fisher 6.999%, 6/4/18 250 270 Scientific, Inc. 7.175%, 6/18/19 440 475 144A 2.150%, Telefonica Emisiones SAU 12/28/12 (4) 195 194 5.877%, 7/15/19 320 343 --------- 1,222 --------- Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 36
VIRTUS TACTICAL ALLOCATION FUND SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2010 ($ reported in thousands) PAR VALUE VALUE SHARES VALUE SHARES VALUE --------- --------- --------- --------- --------- ---------- TELECOMMUNICATION SERVICES--CONTINUED HEALTH CARE--7.0% SHORT-TERM INVESTMENTS--1.6% Virgin Media Finance Biogen Idec, Inc.(2) 38,000 $ 2,180 plc Gilead Sciences, MONEY MARKET MUTUAL FUNDS--1.6% 8.375%, 10/15/19 $ 180 $ 186 Inc.(2) 50,000 2,274 BlackRock Liquidity Windstream Corp. Johnson & Johnson 37,000 2,412 Funds 7.000%, 3/15/19 530 497 Shire plc ADR 34,000 2,243 TempFund Portfolio --------- St. Jude Medical, - Institutional 4,001 Inc.(2) 62,000 2,545 Shares (seven-day --------- UnitedHealth Group, effective yield UTILITIES--0.5% Inc 71,000 2,319 0.119%) 3,165,126 $ 3,165 AmeriGas Partners LP --------- ------------------------------------------ 7.250%, 5/20/15 500 510 13,973 TOTAL SHORT-TERM INVESTMENTS CMS Energy Corp. --------- (IDENTIFIED COST $3,165) 3,165 6.250%, 2/1/20 350 348 INDUSTRIALS--7.2% ------------------------------------------ FirstEnergy Solutions Caterpillar, Inc. 40,000 2,514 TOTAL INVESTMENTS--99.9% Corp. Continental Airlines, (IDENTIFIED COST $170,774) 199,163(1) 6.050%, 8/15/21 180 180 Inc --------- Class B(2) 107,000 2,351 Other Assets and 1,038 DryShips, Inc.(2) 383,000 2,237 Liabilities--0.1% 254 ------------------------------------------ Foster Wheeler AG(2) 89,000 2,415 --------- TOTAL CORPORATE BONDS L-3 Communications NET ASSETS--100.0% $ 199,417 (IDENTIFIED COST $39,591) 41,246 Holdings, Inc. 25,000 2,291 ========= ------------------------------------------ Union Pacific Corp. 35,000 2,565 --------- ABBREVIATIONS: SHARES 14,373 ------- --------- ADR American Depositary Receipt PREFERRED STOCK--0.0% INFORMATION TECHNOLOGY--9.8% FHLMC Federal Home Loan Mortgage Corporation Cisco Systems, Inc.(2) 86,000 2,239 ("Freddie Mac") FINANCIALS--0.0% Corning, Inc. 129,000 2,607 FNMA Federal National Mortgage Association GMAC, Inc. Series G Hewlett-Packard Co. 46,000 2,445 ("Fannie Mae") Pfd International Business GNMA Government National Mortgage 7.00% 144A(4) 68 52 Machines Corp. 19,000 2,437 Association ("Ginnie Mae") ------------------------------------------ Microsoft Corp. 82,000 2,400 REMIC Real Estate Mortgage Investment TOTAL PREFERRED STOCK Nokia Oyj Sponsored Conduit (IDENTIFIED COST $21) 52 ADR 167,000 2,595 ------------------------------------------ QUALCOMM, Inc. 61,000 2,561 COUNTRY WEIGHTINGS as of 3/31/10+ COMMON STOCKS--53.8% Research In Motion --------------------------------------------- Ltd.(2) 31,000 2,293 United States CONSUMER DISCRETIONARY--1.2% --------- (includes short-term investments) 86% McDonald's Corp. 35,000 2,335 19,577 Canada 3 --------- --------- Bermuda 2 CONSUMER STAPLES--7.1% MATERIALS--4.8% United Kingdom 2 Altria Group, Inc. 109,000 2,237 Alcoa, Inc. 173,000 2,463 Brazil 1 Bunge Ltd. 38,000 2,342 Freeport-McMoRan Finland 1 Clorox Co. (The) 38,000 2,437 Copper & Gold, Inc. 30,000 2,506 Switzerland 1 Costco Wholesale Corp. 39,000 2,329 Nucor Corp. 49,000 2,224 Other 4 PepsiCo, Inc. 37,000 2,448 Potash Corp. of --------------------------------------------- Philip Morris Saskatchewan, Inc. 20,000 2,387 Total 100% International, Inc. 45,000 2,347 --------- --------------------------------------------- --------- 9,580 + % of total investments as of March 31, 2010 14,140 --------- --------- TELECOMMUNICATION SERVICES--2.4% ENERGY--10.7% AT&T, Inc. 92,000 2,377 Chesapeake Energy Verizon Corp. 92,000 2,175 Communications, Chevron Corp. 32,000 2,426 Inc. 79,000 2,451 ConocoPhillips 46,000 2,354 --------- Halliburton Co. 77,000 2,320 4,828 Massey Energy Co. 51,000 2,667 --------- Occidental Petroleum UTILITIES--1.2% Corp 29,000 2,452 Exelon Corp. 53,000 2,322 Petroleo Brasileiro SA ------------------------------------------ ADR 52,000 2,313 TOTAL COMMON STOCKS Valero Energy Corp. 111,000 2,187 (IDENTIFIED COST $81,643) 107,240 Williams Cos., Inc. ------------------------------------------ (The) 103,000 2,379 EXCHANGE TRADED FUNDS--1.2% --------- PowerShares Deutsche 21,273 Bank Agriculture --------- Fund(2) 96,000 2,327 FINANCIALS--2.4% ------------------------------------------ Goldman Sachs Group, TOTAL EXCHANGE TRADED FUNDS Inc. (The) 14,000 2,389 (IDENTIFIED COST $2,378) 2,327 Hudson City Bancorp, ------------------------------------------ Inc. 173,000 2,450 TOTAL LONG-TERM INVESTMENTS--98.3% --------- (IDENTIFIED COST $167,609) 195,998 4,839 ------------------------------------------ --------- Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 37
VIRTUS TACTICAL ALLOCATION FUND SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2010 The following table provides a summary of inputs used to value the Fund's net assets as of March 31, 2010 (see Security Valuation Note 2A in the Notes to Financial Statements): Level 2 - Level 3 - Significant Significant Total Value at Level 1 - Observable Unobservable March 31, 2010 Quoted Prices Inputs Inputs -------------- ------------- ----------- ------------ INVESTMENT IN SECURITIES: Debt Securities: U.S. Government Securities $ 13,586 $ -- $13,586 $-- Mortgage-Backed Securities 31,398 -- 31,398 -- Asset-Backed Securities 149 -- 149 -- Corporate Debt 41,246 -- 41,246 -- Equity Securities: Preferred Stocks 52 52 -- -- Common Stocks 107,240 107,240 -- -- Exchange-Traded Funds 2,327 2,327 -- -- Short-Term Investments 3,165 3,165 -- -- -------- -------- ------- --- Total Investments $199,163 $112,784 $86,379 $-- ======== ======== ======= === The following is a reconciliation of assets of the Fund for Level 3 investments for which significant unobservable inputs were used to determine fair value: Corporate Debt --------- INVESTMENTS IN SECURITIES: BALANCE AS OF MARCH 31, 2009 .......................... $ 818 Accrued discounts/premiums ............................ -- Realized gain (loss)(1) ............................... -- Change in unrealized appreciation (depreciation)(1) ... 90 Net purchases (sales) ................................. (162) Transfers in and/or out of Level 3(2) ................. (746) ----- BALANCE AS OF MARCH 31, 2010 .......................... $ -- ===== (1) Disclosed in the Statement of Operations under Net realized and unrealized gain (loss) on investments. (2) "Transfers in and/or out" represent the ending value as of March 31, 2010, for any investment security where a change in the pricing level occurred from the beginning to the end of the period. Level 3 securities are without an active market or market participants and therefore are internally fair valued. These internally fair valued securities derive their valuation based on the review of inputs such as, but not limited to, similar securities, liquidity factors, capital structure, and credit analysis. Footnote explanations are located under the Key Investment Terms and Footnote Legend starting on page 2. See Notes to Financial Statements 38
THIS PAGE INTENTIONALLY BLANK. VIRTUS EQUITY TRUST STATEMENTS OF ASSETS AND LIABILITIES MARCH 31, 2010 (Reported in thousands except shares and per share amounts) ---------- -------- ----------- ---------- ---------- GROWTH & MID-CAP MID-CAP QUALITY QUALITY INCOME CORE GROWTH LARGE-CAP SMALL-CAP FUND FUND FUND VALUE FUND FUND ---------- -------- ----------- ---------- ---------- ASSETS Investment in securities at value(1) ........................ $ 141,296 $ 648 $ 89,039 $ 47,900 $ 97,069 Receivables Fund shares sold ......................................... 11 -- 4 --(2) 866 Receivable from adviser .................................. -- 6 -- -- -- Dividends and interest receivable ........................ 169 1 86 96 179 Prepaid expenses ............................................ 21 1 20 11 11 ---------- ------- ---------- ---------- ---------- Total assets .......................................... 141,497 656 89,149 48,007 98,125 ---------- ------- ---------- ---------- ---------- LIABILITIES Payables Fund shares repurchased .................................. 161 -- 53 38 112 Investment securities purchased .......................... -- -- -- -- 25 Investment advisory fee .................................. 65 -- 51 24 64 Distribution and service fees ............................ 50 --(2) 23 12 11 Administration fee ....................................... 10 --(2) 6 3 7 Transfer agent fees and expenses ......................... 59 --(2) 31 17 35 Trustees' fee and expenses ............................... 2 --(2) 1 1 1 Professional fee ......................................... 25 25 25 25 25 Other accrued expenses ................................... 25 --(2) 14 7 13 ---------- ------- ---------- ---------- ---------- Total liabilities ..................................... 397 25 204 127 293 ---------- ------- ---------- ---------- ---------- NET ASSETS .................................................. $ 141,100 $ 631 $ 88,945 $ 47,880 $ 97,832 ========== ======= ========== ========== ========== NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest ......... $ 159,935 $ 527 $ 110,581 $ 76,063 $ 99,476 Accumulated undistributed net investment income (loss) ... 363 1 -- 317 380 Accumulated undistributed net realized gain (loss) ....... (55,695) 5 (38,973) (33,887) (18,428) Net unrealized appreciation (depreciation) on investments ........................................... 36,497 98 17,337 5,387 16,404 ---------- ------- ---------- ---------- ---------- NET ASSETS .................................................. $ 141,100 $ 631 $ 88,945 $ 47,880 $ 97,832 ========== ======= ========== ========== ========== CLASS A Net asset value (net assets/shares outstanding) per share ... $ 14.87 $ 12.57 $ 14.03 $ 9.18 $ 9.98 Maximum offering price per share NAV/(1-5.75%) .............. $ 15.78 $ 13.34 $ 14.89 $ 9.74 $ 10.59 Shares of beneficial interest outstanding, no par value, unlimited authorization .................................. 6,480,122 27,483 5,670,732 4,751,862 3,767,221 Net Assets .................................................. $ 96,335 $ 345 $ 79,547 $ 43,612 $ 37,605 CLASS B Net asset value (net assets/shares outstanding) and offering price per share .......................................... $ 14.24 $ -- $ 12.22 $ -- $ -- Shares of beneficial interest outstanding, no par value, unlimited authorization .................................. 402,487 -- 269,280 -- -- Net Assets .................................................. $ 5,733 $ -- $ 3,291 $ -- $ -- CLASS C Net asset value (net assets/shares outstanding) and offering price per share .......................................... $ 14.23 $ 12.49 $ 12.22 $ 9.05 $ 9.97 Shares of beneficial interest outstanding, no par value, unlimited authorization .................................. 2,091,447 10,087 390,636 433,553 341,628 Net Assets .................................................. $ 29,762 $ 126 $ 4,775 $ 3,925 $ 3,407 CLASS I Net asset value (net assets/shares outstanding) and offering price per share .......................................... $ 14.85 $ 12.59 $ 14.12 $ 9.18 $ 9.99 Shares of beneficial interest outstanding, no par value, unlimited authorization .................................. 624,101 12,700 94,346 37,372 5,689,491 Net Assets .................................................. $ 9,270 $ 160 $ 1,332 $ 343 $ 56,820 (1) Investment in securities at cost ....................... $ 104,799 $ 550 $ 71,702 $ 42,513 $ 80,665 (2) Amount is less than $500 (not reported in thousands). See Notes to Financial Statements 40
VIRTUS EQUITY TRUST STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) MARCH 31, 2010 (Reported in thousands except shares and per share amounts) ---------- ---------- ----------- ----------- ----------- SMALL-CAP SMALL-CAP SMALL-CAP STRATEGIC TACTICAL CORE GROWTH SUSTAINABLE GROWTH ALLOCATION FUND FUND GROWTH FUND FUND FUND ---------- ---------- ----------- ----------- ----------- ASSETS Investment in securities at value(1) ........................ $ 53,742 $ 61,512 $ 5,668 $ 440,149 $ 199,163 Receivables Investment securities sold ............................... -- -- -- -- 136 Fund shares sold ......................................... 179 1 --(2) 2 26 Dividends and interest receivable ........................ 17 5 2 352 966 Tax reclaims ............................................. -- -- -- 9 -- Prepaid expenses ............................................ 16 13 8 27 19 ---------- ---------- -------- ----------- ----------- Total assets .......................................... 53,954 61,531 5,678 440,539 200,310 ---------- ---------- -------- ----------- ----------- LIABILITIES Payables Fund shares repurchased .................................. 115 63 11 448 458 Investment securities purchased .......................... -- -- 1 -- 131 Investment advisory fee .................................. 38 35 1 259 119 Distribution and service fees ............................ 9 19 1 102 45 Administration fee ....................................... 3 4 --(2) 33 14 Transfer agent fees and expenses ......................... 13 39 2 154 42 Trustees' fee and expenses ............................... 1 1 --(2) 5 3 Professional fee ......................................... 20 21 24 35 27 Other accrued expenses ................................... 7 14 1 102 54 ---------- ---------- -------- ----------- ----------- Total liabilities ..................................... 206 196 41 1,138 893 ---------- ---------- -------- ----------- ----------- NET ASSETS .................................................. $ 53,748 $ 61,335 $ 5,637 $ 439,401 $ 199,417 ========== ========== ======== =========== =========== NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest ......... $ 48,442 $ 75,736 $ 9,409 $ 477,433 $ 199,042 Accumulated undistributed net investment income (loss) ... -- -- -- -- 57 Accumulated undistributed net realized gain (loss) ....... (7,484) (26,901) (5,068) (123,546) (28,071) Net unrealized appreciation (depreciation) on investments ........................................... 12,790 12,500 1,296 85,514 28,389 ---------- ---------- -------- ----------- ----------- NET ASSETS .................................................. $ 53,748 $ 61,335 $ 5,637 $ 439,401 $ 199,417 ========== ========== ======== =========== =========== CLASS A Net asset value (net assets/shares outstanding) per share ... $ 14.81 $ 27.07 $ 9.51 $ 8.48 $ 8.18 Maximum offering price per share NAV/(1-5.75%) .............. $ 15.71 $ 28.72 $ 10.09 $ 9.00 $ 8.68 Shares of beneficial interest outstanding, no par value, unlimited authorization .................................. 1,024,422 1,900,181 124,068 49,570,154 23,947,785 Net Assets .................................................. $ 15,167 $ 51,433 $ 1,180 $ 420,181 $ 195,988 CLASS B Net asset value (net assets/shares outstanding) and offering price per share .......................................... $ 13.78 $ 24.42 $ -- $ 7.46 $ 8.26 Shares of beneficial interest outstanding, no par value, unlimited authorization .................................. 56,745 158,305 -- 1,081,577 237,344 Net Assets .................................................. $ 782 $ 3,866 $ -- $ 8,067 $ 1,961 CLASS C Net asset value (net assets/shares outstanding) and offering price per share .......................................... $ 13.79 $ 24.41 $ 9.24 $ 7.46 $ 8.33 Shares of beneficial interest outstanding, no par value, unlimited authorization .................................. 434,312 247,306 38,819 984,986 176,205 Net Assets .................................................. $ 5,989 $ 6,036 $ 359 $ 7,351 $ 1,468 CLASS I Net asset value (net assets/shares outstanding) and offering price per share .......................................... $ 15.17 $ -- $ 9.52 $ 8.56 $ -- Shares of beneficial interest outstanding, no par value, unlimited authorization .................................. 2,097,242 -- 430,678 444,270 -- Net Assets .................................................. $ 31,810 $ -- $ 4,098 $ 3,802 $ -- (1) Investment in securities at cost ........................ $ 40,952 $ 49,012 $ 4,372 $ 354,635 $ 170,774 (2) Amount is less than $500 (not reported in thousands). See Notes to Financial Statements 41
VIRTUS EQUITY TRUST STATEMENTS OF OPERATIONS YEAR ENDED MARCH 31, 2010 (Reported in thousands) -------- ------- ------- ---------- --------- GROWTH & MID-CAP MID-CAP QUALITY QUALITY INCOME CORE GROWTH LARGE-CAP SMALL-CAP FUND FUND(2) FUND VALUE FUND FUND -------- ------- ------- ---------- --------- INVESTMENT INCOME Dividends ................................................ $ 2,992 $ 6 $ 754 $ 1,260 $ 2,373 Interest ................................................. 10 -- -- -- -- Foreign taxes withheld ................................... (32) -- (7) (1) -- ------- ---- ------- ------- ------- Total investment income ............................... 2,970 6 747 1,259 2,373 ------- ---- ------- ------- ------- EXPENSES Investment advisory fees ................................. 1,081 3 636 367 732 Service fees, Class A .................................... 249 --(1) 177 113 78 Distribution and service fees, Class B ................... 63 -- 37 -- -- Distribution and service fees, Class C ................... 284 1 41 35 26 Administration fees ...................................... 122 --(1) 67 41 69 Transfer agent fee and expenses .......................... 372 --(1) 227 110 290 Custodian fees ........................................... 12 1 8 9 6 Printing fees and expenses ............................... 48 5 22 12 22 Professional fees ........................................ 33 32 31 31 31 Registration fees ........................................ 46 33 52 38 39 Trustees' fee and expenses ............................... 66 --(1) 7 5 7 Miscellaneous expenses ................................... 27 3 14 11 13 ------- ---- ------- ------- ------- Total expenses ........................................ 2,403 78 1,319 772 1,313 Less expenses reimbursed by investment adviser ........... (531)(3) (73) (110) (85) (152) ------- ---- ------- ------- ------- Net expenses .......................................... 1,872 5 1,209 687 1,161 ------- ---- ------- ------- ------- NET INVESTMENT INCOME (LOSS) ............................. 1,098 1 (462) 572 1,212 ------- ---- ------- ------- ------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments .................. 20,068 9 (3,876) 7,096 (3,838) Net change in unrealized appreciation (depreciation) on investments ........................................... 35,408 98 39,199 11,369 38,907 ------- ---- ------- ------- ------- NET GAIN (LOSS) ON INVESTMENTS .............................. 55,476 107 35,323 18,465 35,069 ------- ---- ------- ------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............................................... $56,574 $108 $34,861 $19,037 $36,281 ======= ==== ======= ======= ======= (1) Amount is less than $500 (not reported in thousands). (2) From inception, June 22, 2009. (3) See Note 3 in the Notes to Financial Statements. See Notes to Financial Statements 42
VIRTUS EQUITY TRUST STATEMENTS OF OPERATIONS (CONTINUED) YEAR ENDED MARCH 31, 2010 (Reported in thousands) --------- --------- ----------- --------- ---------- SMALL-CAP SMALL-CAP SMALL-CAP STRATEGIC TACTICAL CORE GROWTH SUSTAINABLE GROWTH ALLOCATION FUND FUND GROWTH FUND FUND FUND --------- --------- ----------- --------- ---------- INVESTMENT INCOME Dividends ................................................ $ 570 $ 145 $ 68 $ 2,103 $ 2,015 Interest ................................................. -- -- -- 87 4,580 Foreign taxes withheld ................................... -- -- -- (2) (21) ------- ------- ------ ------- ------- Total investment income ............................... 570 145 68 2,188 6,574 ------- ------- ------ ------- ------- EXPENSES Investment advisory fees ................................. 371 566 67 1,337 1,346 Service fees, Class A .................................... 33 119 5 443 472 Distribution and service fees, Class B ................... 8 41 -- 47 22 Distribution and service fees, Class C ................... 45 56 3 56 12 Administration fees ...................................... 37 48 6 164 163 Transfer agent fee and expenses .......................... 77 270 13 568 309 Custodian fees ........................................... 3 5 3 15 26 Printing fees and expenses ............................... 12 16 2 89 104 Professional fees ........................................ 24 26 29 40 43 Registration fees ........................................ 62 33 32 46 39 Trustees' fee and expenses ............................... 4 5 1 16 17 Miscellaneous expenses ................................... 8 11 3 28 32 ------- ------- ------ ------- ------- Total expenses ........................................ 684 1,196 164 2,849 2,585 Less expenses reimbursed by investment adviser .............. -- (165) (51) -- -- ------- ------- ------ ------- ------- Net expenses .......................................... 684 1,031 113 2,849 2,585 ------- ------- ------ ------- ------- NET INVESTMENT INCOME (LOSS) ............................. (114) (886) (45) (661) 3,989 ------- ------- ------ ------- ------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments .................. 1,134 4,894 130 26,640 6,087 Net realized gain (loss) on foreign currency transactions .......................................... -- -- -- -- 1 Net change in unrealized appreciation (depreciation) on investments ........................................... 17,590 21,877 3,535 52,022 42,225 Net change in unrealized appreciation (depreciation) on foreign currency translation .......................... -- -- -- -- -- ------- ------- ------ ------- ------- NET GAIN (LOSS) ON INVESTMENTS .............................. 18,724 26,771 3,665 78,662 48,313 ------- ------- ------ ------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............................................... $18,610 $25,885 $3,620 $78,001 $52,302 ======= ======= ====== ======= ======= See Notes to Financial Statements 43
VIRTUS EQUITY TRUST STATEMENTS OF CHANGES IN NET ASSETS (Reported in thousands) ------------------------------- ----------------- GROWTH & INCOME FUND MID-CAP CORE FUND ------------------------------- ----------------- FROM INCEPTION, YEAR ENDED YEAR ENDED JUNE 22, 2009 TO MARCH 31, 2010 MARCH 31, 2009 MARCH 31, 2010 -------------- -------------- ----------------- INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) ................................................ $ 1,098 $ 1,973 $ 1 Net realized gain (loss) .................................................... 20,068 (47,791) 9 Net change in unrealized appreciation (depreciation) ........................ 35,408 (38,963) 98 -------- --------- ---- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ................. 56,574 (84,781) 108 -------- --------- ---- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income, Class A ........................................... (1,404) (1,487) -- Net investment income, Class B ........................................... (48) -- -- Net investment income, Class C ........................................... (210) (11) -- Net investment income, Class I ........................................... (179) (256) -- Net realized short-term gains, Class A ................................... -- -- (2) Net realized short-term gains, Class C ................................... -- -- (1) Net realized short-term gains, Class I ................................... -- -- (1) Net realized long-term gains, Class A .................................... -- -- --(1) Net realized long-term gains, Class C .................................... -- -- --(1) Net realized long-term gains, Class I .................................... -- -- --(1) -------- --------- ---- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS ................... (1,841) (1,754) (4) -------- --------- ---- FROM SHARE TRANSACTIONS (SEE NOTE 5) Change in net assets from share transactions, Class A .................... (28,903) (20,764) 295 Change in net assets from share transactions, Class B .................... (2,880) (5,673) -- Change in net assets from share transactions, Class C .................... (4,100) (6,538) 101 Change in net assets from share transactions, Class I .................... (4,658) (5,827) 131 -------- --------- ---- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS ................... (40,541) (38,802) 527 -------- --------- ---- CAPITAL CONTRIBUTIONS Fair Funds settlement(2) ................................................. -- -- -- -------- --------- ---- NET INCREASE (DECREASE) IN NET ASSETS ....................................... 14,192 (125,337) 631 NET ASSETS Beginning of period ......................................................... 126,908 252,245 -- -------- --------- ---- END OF PERIOD ............................................................... $141,100 $ 126,908 $631 ======== ========= ==== Accumulated undistributed net investment income (loss) at end of period ..... $ 363 $ 1,126 $ 1 (1) Amount is less than $500 (not reported in thousands). (2) The Fund was a recipient of a portion of a distribution from a Fair Fund established by the United States Securities and Exchange Commission. The proceeds received were part of the Millennium Partners, L.P. and Bear Stearns & Co., Inc. settlements. See Notes to Financial Statements 44
------------------------------------- ------------------------------------- ------------------------------------- MID-CAP GROWTH FUND QUALITY LARGE-CAP VALUE FUND QUALITY SMALL-CAP FUND ------------------------------------- ------------------------------------- ------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, 2010 MARCH 31, 2009 MARCH 31, 2010 MARCH 31, 2009 MARCH 31, 2010 MARCH 31, 2009 -------------- -------------- -------------- -------------- -------------- -------------- $ (462) $ (436) $ 572 $ 789 $ 1,212 $ 1,261 (3,876) (31,213) 7,096 (33,560) (3,838) (14,590) 39,199 (11,982) 11,369 37 38,907 (13,410) -------- --------- -------- -------- -------- -------- 34,861 (43,631) 19,037 (32,734) 36,281 (26,739) -------- --------- -------- -------- -------- -------- -- -- (669) (390) (403) (195) -- -- -- -- -- -- -- -- (24) (4) (15) (16) -- -- (2) (1) (721) (1,035) -- -- -- -- -- --(1) -- -- -- -- -- --(1) -- -- -- -- -- (1) -- -- -- -- -- --(1) -- -- -- -- -- --(1) -- -- -- -- -- (2) -------- --------- -------- -------- -------- -------- -- -- (695) (395) (1,139) (1,249) -------- --------- -------- -------- -------- -------- (5,693) (8,349) (17,729) (15,485) 540 16,434 (2,252) (3,449) -- -- -- -- 597 (1,274) (312) (3,575) 906 175 105 (112) 241 101 2,957 8,419 -------- --------- -------- -------- -------- -------- (7,243) (13,184) (17,800) (18,959) 4,403 25,028 -------- --------- -------- -------- -------- -------- 25 -- -- -- -- -- -------- --------- -------- -------- -------- -------- 27,643 (56,815) 542 (52,088) 39,545 (2,960) 61,302 118,117 47,338 99,426 58,287 61,247 -------- --------- -------- -------- -------- -------- $ 88,945 $ 61,302 $ 47,880 $ 47,338 $ 97,832 $ 58,287 ======== ========= ======== ======== ======== ======== $ -- $ -- $ 317 $ 367 $ 380 $ 307 See Notes to Financial Statements 45
VIRTUS EQUITY TRUST STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) (Reported in thousands) ------------------------------- ------------------------------- SMALL-CAP CORE FUND SMALL-CAP GROWTH FUND ------------------------------- ------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, 2010 MARCH 31, 2009 MARCH 31, 2010 MARCH 31, 2009 -------------- -------------- -------------- -------------- INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) ................................... $ (114) $ 9 $ (886) $ (1,253) Net realized gain (loss) ....................................... 1,134 (8,618) 4,894 (22,925) Net change in unrealized appreciation (depreciation) ........... 17,590 (6,704) 21,877 (18,152) ------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .... 18,610 (15,313) 25,885 (42,330) ------- -------- -------- -------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income, Class A .............................. -- (3) -- -- Net investment income, Class B .............................. -- --(1) -- -- Net investment income, Class C .............................. -- (1) -- -- Net investment income, Class I .............................. -- (4) -- -- Net realized long-term gains, Class A ....................... -- (1,906) -- -- Net realized long-term gains, Class B ....................... -- (151) -- -- Net realized long-term gains, Class C ....................... -- (654) -- -- Net realized long-term gains, Class I ....................... -- (3,052) -- -- ------- -------- -------- -------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS ...... -- (5,771) -- -- ------- -------- -------- -------- FROM SHARE TRANSACTIONS (SEE NOTE 5) Change in net assets from share transactions, Class A ....... (935) (3,203) (9,546) (8,702) Change in net assets from share transactions, Class B ....... (310) (416) (2,194) (5,033) Change in net assets from share transactions, Class C ....... 1,110 (1,475) (1,000) (2,607) Change in net assets from share transactions, Class I ....... 3,300 (2,905) -- -- ------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS ...... 3,165 (7,999) (12,740) (16,342) ------- -------- -------- -------- CAPITAL CONTRIBUTIONS Fair Funds settlement(2) .................................... 5 -- 113 -- ------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS .......................... 21,780 (29,083) 13,258 (58,672) NET ASSETS Beginning of period ............................................ 31,968 61,051 48,077 106,749 ------- -------- -------- -------- END OF PERIOD .................................................. $53,748 $ 31,968 $ 61,335 $ 48,077 ======= ======== ======== ======== Accumulated undistributed net investment income (loss) at end of period ............................................ $ -- $ -- $ -- $ -- (1) Amount is less than $500 (not reported in thousands). (2) The Fund was a recipient of a portion of a distribution from a Fair Fund established by the United States Securities and Exchange Commission. The proceeds received were part of the Millennium Partners, L.P. and Bear Stearns & Co., Inc. settlements. See Notes to Financial Statements 46
------------------------------------- ------------------------------------- ------------------------------------- SMALL-CAP SUSTAINABLE GROWTH FUND STRATEGIC GROWTH FUND TACTICAL ALLOCATION FUND ------------------------------------- ------------------------------------- ------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, 2010 MARCH 31, 2009 MARCH 31, 2010 MARCH 31, 2009 MARCH 31, 2010 MARCH 31, 2009 -------------- -------------- -------------- -------------- -------------- -------------- $ (45) $ (100) $ (661) $ (536) $ 3,989 $ 6,738 130 (4,886) 26,640 (31,280) 6,088 (31,810) 3,535 (1,033) 52,022 (23,340) 42,225 (30,053) ------- -------- --------- --------- --------- --------- 3,620 (6,019) 78,001 (55,156) 52,302 (55,125) ------- -------- --------- --------- --------- --------- -- -- -- -- (4,428) (6,951) -- -- -- -- (36) (82) -- -- -- -- (18) (25) ------- -------- --------- --------- --------- --------- -- -- -- -- -- (1,597) -- -- -- -- -- (28) -- -- -- -- -- (7) -- -- -- -- -- -- ------- -------- --------- --------- --------- --------- -- -- -- -- (4,482) (8,690) ------- -------- --------- --------- --------- --------- (2,058) (4,089) 276,167 (12,402) (14,568) (24,315) -- -- 3,893 (1,860) (842) (1,659) 87 79 3,726 (625) 401 (770) (4,372) 3,756 (654) (364) -- -- ------- -------- --------- --------- --------- --------- (6,343) (254) 283,132 (15,251) (15,009) (26,744) ------- -------- --------- --------- --------- --------- -- -- -- -- 3 -- ------- -------- --------- --------- --------- --------- (2,723) (6,273) 361,133 (70,407) 32,814 (90,559) 8,360 14,633 78,268 148,675 166,603 257,162 ------- -------- --------- --------- --------- --------- $ 5,637 $ 8,360 $ 439,401 $ 78,268 $ 199,417 $ 166,603 ------- -------- --------- --------- --------- --------- $ -- $ -- $ -- $ -- $ 57 $ 486 See Notes to Financial Statements 47
VIRTUS EQUITY TRUST FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD NET ASSET NET NET TOTAL DIVIDENDS DISTRIBUTIONS VALUE, INVESTMENT REALIZED AND FROM FROM NET FROM NET BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL OF PERIOD (LOSS)(2) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS ------------------------------------------------------------------------------------------------------------------------------------ -------------------- GROWTH & INCOME FUND -------------------- CLASS A 4/1/09 to 3/31/10 $10.15 0.12 4.78 4.90 (0.18) -- (0.18) 4/1/08 to 3/31/09 16.47 0.17 (6.33) (6.16) (0.16) -- (0.16) 9/1/07 to 3/31/08 18.08 0.08 (1.65) (1.57) (0.04) -- (0.04) 9/1/06 to 8/31/07 15.96 0.10 2.20 2.30 (0.18) -- (0.18) 9/1/05 to 8/31/06 14.74 0.13 1.19 1.32 (0.10) -- (0.10) 9/1/04 to 8/31/05 13.15 0.12 1.57 1.69 (0.10) -- (0.10) CLASS B 4/1/09 to 3/31/10 $ 9.73 0.02 4.58 4.60 (0.09) -- (0.09) 4/1/08 to 3/31/09 15.71 0.05 (6.03) (5.98) -- -- -- 9/1/07 to 3/31/08 17.31 --(5) (1.58) (1.58) (0.02) -- (0.02) 9/1/06 to 8/31/07 15.26 (0.02) 2.10 2.08 (0.03) -- (0.03) 9/1/05 to 8/31/06 14.13 0.01 1.14 1.15 (0.02) -- (0.02) 9/1/04 to 8/31/05 12.61 0.01 1.51 1.52 -- -- -- CLASS C 4/1/09 to 3/31/10 $ 9.72 0.02 4.58 4.60 (0.09) -- (0.09) 4/1/08 to 3/31/09 15.72 0.06 (6.06) (6.00) --(5) -- -- 9/1/07 to 3/31/08 17.31 --(5) (1.57) (1.57) (0.02) -- (0.02) 9/1/06 to 8/31/07 15.26 (0.03) 2.11 2.08 (0.03) -- (0.03) 9/1/05 to 8/31/06 14.13 0.01 1.14 1.15 (0.02) -- (0.02) 9/1/04 to 8/31/05 12.62 0.01 1.50 1.51 -- -- -- CLASS I 4/1/09 to 3/31/10 $10.14 0.15 4.77 4.92 (0.21) -- (0.21) 4/1/08 to 3/31/09 16.49 0.20 (6.33) (6.13) (0.22) -- (0.22) 11/13/07(7) to 3/31/08 18.33 0.06 (1.90) (1.84) -- -- -- ----------------- MID-CAP CORE FUND ----------------- CLASS A 6/22/09(7) to 3/31/10 $10.00 0.05 2.62 2.67 -- (0.10) (0.10) CLASS C 6/22/09(7) to 3/31/10 $10.00 (0.02) 2.61 2.59 -- (0.10) (0.10) CLASS I 6/22/09(7) to 3/31/10 $10.00 0.07 2.62 2.69 -- (0.10) (0.10) ------------------- MID-CAP GROWTH FUND ------------------- CLASS A 4/1/09 to 3/31/10 $ 8.83 (0.06) 5.26 5.20 -- -- -- 4/1/08 to 3/31/09 14.78 (0.05) (5.90) (5.95) -- -- -- 11/1/07 to 3/31/08 17.98 (0.05) (3.15) (3.20) -- -- -- 11/1/06 to 10/31/07 16.33 (0.10) 1.75 1.65 -- -- -- 11/1/05 to 10/31/06 15.42 (0.08) 0.99 0.91 -- -- -- 11/1/04 to 10/31/05 13.40 (0.16) 2.18 2.02 -- -- -- The footnote legend is at the end of the financial highlights. See Notes to Financial Statements 48
RATIO OF GROSS EXPENSES TO NET NET AVERAGE RATIO OF NET ASSET ASSETS, RATIO OF NET NET ASSETS INVESTMENT CHANGE IN VALUE, END OF EXPENSES TO (BEFORE WAIVERS INCOME (LOSS) PORTFOLIO NET ASSET END OF TOTAL PERIOD AVERAGE NET AND TO AVERAGE NET TURNOVER VALUE PERIOD RETURN(1) (IN THOUSANDS) ASSETS(11) REIMBURSEMENTS)(11) ASSETS RATE ------------------------------------------------------------------------------------------------------------------------------------ 4.72 $14.87 48.67% $ 96,335 1.13%(10) 1.34% 0.93% 34% (6.32) 10.15 (37.65) 87,198 1.42 1.60 1.19 112 (1.61) 16.47 (8.69)(4) 166,600 1.37(3) 1.51(3) 0.73(3) 53(4) 2.12 18.08 14.43 188,479 1.28 1.42 0.60 37 1.22 15.96 9.02 168,209 1.25 1.39 0.86 33 1.59 14.74 12.85 178,557 1.25 1.40 0.84 41 4.51 $14.24 47.49% $ 5,733 1.89%(10) 2.10% 0.17% 34% (5.98) 9.73 (38.06) 6,177 2.17 2.35 0.40 112 (1.60) 15.71 (9.14)(4) 16,658 2.11(3) 2.24(3) (0.03)(3) 53(4) 2.05 17.31 13.64 24,731 2.03 2.17 (0.14) 37 1.13 15.26 8.18 41,863 2.00 2.14 0.09 33 1.52 14.13 12.05 58,869 2.00 2.15 0.10 41 4.51 $14.23 47.60% $ 29,762 1.89%(10) 2.11% 0.16% 34% (6.00) 9.72 (38.15) 23,470 2.17 2.35 0.43 112 (1.59) 15.72 (9.08)(4) 46,292 2.12(3) 2.26(3) (0.02)(3) 53(4) 2.05 17.31 13.64 53,854 2.03 2.17 (0.15) 37 1.13 15.26 8.18 57,345 2.00 2.14 0.10 33 1.51 14.13 12.05 68,432 2.00 2.15 0.10 41 4.71 $14.85 49.00% $ 9,270 0.91%(10) 1.13% 1.16% 34% (6.35) 10.14 (37.51) 10,063 1.17 1.35 1.40 112 (1.84) 16.49 (10.04)(4) 22,695 1.19(3) 1.34(3) 0.88(3) 53(4) 2.57 $12.57 26.79%(4) $ 345 1.35%(3) 20.83%(3) 0.53%(3) 16%(4) 2.49 $12.49 25.99%(4) $ 126 2.10%(3) 23.95%(3) (0.25)%(3) 16%(4) 2.59 $12.59 26.99%(4) $ 160 1.10%(3) 22.33%(3) 0.77%(3) 16%(4) 5.20 $14.03 58.89% $ 79,547 1.45% 1.59% (0.51)% 104% (5.95) 8.83 (40.26) 54,233 1.45 1.60 (0.38) 93 (3.20) 14.78 (17.80)(4) 100,416 1.66(3) 1.76(3) (0.68)(3) 27(4) 1.65 17.98 10.10 130,028 1.55 1.55 (0.60) 77 0.91 16.33 5.90 127,160 1.52 1.52 (0.50) 124 2.02 15.42 15.07 142,651 1.53 1.53 (1.06) 46 See Notes to Financial Statements 49
VIRTUS EQUITY TRUST FINANCIAL HIGHLIGHTS (CONTINUED) SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD NET ASSET NET NET TOTAL DIVIDENDS DISTRIBUTIONS VALUE, INVESTMENT REALIZED AND FROM FROM NET FROM NET BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL OF PERIOD (LOSS)(2) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------- MID-CAP GROWTH FUND (CONTINUED) ------------------------------- CLASS B 4/1/09 to 3/31/10 $ 7.75 (0.13) 4.60 4.47 -- -- -- 4/1/08 to 3/31/09 13.09 (0.13) (5.21) (5.34) -- -- -- 11/1/07 to 3/31/08 15.97 (0.08) (2.80) (2.88) -- -- -- 11/1/06 to 10/31/07 14.61 (0.24) 1.60 1.36 -- -- -- 11/1/05 to 10/31/06 13.91 (0.18) 0.88 0.70 -- -- -- 11/1/04 to 10/31/05 12.18 (0.25) 1.98 1.73 -- -- -- CLASS C 4/1/09 to 3/31/10 $ 7.75 (0.14) 4.61 4.47 -- -- -- 4/1/08 to 3/31/09 13.07 (0.13) (5.19) (5.32) -- -- -- 11/1/07 to 3/31/08 15.96 (0.08) (2.81) (2.89) -- -- -- 11/1/06 to 10/31/07 14.60 (0.41) 1.77 1.36 -- -- -- 11/1/05 to 10/31/06 13.89 (0.19) 0.90 0.71 -- -- -- 11/1/04 to 10/31/05 12.16 (0.25) 1.98 1.73 -- -- -- CLASS I 4/1/09 to 3/31/10 $ 8.87 (0.03) 5.28 5.25 -- -- -- 4/1/08 to 3/31/09 14.80 (0.02) (5.91) (5.93) -- -- -- 11/1/07 to 3/31/08 17.99 (0.03) (3.16) (3.19) -- -- -- 9/13/07(7) to 10/31/07 17.25 (0.09) 0.83 0.74 -- -- -- ---------------------------- QUALITY LARGE-CAP VALUE FUND ---------------------------- CLASS A 4/1/09 to 3/31/10 $ 6.32 0.10 2.87 2.97 (0.11) -- (0.11) 4/1/08 to 3/31/09 10.51 0.10 (4.24) (4.14) (0.05) -- (0.05) 7/1/07 to 3/31/08 13.67 0.04 (2.87) (2.83) (0.07) (0.26) (0.33) 7/1/06 to 6/30/07 11.20 0.06 2.86 2.92 (0.05) (0.40) (0.45) 7/29/05(7) to 6/30/06 10.00 0.07 1.17 1.24 (0.04) -- (0.04) CLASS C 4/1/09 to 3/31/10 $ 6.24 0.04 2.82 2.86 (0.05) -- (0.05) 4/1/08 to 3/31/09 10.40 0.03 (4.18) (4.15) (0.01) -- (0.01) 7/1/07 to 3/31/08 13.60 (0.03) (2.85) (2.88) (0.06) (0.26) (0.32) 7/1/06 to 6/30/07 11.18 (0.03) 2.85 2.82 --(5) (0.40) (0.40) 7/29/05(7) to 6/30/06 10.00 --(5) 1.19 1.19 (0.01) -- (0.01) CLASS I 4/1/09 to 3/31/10 $ 6.32 0.14 2.85 2.99 (0.13) -- (0.13) 6/6/08(7) to 3/31/09 11.04 0.11 (4.76) (4.65) (0.07) -- (0.07) ---------------------- QUALITY SMALL-CAP FUND ---------------------- CLASS A 4/1/09 to 3/31/10 $ 6.29 0.12 3.68 3.80 (0.11) -- (0.11) 4/1/08 to 3/31/09 9.66 0.14 (3.37) (3.23) (0.14) --(5) (0.14) 9/1/07 to 3/31/08 11.74 0.11 (2.08) (1.97) (0.08) (0.03) (0.11) 9/1/06 to 8/31/07 10.05 0.25 1.51 1.76 (0.05) (0.02) (0.07) 6/28/06(7) to 8/31/06 10.00 0.03 0.02 0.05 -- -- -- The footnote legend is at the end of the financial highlights. See Notes to Financial Statements 50
RATIO OF GROSS EXPENSES TO NET NET AVERAGE RATIO OF NET ASSET ASSETS, RATIO OF NET NET ASSETS INVESTMENT CHANGE IN VALUE, END OF EXPENSES TO (BEFORE WAIVERS INCOME (LOSS) PORTFOLIO NET ASSET END OF TOTAL PERIOD AVERAGE NET AND TO AVERAGE NET TURNOVER VALUE PERIOD RETURN(1) (IN THOUSANDS) ASSETS(11) REIMBURSEMENTS)(11) ASSETS RATE ------------------------------------------------------------------------------------------------------------------------------------ 4.47 $12.22 57.68% $ 3,291 2.20% 2.34% (1.24)% 104% (5.34) 7.75 (40.79) 3,795 2.20 2.34 (1.17) 93 (2.88) 13.09 (18.03)(4) 10,600 2.40(3) 2.50(3) (1.42)(3) 27(4) 1.36 15.97 9.31 15,407 2.29 2.29 (1.53) 77 0.70 14.61 5.03 10,102 2.27 2.27 (1.24) 124 1.73 13.91 14.20 12,776 2.28 2.28 (1.81) 46 4.47 $12.22 57.68% $ 4,775 2.20% 2.34% (1.29)% 104% (5.32) 7.75 (40.70) 2,509 2.20 2.35 (1.16) 93 (2.89) 13.07 (18.11)(4) 5,629 2.41(3) 2.51(3) (1.43)(3) 27(4) 1.36 15.96 9.32 6,853 2.20 2.20 (2.60) 77 0.71 14.60 5.11 530 2.27 2.27 (1.29) 124 1.73 13.89 14.23 418 2.28 2.28 (1.81) 46 5.25 $14.12 59.19% $ 1,332 1.20% 1.34% (0.28)% 104% (5.93) 8.87 (40.07) 765 1.20 1.35 (0.13) 93 (3.19) 14.80 (17.73)(4) 1,472 1.40(3) 1.50(3) (0.41)(3) 27(4) 0.74 17.99 4.29(4) 2,086 1.09(3) 1.09(3) (3.85)(3) 77(4) 2.86 $ 9.18 47.40% $43,612 1.35% 1.52% 1.22% 165% (4.19) 6.32 (39.44) 44,283 1.35 1.46 1.16 140 (3.16) 10.51 (21.06)(4) 90,476 1.52(3) 1.55(3) 0.45(3) 103(4) 2.47 13.67 26.71 50,788 1.41 1.60 0.46 101 1.20 11.20 12.41(4) 3,292 1.40(3)(6) 7.45(3) 0.72(3) 136(4) 2.81 $ 9.05 46.15% $ 3,925 2.10% 2.28% 0.48% 165% (4.16) 6.24 (39.93) 2,997 2.10 2.20 0.33 140 (3.20) 10.40 (21.54)(4) 8,950 2.27(3) 2.31(3) (0.33)(3) 103(4) 2.42 13.60 25.77 1,128 2.16 2.58 (0.22) 101 1.18 11.18 11.85(4) 183 2.15(3)(6) 8.19(3) (0.05)(3) 136(4) 2.86 $ 9.18 47.74% $ 343 1.10% 1.29% 1.67% 165% (4.72) 6.32 (42.22)(4) 58 1.10(3) 1.25(3) 1.68(3) 140(4) 3.69 $ 9.98 60.78% $37,605 1.55% 1.74% 1.37% 14% (3.37) 6.29 (33.77) 23,355 1.45(9) 1.84 1.81 15 (2.08) 9.66 (16.92)(4) 12,422 1.47(3) 1.63(3) 1.68(3) 0(4) 1.69 11.74 17.51 8,506 1.40 2.19 2.14 17 0.05 10.05 0.50(4) 101 1.40(3) 26.39(3) 1.82(3) 7(4) See Notes to Financial Statements 51
VIRTUS EQUITY TRUST FINANCIAL HIGHLIGHTS (CONTINUED) SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD NET ASSET NET NET TOTAL DIVIDENDS DISTRIBUTIONS VALUE, INVESTMENT REALIZED AND FROM FROM NET FROM NET BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL OF PERIOD (LOSS)(2) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS ------------------------------------------------------------------------------------------------------------------------------------ ---------------------------------- QUALITY SMALL-CAP FUND (CONTINUED) ---------------------------------- CLASS C 4/1/09 to 3/31/10 $ 6.28 0.05 3.69 3.74 (0.05) -- (0.05) 4/1/08 to 3/31/09 9.65 0.07 (3.37) (3.30) (0.07) --(5) (0.07) 9/1/07 to 3/31/08 11.68 0.06 (2.06) (2.00) -- (0.03) (0.03) 9/1/06 to 8/31/07 10.04 0.10 1.57 1.67 (0.01) (0.02) (0.03) 6/28/06(7) to 8/31/06 10.00 0.02 0.02 0.04 -- -- -- CLASS I 4/1/09 to 3/31/10 $ 6.29 0.14 3.69 3.83 (0.13) -- (0.13) 4/1/08 to 3/31/09 9.67 0.16 (3.38) (3.22) (0.16) --(5) (0.16) 9/1/07 to 3/31/08 11.76 0.13 (2.08) (1.95) (0.11) (0.03) (0.14) 9/1/06 to 8/31/07 10.06 0.21 1.57 1.78 (0.06) (0.02) (0.08) 6/28/06(7) to 8/31/06 10.00 0.07 (0.01) 0.06 -- -- -- ------------------- SMALL-CAP CORE FUND ------------------- CLASS A 4/1/09 to 3/31/10 $ 9.36 (0.04) 5.49 5.45 -- -- -- 4/1/08 to 3/31/09 14.76 --(5) (3.89) (3.89) --(5) (1.51) (1.51) 1/01/08 to 3/31/08 17.31 (0.02) (2.53) (2.55) -- -- -- 1/1/07 to 12/31/07 19.46 (0.12) 0.10 (0.02) -- (2.13) (2.13) 1/1/06 to 12/31/06 21.15 (0.12) 2.52 2.40 -- (4.09) (4.09) 1/1/05 to 12/31/05 20.59 (0.09) 0.65 0.56 -- -- -- CLASS B 4/1/09 to 3/31/10 $ 8.77 (0.12) 5.13 5.01 -- -- -- 4/1/08 to 3/31/09 14.03 (0.09) (3.66) (3.75) --(5) (1.51) (1.51) 1/1/08 to 3/31/08 16.48 (0.05) (2.40) (2.45) -- -- -- 1/1/07 to 12/31/07 18.76 (0.26) 0.11 (0.15) -- (2.13) (2.13) 1/1/06 to 12/31/06 20.67 (0.28) 2.46 2.18 -- (4.09) (4.09) 1/1/05 to 12/31/05 20.27 (0.23) 0.63 0.40 -- -- -- CLASS C 4/1/09 to 3/31/10 $ 8.78 (0.13) 5.14 5.01 -- -- -- 4/1/08 to 3/31/09 14.05 (0.09) (3.67) (3.76) --(5) (1.51) (1.51) 1/1/08 to 3/31/08 16.50 (0.05) (2.40) (2.45) -- -- -- 1/1/07 to 12/31/07 18.79 (0.26) 0.10 (0.16) -- (2.13) (2.13) 1/1/06 to 12/31/06 20.69 (0.28) 2.47 2.19 -- (4.09) (4.09) 1/1/05 to 12/31/05 20.30 (0.23) 0.62 0.39 -- -- -- CLASS I 4/1/09 to 3/31/10 $ 9.56 (0.01) 5.62 5.61 -- -- -- 4/1/08 to 3/31/09 15.02 0.03 (3.98) (3.95) --(5) (1.51) (1.51) 1/1/08 to 3/31/08 17.60 (0.01) (2.57) (2.58) -- -- -- 1/1/07 to 12/31/07 19.70 (0.08) 0.11 0.03 -- (2.13) (2.13) 1/1/06 to 12/31/06 21.31 (0.07) 2.55 2.48 -- (4.09) (4.09) 1/1/05 to 12/31/05 20.70 (0.04) 0.65 0.61 -- -- -- The footnote legend is at the end of the financial highlights. See Notes to Financial Statements 52
RATIO OF GROSS EXPENSES TO NET NET AVERAGE RATIO OF NET ASSET ASSETS, RATIO OF NET NET ASSETS INVESTMENT CHANGE IN VALUE, END OF EXPENSES TO (BEFORE WAIVERS INCOME (LOSS) PORTFOLIO NET ASSET END OF TOTAL PERIOD AVERAGE NET AND TO AVERAGE NET TURNOVER VALUE PERIOD RETURN(1) (IN THOUSANDS) ASSETS(11) REIMBURSEMENTS)(11) ASSETS RATE --------- ------ --------- -------------- ------------ ------------------- -------------- --------- 3.69 $ 9.97 59.74% $ 3,407 2.30% 2.48% 0.64% 14% (3.37) 6.28 (34.30) 1,436 2.19(8) 2.55 0.89 15 (2.03) 9.65 (17.25)(4) 2,108 2.22(3) 2.38(3) 0.92(3) 0(4) 1.64 11.68 16.61 1,354 2.16 3.45 0.89 17 0.04 10.04 0.40(4) 138 2.15(3) 25.96(3) 1.38(3) 7(4) 3.70 $ 9.99 61.32% $56,820 1.30% 1.48% 1.61% 14% (3.38) 6.29 (33.66) 33,496 1.19(8) 1.55 1.95 15 (2.09) 9.67 (16.75)(4) 46,717 1.25(3) 1.42(3) 2.07(3) 0(4) 1.70 11.76 17.74 10,691 1.15 2.54 1.82 17 0.06 10.06 0.60(4) 1,070 1.15(3) 21.32(3) 3.85(3) 7(4) 5.45 $14.81 58.23% $15,167 1.62% 1.62% (0.32)% 23% (5.40) 9.36 (29.71) 10,339 1.59 1.59 (0.01) 95 (2.55) 14.76 (14.73)(4) 20,204 1.66(3) 1.66(3) (0.60)(3) 8(4) (2.15) 17.31 (0.32) 25,534 1.45 1.45 (0.63) 18 (1.69) 19.46 11.70 33,383 1.47 1.47 (0.55) 26 0.56 21.15 2.72 38,170 1.42 1.42 (0.45) 22 5.01 $13.78 57.13% $ 782 2.37% 2.37% (1.07)% 23% (5.26) 8.77 (30.30) 720 2.34 2.34 (0.78) 95 (2.45) 14.03 (14.87)(4) 1,623 2.41(3) 2.41(3) (1.35)(3) 8(4) (2.28) 16.48 (1.04) 2,136 2.20 2.20 (1.39) 18 (1.91) 18.76 10.88 3,024 2.22 2.22 (1.30) 26 0.40 20.67 1.97 3,960 2.19 2.19 (1.19) 22 5.01 $13.79 57.06% $ 5,989 2.37% 2.37% (1.06)% 23% (5.27) 8.78 (30.33) 3,028 2.34 2.34 (0.79) 95 (2.45) 14.05 (14.85)(4) 6,569 2.41(3) 2.41(3) (1.35)(3) 8(4) (2.29) 16.50 (1.09) 8,590 2.20 2.20 (1.38) 18 (1.90) 18.79 10.93 11,646 2.22 2.22 (1.30) 26 0.39 20.69 1.92 14,102 2.19 2.19 (1.19) 22 5.61 $15.17 58.68% $31,810 1.37% 1.37% (0.06)% 23% (5.46) 9.56 (29.59) 17,881 1.34 1.34 0.22 95 (2.58) 15.02 (14.66)(4) 32,655 1.41(3) 1.41(3) (0.36)(3) 8(4) (2.10) 17.60 (0.11) 42,525 1.20 1.20 (0.38) 18 (1.61) 19.70 12.05 64,361 1.22 1.22 (0.30) 26 0.61 21.31 2.95 78,290 1.17 1.17 (0.18) 22 See Notes to Financial Statements 53
VIRTUS EQUITY TRUST FINANCIAL HIGHLIGHTS (CONTINUED) SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD NET ASSET NET NET TOTAL DIVIDENDS DISTRIBUTIONS VALUE, INVESTMENT REALIZED AND FROM FROM NET FROM NET BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL OF PERIOD (LOSS)(2) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS ------------------------------------------------------------------------------------------------------------------------------------ --------------------- SMALL-CAP GROWTH FUND --------------------- CLASS A 4/1/09 to 3/31/10 $17.03 (0.32) 10.36 10.04 -- -- -- 4/1/08 to 3/31/09 30.28 (0.35) (12.90) (13.25) -- -- -- 1/1/08 to 3/31/08 37.26 (0.12) (6.86) (6.98) -- -- -- 1/1/07 to 12/31/07 34.30 (0.41) 3.37 2.96 -- -- -- 1/1/06 to 12/31/06 32.53 (0.39) 2.16 1.77 -- -- -- 1/1/05 to 12/31/05 29.65 (0.35) 3.23 2.88 -- -- -- CLASS B 4/1/09 to 3/31/10 $15.48 (0.43) 9.37 8.94 -- -- -- 4/1/08 to 3/31/09 27.73 (0.51) (11.74) (12.25) -- -- -- 1/1/08 to 3/31/08 34.19 (0.16) (6.30) (6.46) -- -- -- 1/1/07 to 12/31/07 31.71 (0.64) 3.12 2.48 -- -- -- 1/1/06 to 12/31/06 30.30 (0.59) 2.00 1.41 -- -- -- 1/1/05 to 12/31/05 27.82 (0.54) 3.02 2.48 -- -- -- CLASS C 4/1/09 to 3/31/10 $15.47 (0.44) 9.38 8.94 -- -- -- 4/1/08 to 3/31/09 27.72 (0.50) (11.75) (12.25) -- -- -- 1/1/08 to 3/31/08 34.18 (0.16) (6.30) (6.46) -- -- -- 1/1/07 to 12/31/07 31.70 (0.64) 3.12 2.48 -- -- -- 1/1/06 to 12/31/06 30.29 (0.59) 2.00 1.41 -- -- -- 1/1/05 to 12/31/05 27.81 (0.54) 3.02 2.48 -- -- -- --------------------------------- SMALL-CAP SUSTAINABLE GROWTH FUND --------------------------------- CLASS A 4/1/09 to 3/31/10 $ 6.20 (0.06) 3.37 3.31 -- -- -- 4/1/08 to 3/31/09 9.15 (0.08) (2.87) (2.95) -- -- -- 9/1/07 to 3/31/08 10.34 (0.07) (1.12) (1.19) -- -- -- 9/1/06 to 8/31/07 9.79 (0.10) 0.65 0.55 -- -- -- 6/28/06(7) to 8/31/06 10.00 (0.01) (0.20) (0.21) -- -- -- CLASS C 4/1/09 to 3/31/10 $ 6.06 (0.11) 3.29 3.18 -- -- -- 4/1/08 to 3/31/09 9.03 (0.12) (2.85) (2.97) -- -- -- 9/1/07 to 3/31/08 10.25 (0.11) (1.11) (1.22) -- -- -- 9/1/06 to 8/31/07 9.77 (0.18) 0.66 0.48 -- -- -- 6/28/06(7) to 8/31/06 10.00 (0.03) (0.20) (0.23) -- -- -- CLASS I 4/1/09 to 3/31/10 $ 6.18 (0.04) 3.38 3.34 -- -- -- 4/1/08 to 3/31/09 9.19 (0.04) (2.97) (3.01) -- -- -- 9/1/07 to 3/31/08 10.37 (0.05) (1.13) (1.18) -- -- -- 9/1/06 to 8/31/07 9.79 (0.08) 0.66 0.58 -- -- -- 6/28/06(7) to 8/31/06 10.00 (0.01) (0.20) (0.21) -- -- -- The footnote legend is at the end of the financial highlights. See Notes to Financial Statements 54
RATIO OF GROSS EXPENSES TO NET NET AVERAGE RATIO OF NET ASSET ASSETS, RATIO OF NET NET ASSETS INVESTMENT CHANGE IN VALUE, END OF EXPENSES TO (BEFORE WAIVERS INCOME (LOSS) PORTFOLIO NET ASSET END OF TOTAL PERIOD AVERAGE NET AND TO AVERAGE NET TURNOVER VALUE PERIOD RETURN(1) (IN THOUSANDS) ASSETS(11) REIMBURSEMENTS)(11) ASSETS RATE -------------------------------------------------------------------------------------------------------------------------------- 10.04 $27.07 58.95% $ 51,433 1.67% 1.96% (1.42)% 112% (13.25) 17.03 (43.76) 39,353 1.84(8) 1.93 (1.42) 158 (6.98) 30.28 (18.73)(4) 81,622 1.86(3) 1.86(3) (1.44)(3) 14(4) 2.96 37.26 8.63 104,135 1.67 1.72 (1.12) 35 1.77 34.30 5.41 120,953 1.60 1.68 (1.16) 22 2.88 32.53 9.75 168,527 1.58 1.69 (1.18) 38 8.94 $24.42 57.75% $ 3,866 2.42% 2.71% (2.16)% 112% (12.25) 15.48 (44.18) 4,162 2.59(8) 2.66 (2.17) 158 (6.46) 27.73 (18.89)(4) 13,662 2.61(3) 2.61(3) (2.20)(3) 14(4) 2.48 34.19 7.82 19,320 2.42 2.47 (1.87) 35 1.41 31.71 4.62 27,138 2.35 2.44 (1.91) 22 2.48 30.30 8.95 41,105 2.34 2.44 (1.93) 38 8.94 $24.41 57.79% $ 6,036 2.42% 2.71% (2.17)% 112% (12.25) 15.47 (44.19) 4,562 2.59(8) 2.67 (2.17) 158 (6.46) 27.72 (18.90)(4) 11,465 2.61(3) 2.61(3) (2.19)(3) 14(4) 2.48 34.18 7.82 15,352 2.42 2.47 (1.87) 35 1.41 31.70 4.66 18,426 2.36 2.43 (1.91) 22 2.48 30.29 8.92 23,653 2.34 2.44 (1.93) 38 3.31 $ 9.51 53.39% $ 1,180 1.65% 2.27% (0.77)% 26% (2.95) 6.20 (32.24) 2,185 1.44(8) 1.97 (0.87) 64 (1.19) 9.15 (11.51)(4) 8,481 1.54(3) 1.84(3) (1.12)(3) 12(4) 0.55 10.34 5.62 10,222 1.40 2.16 (0.96) 26 (0.21) 9.79 (2.10)(4) 100 1.40(3) 28.32(3) (0.87)(3) 4(4) 3.18 $ 9.24 52.48% $ 359 2.40% 3.18% (1.34)% 26% (2.97) 6.06 (32.89) 165 2.22(8) 2.72 (1.57) 64 (1.22) 9.03 (11.90)(4) 181 2.29(3) 2.60(3) (1.86)(3) 12(4) 0.48 10.25 4.81 174 2.15 4.31 (1.78) 26 (0.23) 9.77 (2.20)(4) 98 2.15(3) 29.09(3) (1.61)(3) 4(4) 3.34 $ 9.52 54.05% $ 4,098 1.40% 2.10% (0.49)% 26% (3.01) 6.18 (32.75) 6,010 1.23(8) 1.72 (0.55) 64 (1.18) 9.19 (11.38)(4) 5,971 1.30(3) 1.60(3) (0.88)(3) 12(4) 0.58 10.37 5.92 6,231 1.16 2.94 (0.77) 26 (0.21) 9.79 (2.10)(4) 898 1.15(3) 23.99(3) (0.61)(3) 4(4) See Notes to Financial Statements 55
VIRTUS EQUITY TRUST FINANCIAL HIGHLIGHTS (CONTINUED) SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD NET ASSET NET NET TOTAL DIVIDENDS DISTRIBUTIONS VALUE, INVESTMENT REALIZED AND FROM FROM NET FROM NET BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL OF PERIOD (LOSS)(2) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS ------------------------------------------------------------------------------------------------------------------------------------ ------------------------ STRATEGIC GROWTH FUND ------------------------ CLASS A 4/1/09 to 3/31/10 $ 5.78 (0.02) 2.72 2.70 -- -- -- 4/1/08 to 3/31/09 9.50 (0.03) (3.69) (3.72) -- -- -- 5/1/07 to 3/31/08 9.99 (0.05) (0.44) (0.49) -- -- -- 5/1/06 to 4/30/07 9.78 (0.06) 0.27 0.21 -- -- -- 5/1/05 to 4/30/06 8.59 (0.06) 1.25 1.19 -- -- -- 5/1/04 to 4/30/05 8.64 (0.06) 0.01 (0.05) -- -- -- CLASS B 4/1/09 to 3/31/10 $ 5.12 (0.07) 2.41 2.34 -- -- -- 4/1/08 to 3/31/09 8.48 (0.08) (3.28) (3.36) -- -- -- 5/1/07 to 3/31/08 8.98 (0.11) (0.39) (0.50) -- -- -- 5/1/06 to 4/30/07 8.86 (0.12) 0.24 0.12 -- -- -- 5/1/05 to 4/30/06 7.84 (0.12) 1.14 1.02 -- -- -- 5/1/04 to 4/30/05 7.94 (0.11) 0.01 (0.10) -- -- -- CLASS C 4/1/09 to 3/31/10 $ 5.12 (0.07) 2.41 2.34 -- -- -- 4/1/08 to 3/31/09 8.49 (0.08) (3.29) (3.37) -- -- -- 5/1/07 to 3/31/08 8.99 (0.11) (0.39) (0.50) -- -- -- 5/1/06 to 4/30/07 8.87 (0.11) 0.23 0.12 -- -- -- 5/1/05 to 4/30/06 7.85 (0.12) 1.14 1.02 -- -- -- 5/1/04 to 4/30/05 7.95 (0.11) 0.01 (0.10) -- -- -- CLASS I 4/1/09 to 3/31/10 $ 5.82 (0.01) 2.75 2.74 -- -- -- 4/1/08 to 3/31/09 9.54 (0.01) (3.71) (3.72) -- -- -- 5/1/07 to 3/31/08 10.01 (0.03) (0.44) (0.47) -- -- -- 9/29/06(7) to 4/30/07 9.26 (0.01) 0.76 0.75 -- -- -- ------------------------ TACTICAL ALLOCATION FUND ------------------------ CLASS A 4/1/09 to 3/31/10 $ 6.33 0.16 1.87 2.03 (0.18) -- (0.18) 4/1/08 to 3/31/09 8.59 0.24 (2.18) (1.94) (0.26) (0.06) (0.32) 5/1/07 to 3/31/08 9.71 0.22 (0.48) (0.26) (0.23) (0.63) (0.86) 5/1/06 to 4/30/07 9.18 0.23 0.75 0.98 (0.24) (0.21) (0.45) 5/1/05 to 4/30/06 8.90 0.22 0.44 0.66 (0.24) (0.14) (0.38) 5/1/04 to 4/30/05 8.66 0.22 0.26 0.48 (0.24) -- (0.24) CLASS B 4/1/09 to 3/31/10 $ 6.39 0.10 1.89 1.99 (0.12) -- (0.12) 4/1/08 to 3/31/09 8.65 0.18 (2.18) (2.00) (0.20) (0.06) (0.26) 5/1/07 to 3/31/08 9.77 0.15 (0.48) (0.33) (0.16) (0.63) (0.79) 5/1/06 to 4/30/07 9.23 0.16 0.76 0.92 (0.17) (0.21) (0.38) 5/1/05 to 4/30/06 8.95 0.15 0.44 0.59 (0.17) (0.14) (0.31) 5/1/04 to 4/30/05 8.71 0.15 0.26 0.41 (0.17) -- (0.17) The footnote legend is at the end of the financial highlights. See Notes to Financial Statements 56
RATIO OF GROSS EXPENSES TO NET NET AVERAGE RATIO OF NET ASSET ASSETS, RATIO OF NET NET ASSETS INVESTMENT CHANGE IN VALUE, END OF EXPENSES TO (BEFORE WAIVERS INCOME (LOSS) PORTFOLIO NET ASSET END OF TOTAL PERIOD AVERAGE NET AND TO AVERAGE NET TURNOVER VALUE PERIOD RETURN(1) (IN THOUSANDS) ASSETS(11) REIMBURSEMENTS)(11) ASSETS RATE ------------------------------------------------------------------------------------------------------------------------------------ 2.70 $ 8.48 46.71% $420,181 1.46% 1.46% (0.31)% 52% (3.72) 5.78 (39.16) 71,082 1.53 1.53 (0.43) 91 (0.49) 9.50 (4.90)(4) 133,119 1.44(3) 1.44(3) (0.53)(3) 75(4) 0.21 9.99 2.15 161,396 1.61 1.61 (0.61) 81 1.19 9.78 13.85 106,693 1.62 1.62 (0.66) 63 (0.05) 8.59 (0.58) 128,426 1.56 1.56 (0.67) 107 2.34 $ 7.46 45.70% $ 8,067 2.21% 2.21% (1.07)% 52% (3.36) 5.12 (39.62) 2,374 2.27 2.27 (1.18) 91 (0.50) 8.48 (5.57)(4) 6,242 2.19(3) 2.19(3) (1.27)(3) 75(4) 0.12 8.98 1.35 9,932 2.36 2.36 (1.36) 81 1.02 8.86 13.01 7,885 2.37 2.37 (1.41) 63 (0.10) 7.84 (1.26) 11,006 2.32 2.32 (1.40) 107 2.34 $ 7.46 45.70% $ 7,351 2.21% 2.21% (1.08)% 52% (3.37) 5.12 (39.69) 1,685 2.28 2.28 (1.18) 91 (0.50) 8.49 (5.56)(4) 3,625 2.19(3) 2.19(3) (1.27)(3) 75(4) 0.12 8.99 1.35 4,843 2.32 2.32 (1.30) 81 1.02 8.87 12.99 1,490 2.37 2.37 (1.42) 63 (0.10) 7.85 (1.26) 2,371 2.31 2.31 (1.42) 107 2.74 $ 8.56 47.08% $ 3,802 1.22% 1.22% (0.07)% 52% (3.72) 5.82 (38.99) 3,127 1.28 1.28 (0.18) 91 (0.47) 9.54 (4.70)(4) 5,689 1.19(3) 1.19(3) (0.27)(3) 75(4) 0.75 10.01 8.10(4) 7,208 1.27(3) 1.27(3) (0.24)(3) 81(4) 1.85 $ 8.18 32.29% $195,988 1.33% 1.33% 2.09% 139% (2.26) 6.33 (23.17) 163,586 1.33 1.33 3.19 86 (1.12) 8.59 (3.08)(4) 250,502 1.32(3) 1.32(3) 2.52(3) 44(4) 0.53 9.71 10.93 296,354 1.34 1.34 2.47 46 0.28 9.18 7.33 318,318 1.28 1.28 2.38 72 0.24 8.90 5.53 350,609 1.28 1.28 2.46 59 1.87 $ 8.26 31.34% $ 1,961 2.08% 2.08% 1.35% 139% (2.26) 6.39 (23.59) 2,217 2.08 2.08 2.38 86 (1.12) 8.65 (3.79)(4) 4,820 2.06(3) 2.06(3) 1.76(3) 44(4) 0.54 9.77 10.04 7,059 2.08 2.08 1.73 46 0.28 9.23 6.58 10,997 2.03 2.03 1.62 72 0.24 8.95 4.69 16,145 2.03 2.03 1.71 59 See Notes to Financial Statements 57
VIRTUS EQUITY TRUST FINANCIAL HIGHLIGHTS (CONTINUED) SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD NET ASSET NET NET TOTAL DIVIDENDS DISTRIBUTIONS VALUE, INVESTMENT REALIZED AND FROM FROM NET FROM NET BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL OF PERIOD (LOSS)(2) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------ TACTICAL ALLOCATION FUND (CONTINUED) ------------------------------------ CLASS C 4/1/09 to 3/31/10 $6.44 0.10 1.91 2.01 (0.12) -- (0.12) 4/1/08 to 3/31/09 8.73 0.18 (2.21) (2.03) (0.20) (0.06) (0.26) 5/1/07 to 3/31/08 9.86 0.16 (0.50) (0.34) (0.16) (0.63) (0.79) 5/1/06 to 4/30/07 9.31 0.16 0.77 0.93 (0.17) (0.21) (0.38) 5/1/05 to 4/30/06 9.02 0.15 0.45 0.60 (0.17) (0.14) (0.31) 5/1/04 to 4/30/05 8.78 0.15 0.26 0.41 (0.17) -- (0.17) FOOTNOTE LEGEND: (1) Sales charges, where applicable, are not reflected in the total return calculation. (2) Computed using average shares outstanding. (3) Annualized. (4) Not annualized. (5) Amount is less than $0.005. (6) For the Quality Large-Cap Value Fund, the ratio of net expenses to average net assets excludes the effect of expense offsets for custodian fees; if expense offsets were included, the ratio would have been 0.05% lower than the ratio shown in the table. (7) Inception date. (8) Represents a blended Ratio, for more information regarding this see Note 3 in the Notes to Financial Statements. (9) Unaudited. (10) Includes extraordinary expenses. See Note 3 in the Notes to Financial Statements. (11) For Funds which may invest in other funds the annualized expense ratios do not reflect the fees and expenses associated with the underlying funds. See Notes to Financial Statements 58
RATIO OF GROSS EXPENSES TO NET NET AVERAGE RATIO OF NET ASSET ASSETS, RATIO OF NET NET ASSETS INVESTMENT CHANGE IN VALUE, END OF EXPENSES TO (BEFORE WAIVERS INCOME (LOSS) PORTFOLIO NET ASSET END OF TOTAL PERIOD AVERAGE NET AND TO AVERAGE NET TURNOVER VALUE PERIOD RETURN(1) (IN THOUSANDS) ASSETS(11) REIMBURSEMENTS)(11) ASSETS RATE ------------------------------------------------------------------------------------------------------------------------------------ 1.89 $8.33 31.41% $1,468 2.08% 2.08% 1.32% 139% (2.29) 6.44 (23.72) 800 2.08 2.08 2.38 86 (1.13) 8.73 (3.85)(4) 1,840 2.07(3) 2.07(3) 1.78(3) 44(4) 0.55 9.86 10.06 1,652 2.09 2.09 1.72 46 0.29 9.31 6.64 1,888 2.03 2.03 1.63 72 0.24 9.02 4.65 1,988 2.03 2.03 1.71 59 See Notes to Financial Statements 59
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS MARCH 31, 2010 1. ORGANIZATION Virtus Equity Trust (the "Trust") is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. As of the date of this report, 12 funds are offered for sale (each a "Fund"), of which ten are reported in this annual report. Each Fund's investment objective is outlined on the respective Fund's summary page. All the Funds offer Class A and Class C shares. All Funds with the exception of the Small-Cap Growth Fund and Tactical Allocation Fund also offer Class I shares. Effective December 1, 2009, Class B shares were no longer available for purchase by new or existing shareholders, except for existing shareholders through Qualifying Transactions (for more information regarding Qualifying Transactions refer to the prospectus). Class A shares are sold with a front-end sales charge of up to 5.75% with some exceptions. Generally, Class A shares are not subject to any charges by the Funds when redeemed; however, a 1% contingent deferred sales charge ("CDSC") may be imposed on certain redemptions made within a certain period following purchases on which a finder's fee has been paid. Prior to January 29, 2010, the CDSC was imposed on certain redemptions made within one year following purchases on which a finder's fee had been paid. As of January 29, 2010, the period for which the CDSC applies for the funds was modified to be 18 months. In each case, the CDSC period begins on the last day of the month preceding the month in which the purchase was made. Class B shares are sold with a contingent deferred sales charge, which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with a 1% contingent deferred sales charge if redeemed within one year of purchase. Class I shares are sold without a sales charge. Each class of shares has identical voting, dividend, liquidation and other rights and the same terms and conditions, except that each class bears different distribution and/or service expenses and has exclusive voting rights with respect to its distribution plan. Class I shares bear no distribution and/or service expenses. Income and other expenses and realized and unrealized gains and losses of each Fund are borne pro rata by the holders of each class of shares. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates and those differences could be significant. A. SECURITIES VALUATION: Equity securities are valued at the official closing price (typically last sale) on the exchange on which the securities are primarily traded, or if no closing price is available, at the last bid price. Debt securities are valued on the basis of broker quotations or valuations provided by a pricing service, which utilizes information with respect to recent sales, market transactions in comparable securities, quotations from dealers, and various relationships between securities in determining value. Due to continued volatility in the current market, valuations developed through pricing techniques may materially vary from the actual amounts realized upon sale of the securities. As required, some securities and assets may be valued at fair value as determined in good faith by or under the direction of the Trustees. Certain foreign securities may be fair valued in cases where closing prices are not readily available or are deemed not reflective of readily available market prices. For example, significant events (such as movement in the U.S. securities market, or other regional and local developments) may occur between the time that foreign markets close (where the security is principally traded) and the time that the Fund calculates its net asset value (generally, the close of the NYSE) that may impact the value of securities traded in those foreign markets. In such cases, the Fund fair values foreign securities using an external pricing service which considers the correlation of the trading patterns of the foreign securities to the intraday trading in the U.S. markets for investments such as American depositary receipts, financial futures, exchange-traded funds and certain indexes, as well as prices for similar securities. Because the frequency of significant events is not predictable, fair valuation of certain foreign common stocks may occur on a frequent basis. Investments in underlying money market mutual funds are valued at each fund's closing net asset value. Short-term investments having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market. The Funds utilize a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. - Level 1 - quoted prices in active markets for identical securities - Level 2 - prices determined using other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) - Level 3 - prices determined using significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) A summary of the inputs used to value each Fund's net assets by each major security type is located at the end of each Fund's Schedule of Investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. 60
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 B. SECURITY TRANSACTIONS AND RELATED INCOME: Security transactions are recorded on the trade date. Dividend income is recorded on the ex-dividend date, or in the case of certain foreign securities, as soon as the Fund is notified. Interest income is recorded on the accrual basis. Each Fund amortizes premiums and accretes discounts using the effective interest method. Realized gains and losses are determined on the identified cost basis. Dividend income is recorded using management's estimate of the income included in distributions received from REIT investments. Distributions received in excess of this estimated amount are recorded as a reduction of the cost of investments or reclassified to capital gains. The actual amounts of income, return of capital, and capital gains are only determined by each REIT after its fiscal year-end, and may differ from the estimated amounts. C. INCOME TAXES: Each Fund is treated as a separate taxable entity. It is the policy of each Fund to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes or excise taxes has been made. The Trust may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Each Fund will accrue such taxes and recoveries as applicable based upon current interpretations of the tax rules and regulations that exist in the markets in which they invest. The Funds have adopted the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Funds to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Funds have determined that there was no effect on the financial statements from the adoption of this authoritative guidance. The Funds do not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months. The Funds file tax returns as prescribed by the tax laws of the jurisdictions in which they operate. In the normal course of business, the Funds are subject to examination by federal, state and local jurisdictions, where applicable. As of March 31, 2010, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations is from the year 2007 forward (with limited exceptions). D. DISTRIBUTIONS TO SHAREHOLDERS: Distributions are recorded by each Fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences may include the treatment of non-taxable dividends, market premium and discount, non-deductible expenses, expiring capital loss carryovers, foreign currency gain or loss, gain or loss on futures contracts, partnerships, operating losses and losses deferred due to wash sales. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital paid in on shares of beneficial interest. E. EXPENSES: Expenses incurred by the Trust with respect to more than one Fund are allocated in proportion to the net assets of each Fund, except where allocation of direct expenses to each Fund or an alternative allocation method can be more appropriately made. F. FOREIGN CURRENCY TRANSLATION: Foreign securities and other foreign assets and liabilities are valued using the foreign currency exchange rate effective at the end of the reporting period. Cost of investments is translated at the currency exchange rate effective at the trade date. The gain or loss resulting from a change in currency exchange rates between the trade and settlement date of a portfolio transaction is treated as a gain or loss on foreign currency. Likewise, the gain or loss resulting from a change in currency exchange rates between the date income is accrued and the date it is paid is treated as a gain or loss on foreign currency. The Trust does not isolate that portion of the results of operations arising from changes in exchange rates or from fluctuations which arise due to changes in the market prices of securities. G. LOAN AGREEMENTS: Certain Funds may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. A Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the lender) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. Direct indebtedness of emerging countries involves a risk that the government entities responsible for the repayment of the debt may be unable, or unwilling, to pay the principal and interest when due. At March 31, 2010 the Funds did not have any open loan agreements. H. SECURITIES LENDING: Certain Funds may loan securities to qualified brokers through an agreement with PFPC Trust Co. ("PFPC"). Under the terms of the agreement, the Funds are required to maintain collateral with a market value not less than 100% of the market value of loaned securities. Collateral is adjusted daily in connection with changes in the market value of securities on loan. Collateral may consist of cash and securities issued by the U.S. Government. Cash collateral is invested in a short-term money market fund. Dividends earned on the collateral and premiums paid by the borrower are recorded as income by the Fund net of fees charged by PFPC for its services in connection with this securities lending program. Lending portfolio securities involves a risk of delay in the recovery of the loaned securities or in the foreclosure on collateral. At March 31, 2010, the Funds had no securities on loan. 61
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 3. INVESTMENT ADVISORY FEE AND RELATED PARTY TRANSACTIONS ($ REPORTED IN THOUSANDS EXCEPT AS NOTED) A. ADVISER: Virtus Investment Advisers, Inc. ("VIA," the "Adviser"), an indirect wholly-owned subsidiary of Virtus Investment Partners, Inc. ("Virtus"), is the Adviser to the Trust. For managing, or directing the management of, the investments of each Fund, the Adviser is entitled to a fee based upon the following annual rates as a percentage of the average daily net assets of each Fund: FIRST $50 MILLION NEXT $450 MILLION OVER $500 MILLION ----------------- ----------------- ----------------- Small-Cap Growth Fund .................... 1.00% 0.90% 0.80% FIRST $400 MILLION $400+ MILLION THROUGH $1 BILLION $1+ BILLION ------------------ -------------------------------- ----------- Quality Small-Cap Fund ................... 0.90% 0.85% 0.80% Small-Cap Sustainable Growth ............. 0.90% 0.85% 0.80% FIRST $500 MILLION OVER $500 MILLION ------------------ ----------------- Mid-Cap Growth Fund ...................... 0.80% 0.70% FIRST $1 BILLION $1+ BILLION THROUGH $2 BILLION $2+ BILLION ------------------ ------------------------------ ----------- Growth & Income Fund ..................... 0.75% 0.70% 0.65% Mid-Cap Core Fund ........................ 0.80% 0.75% 0.70% Quality Large-Cap Value Fund ............. 0.75% 0.70% 0.65% Small-Cap Core Fund ...................... 0.85% 0.80% 0.80% Strategic Growth Fund .................... 0.70% 0.65% 0.60% Tactical Allocation Fund ................. 0.70% 0.65% 0.60% The Adviser manages the Funds' investment programs and general operations of the Funds, including oversight of the Funds' subadvisers. B. SUBADVISER: The subadvisers manage the investments of the Funds for which they are paid a fee by the Adviser. The subadvisers with respect to the Funds are as follows: FUND SUBADVISER FUND SUBADVISER ---- -------------- ---- ---------- Mid-Cap Core Fund .................... KAR*(3) Small-Cap Growth Fund ............. EAM*(1) Mid-Cap Growth Fund .................. HIM(2) Small-Cap Sustainable Growth Fund . KAR*(3) Quality Large-Cap Value Fund++ ....... KAR*(3) Strategic Growth Fund ............. SCM*(4) Quality Small-Cap Fund ............... KAR*(3) Tactical Allocation Fund Small-Cap Core Fund .................. KAR*(3) (Fixed Income Portfolio)+ ...... SCM*(4) (1) Engemann Asset Management (2) Harris Investment Management, Inc. (a subsidiary of Harris Bankcorp, Inc., a minority investor in Virtus) (3) Kayne Anderson Rudnick Investment Management, LLC (4) SCM Advisors LLC * An affiliate of Virtus + Effective June 8, 2009, SCM Advisors LLC became the Fund's Subadviser. For the period April 1, 2009 through June 7, 2009, Goodwin Capital Advisers, Inc. was the Subadviser. ++ Effective September 1, 2009, Kayne Anderson Rudnick Investment Management became the Fund's Subadviser. For the period of April 1, 2009 through August 31, 2009, Acadian Asset Management LLC was the Subadviser. C. EXPENSE LIMITS AND FEE WAIVERS: The Adviser has voluntarily agreed to limit total Fund operating expenses (excluding interest, taxes and extraordinary expenses) so that such expenses do not exceed the following percentages of the average annual net asset values for the following Funds. The voluntary agreement may be discontinued with respect to any and all Funds at any time. CLASS A CLASS B CLASS C CLASS I ---------- ------- ------- ------- Growth & Income Fund ................. 1.25% 2.00% 2.00% 1.00% Mid-Cap Growth Fund .................. 1.45% 2.20% 2.20% 1.20% Quality Large-Cap Value Fund ......... 1.35% N/A 2.10% 1.10% Quality Small-Cap Fund ............... 1.55% N/A 2.30% 1.30% Small-Cap Growth Fund ................ 1.67% 2.42% 2.42% N/A Small-Cap Sustainable Growth Fund .... 1.65% N/A 2.40% 1.40% For the Mid-Cap Core Fund, the Adviser has contractually agreed to limit the total operating expenses (excluding interest, taxes and extraordinary expenses) until June 30, 2010, so that such expenses do not exceed, on an annual basis, the following amounts: CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1.35% N/A 2.10% 1.10% For the Growth & Income Fund for the period ended March 31, 2010, the ratio of net expenses to average net assets reported in the financial highlights includes the effect of a $265 reimbursement of extraordinary legal expenses incurred during the fiscal years ended March 31, 2008 and August 31, 2007, along with an additional $96 of extraordinary expenses incurred in the current fiscal period. If excluded, the net expense ratios for the period ended March 31, 2010 would have been as follows: Class A 1.25%, Class B 2.00%, Class C 2.00%, Class I 1.00%. 62
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 Effective August 23, 2007, the Adviser may recapture operating expenses waived or reimbursed under this arrangement, within three fiscal years following the end of the fiscal year in which such waiver or reimbursement occurred. Each Fund must pay its ordinary operating expenses before the Adviser is entitled to any reimbursement and must remain in compliance with applicable expense limitations. All or a portion of the following Adviser reimbursed expenses may be recaptured by the fiscal years ending: EXPIRATION DATE ------------------------------------------------------- 2010+ 2011 2012 2013 TOTAL ----- ----- ---- ---- ----- Growth & Income Fund ................................. $ 7 $229 $347 $311 $894 Mid-Cap Growth Fund .................................. -- 57 136 110 303 Quality Large-Cap Value Fund ......................... -- -- 79 85 164 Quality Small-Cap Fund ............................... 9 40 244 152 445 Small-Cap Growth Fund ................................ -- -- 68 165 233 Small-Cap Sustainable Growth Fund .................... 8 28 73 51 160 Mid-Cap Core Fund .................................... -- -- -- 73 73 + Expires August 31, 2010. D. DISTRIBUTOR: As the distributor of each Fund's shares, VP Distributors, Inc. ("VP Distributors"), an indirect wholly-owned subsidiary of Virtus, has advised the Funds that for the fiscal year ended March 31, 2010, it retained Class A net commissions of $75; Class B deferred sales charges of $37; and Class C deferred sales charges of $10. In addition, each Fund pays VP Distributors distribution and/or service fees at an annual rate of 0.25% for Class A shares, 1.00% for Class B shares and 1.00% for Class C shares applied to the average daily net assets of each respective Class. There are no distribution and/or service fees for Class I. Under certain circumstances, shares of certain Virtus Mutual Funds may be exchanged for shares of the same class of certain other Virtus Mutual Funds on the basis of the relative net asset values per share at the time of the exchange. On exchanges of share classes with CDSC, the CDSC schedule of the original shares purchased continues to apply. E. ADMINISTRATION AND TRANSFER AGENT SERVICES: VP Distributors serves as the Administrator to the Trust. For the period ended March 31, 2010, VP Distributors received administration fees totaling $584 which is included in the Statement of Operations. A portion of these fees was paid to a sub-administrator for certain accounting and administration services. VP Distributors also serves as the Trust's transfer agent. For the period ended March 31, 2010, VP Distributors received transfer agent fees totaling $1,981 which is included in the Statements of Operations. A portion of these fees was paid to various outside companies for certain sub-transfer agency services. F. AFFILIATED SHAREHOLDERS: At March 31, 2010, Virtus and its affiliates and the retirement plans of Virtus and its affiliates, held shares of the Funds which may be redeemed at any time that aggregated the following: AGGREGATE SHARES NET ASSETS ------- ---------- Mid-Cap Core Fund Class A .............................................. 10,087 $ 127 Class C .............................................. 10,087 126 Class I .............................................. 10,087 127 Quality Large-Cap Value Fund Class I ........................................... 9,299 85 Quality Small-Cap Fund Class I ........................................... 211,660 2,114 Small-Cap Sustainable Growth Fund Class C ........................................... 10,000 92 4. PURCHASES AND SALES OF SECURITIES ($ REPORTED IN THOUSANDS) Purchases and sales of investment securities (excluding U.S. Government and agency securities, short-term securities and forward currency contracts) during the period ended March 31, 2010, were as follows: PURCHASES SALES --------- -------- Growth & Income Fund ...................................... $ 46,857 $ 86,474 Mid-Cap Core Fund ......................................... 598 72 Mid-Cap Growth Fund ....................................... 80,267 87,912 Quality Large-Cap Value Fund .............................. 80,016 97,878 Quality Small-Cap Fund .................................... 11,924 10,464 Small-Cap Core Fund ....................................... 10,985 9,421 Small-Cap Growth Fund ..................................... 63,131 75,583 Small-Cap Sustainable Growth Fund ......................... 1,793 8,390 Strategic Growth Fund ..................................... 96,025 125,709 Tactical Allocation Fund .................................. 117,555 152,236 The Tactical Allocation Fund had purchases of $141,390 and sales of $123,392 of long-term U.S. Government and agency securities during the period ended March 31, 2010. 63
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 5. CAPITAL SHARE TRANSACTIONS (REPORTED IN THOUSANDS) Transactions in shares of capital stock, during the periods ended as indicated below, were as follows: ------------------------ ------------------------- SHARES AMOUNT SHARES AMOUNT -------- -------- -------- --------- ------------------------ ------------------------- -------------------- Year Ended Year Ended GROWTH & INCOME FUND March 31, 2010 March 31, 2009 -------------------- ------------------------ ------------------------- CLASS A Sale of shares 920 $ 11,399 984 $ 12,176 Reinvestment of distributions 99 1,190 95 1,284 Shares repurchased (3,133) (41,492) (2,598) (34,224) ------ -------- ------ -------- Net Increase / (Decrease) (2,114) $(28,903) (1,519) $(20,764) ====== ======== ====== ======== CLASS B Sale of shares 16 $ 189 50 $ 625 Reinvestment of distributions 4 44 -- -- Shares repurchased (252) (3,113) (475) (6,298) ------ -------- ------ -------- Net Increase / (Decrease) (232) $ (2,880) (425) $ (5,673) ====== ======== ====== ======== CLASS C Sale of shares 38 $ 474 75 $ 931 Reinvestment of distributions 15 169 1 9 Shares repurchased (376) (4,743) (606) (7,478) ------ -------- ------ -------- Net Increase / (Decrease) (323) $ (4,100) (530) $ (6,538) ====== ======== ====== ======== CLASS I Sale of shares 24 $ 320 80 $ 922 Reinvestment of distributions 8 98 12 169 Shares repurchased (401) (5,076) (476) (6,918) ------ -------- ------ -------- Net Increase / (Decrease) (369) $ (4,658) (384) $ (5,827) ====== ======== ====== ======== -------------------- MID-CAP CORE FUND(1) -------------------- CLASS A Sale of shares 27 $ 294 -- $ -- Reinvestment of distributions --(2) 2 -- -- Shares repurchased --(2) (1) -- -- ------ -------- ------ -------- Net Increase / (Decrease) 27 $ 295 -- $ -- ====== ======== ====== ======== CLASS C Sale of shares 10 $ 100 -- $ -- Reinvestment of distributions --(2) 1 -- -- ------ -------- ------ -------- Net Increase / (Decrease) 10 $ 101 -- $ -- ====== ======== ====== ======== CLASS I Sale of shares 13 $ 130 -- $ -- Reinvestment of distributions --(2) 1 -- -- Shares repurchased --(2) -- -- -- ------ -------- ------ -------- Net Increase / (Decrease) 13 $ 131 -- $ -- ====== ======== ====== ======== (1) Inception date of the Fund is June 22, 2009. (2) Shares less than 500. 64
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 ------------------------ ------------------------- SHARES AMOUNT SHARES AMOUNT -------- -------- -------- --------- ------------------------ ------------------------- -------------------- Year Ended Year Ended MID-CAP GROWTH FUND March 31, 2010 March 31, 2009 -------------------- ------------------------ ------------------------- CLASS A Sale of shares 443 $ 5,172 406 $ 4,721 Reinvestment of distributions --(1) --(2) -- -- Shares repurchased (915) (10,865) (1,058) (13,070) ------ -------- ------ -------- Net Increase / (Decrease) (472) $ (5,693) (652) $ (8,349) ====== ======== ====== ======== CLASS B Sale of shares 18 $ 182 44 $ 465 Shares repurchased (238) (2,434) (365) (3,914) ------ -------- ------ -------- Net Increase / (Decrease) (220) $ (2,252) (321) $ (3,449) ====== ======== ====== ======== CLASS C Sale of shares 147 $ 1,407 20 $ 168 Shares repurchased (80) (810) (127) (1,442) ------ -------- ------ -------- Net Increase / (Decrease) 67 $ 597 (107) $ (1,274) ====== ======== ====== ======== CLASS I Sale of shares 48 $ 596 17 $ 161 Shares repurchased (40) (491) (30) (273) ------ -------- ------ -------- Net Increase / (Decrease) 8 $ 105 (13) $ (112) ====== ======== ====== ======== ----------------------------- QUALITY LARGE-CAP VALUE FUND ----------------------------- CLASS A Sale of shares 492 $ 3,645 1,003 $ 8,140 Reinvestment of distributions 76 556 44 338 Shares repurchased (2,826) (21,930) (2,643) (23,963) ------ -------- ------ -------- Net Increase / (Decrease) (2,258) $(17,729) (1,596) $(15,485) ====== ======== ====== ======== CLASS C Sale of shares 88 $ 733 104 $ 641 Reinvestment of distributions 2 17 --(1) 3 Shares repurchased (138) (1,062) (484) (4,219) ------ -------- ------ -------- Net Increase / (Decrease) (48) $ (312) (380) $ (3,575) ====== ======== ====== ======== CLASS I Sale of shares 30 $ 255 9 $ 100 Reinvestment of distributions --(1) 2 --(1) 1 Shares repurchased (2) (16) -- -- ------ -------- ------ -------- Net Increase / (Decrease) 28 $ 241 9 $ 101 ====== ======== ====== ======== (1) Shares less than 500. (2) Amount is less than $500. 65
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 ----------------- ----------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ----------------- ----------------- ---------------------- Year Ended Year Ended QUALITY SMALL-CAP FUND March 31, 2010 March 31, 2009 ---------------------- ----------------- ----------------- CLASS A Sale of shares 1,201 $ 10,301 3,361 $ 23,505 Reinvestment of distributions 46 380 22 180 Shares repurchased (1,194) (10,141) (953) (7,251) ------ -------- ------ -------- Net Increase / (Decrease) 53 $ 540 2,430 $ 16,434 ====== ======== ====== ======== CLASS C Sale of shares 179 $ 1,477 81 $ 692 Reinvestment of distributions 2 14 2 16 Shares repurchased (67) (585) (73) (533) ------ -------- ------ -------- Net Increase / (Decrease) 114 $ 906 10 $ 175 ====== ======== ====== ======== CLASS I Sale of shares 2,892 $ 25,129 3,836 $ 34,591 Reinvestment of distributions 81 670 121 996 Shares repurchased (2,611) (22,842) (3,461) (27,168) ------ -------- ------ -------- Net Increase / (Decrease) 362 $ 2,957 496 $ 8,419 ====== ======== ====== ======== ------------------- SMALL-CAP CORE FUND ------------------- CLASS A Sale of shares 237 $ 3,082 160 $ 1,828 Reinvestment of distributions -- -- 125 1,740 Shares repurchased (318) (4,017) (548) (6,771) ------ -------- ------ -------- Net Increase / (Decrease) (81) $ (935) (263) $ (3,203) ====== ======== ====== ======== CLASS B Sale of shares 3 $ 35 6 $ 66 Reinvestment of distributions -- -- 10 127 Shares repurchased (28) (345) (49) (609) ------ -------- ------ -------- Net Increase / (Decrease) (25) $ (310) (33) $ (416) ====== ======== ====== ======== CLASS C Sale of shares 157 $ 1,905 65 $ 686 Reinvestment of distributions -- -- 33 434 Shares repurchased (67) (795) (221) (2,595) ------ -------- ------ -------- Net Increase / (Decrease) 90 $ 1,110 (123) $ (1,475) ====== ======== ====== ======== CLASS I Sale of shares 629 $ 8,480 755 $ 8,235 Reinvestment of distributions -- -- 189 2,695 Shares repurchased (403) (5,180) (1,246) (13,835) ------ -------- ------ -------- Net Increase / (Decrease) 226 $ 3,300 (302) $ (2,905) ====== ======== ====== ======== 66
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 ----------------- ----------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ----------------- ----------------- --------------------- Year Ended Year Ended SMALL-CAP GROWTH FUND March 31, 2010 March 31, 2009 --------------------- ----------------- ----------------- CLASS A Sale of shares 122 $ 2,631 223 $ 5,428 Shares repurchased (533) (12,177) (607) (14,130) ------ -------- ------ -------- Net Increase / (Decrease) (411) $ (9,546) (384) $ (8,702) ====== ======== ====== ======== CLASS B Sale of shares 7 $ 136 17 $ 363 Shares repurchased (118) (2,330) (241) (5,396) ------ -------- ------ -------- Net Increase / (Decrease) (111) $ (2,194) (224) $ (5,033) ====== ======== ====== ======== CLASS C Sale of shares 8 $ 166 6 $ 140 Shares repurchased (56) (1,166) (125) (2,747) ------ -------- ------ -------- Net Increase / (Decrease) (48) $ (1,000) (119) $ (2,607) ====== ======== ====== ======== --------------------------------- SMALL-CAP SUSTAINABLE GROWTH FUND --------------------------------- CLASS A Sale of shares 116 $ 889 455 $ 4,243 Shares repurchased (344) (2,947) (1,029) (8,332) ------ -------- ------ -------- Net Increase / (Decrease) (228) $ (2,058) (574) $ (4,089) ====== ======== ====== ======== CLASS C Sale of shares 17 $ 131 20 $ 167 Shares repurchased (6) (44) (13) (88) ------ -------- ------ -------- Net Increase / (Decrease) 11 $ 87 7 $ 79 ====== ======== ====== ======== CLASS I Sale of shares 104 $ 826 1,221 $ 9,609 Shares repurchased (646) (5,198) (899) (5,853) ------ -------- ------ -------- Net Increase / (Decrease) (542) $ (4,372) 322 $ 3,756 ====== ======== ====== ======== --------------------- STRATEGIC GROWTH FUND --------------------- CLASS A Sale of shares 633 $ 4,661 306 $ 2,357 Plans of Reorganization (Note 12) 40,081 297,847 -- -- Shares repurchased (3,450) (26,341) (2,012) (14,759) ------ -------- ------ -------- Net Increase / (Decrease) 37,264 $276,167 (1,706) $(12,402) ====== ======== ====== ======== CLASS B Sale of shares 26 $ 160 41 $ 280 Plans of Reorganization (Note 12) 887 5,658 -- -- Shares repurchased (295) (1,925) (313) (2,140) ------ -------- ------ -------- Net Increase / (Decrease) 618 $ 3,893 (272) $ (1,860) ====== ======== ====== ======== 67
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 ----------------- ----------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ----------------- ----------------- --------------------------------- Year Ended Year Ended STRATEGIC GROWTH FUND (CONTINUED) March 31, 2010 March 31, 2009 --------------------------------- ----------------- ----------------- CLASS C Sale of shares 44 $ 293 19 $ 119 Plans of Reorganization (Note 12) 1,023 6,050 -- -- Shares repurchased (411) (2,617) (117) (744) ------ -------- ------ -------- Net Increase / (Decrease) 656 $ 3,726 (98) $ (625) ====== ======== ====== ======== CLASS I Sale of shares 94 $ 735 16 $ 109 Shares repurchased (188) (1,389) (75) (473) ------ -------- ------ -------- Net Increase / (Decrease) (94) $ (654) (59) $ (364) ====== ======== ====== ======== ------------------------ TACTICAL ALLOCATION FUND ------------------------ CLASS A Sale of shares 412 $ 3,140 325 $ 2,428 Reinvestment of distributions 473 3,577 937 7,015 Shares repurchased (2,786) (21,285) (4,576) (33,758) ------ -------- ------ -------- Net Increase / (Decrease) (1,901) $(14,568) (3,314) $(24,315) ====== ======== ====== ======== CLASS B Sale of shares 26 $ 193 30 $ 225 Reinvestment of distributions 5 34 14 104 Shares repurchased (141) (1,069) (254) (1,988) ------ -------- ------ -------- Net Increase / (Decrease) (110) $ (842) (210) $ (1,659) ====== ======== ====== ======== CLASS C Sale of shares 59 $ 451 21 $ 145 Reinvestment of distributions 2 14 3 26 Shares repurchased (9) (64) (111) (941) ------ -------- ------ -------- Net Increase / (Decrease) 52 $ 401 (87) $ (770) ====== ======== ====== ======== 68
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 6. 10% SHAREHOLDERS At March 31, 2010, the Funds had individual shareholder accounts and/or omnibus shareholder accounts (comprised of a group of individual shareholders), which amounted to more than 10% of the total shares outstanding of the Funds as detailed below. % OF SHARES NUMBER OF ACCOUNTS ----------- ------------------ Mid-Cap Core Fund ........................... 81% 4* Small-Cap Sustainable Growth Fund ........... 31 1 *INCLUDES SHAREHOLDER ACCOUNT AFFILIATED WITH VIRTUS. 7. INDEMNIFICATIONS Under the Funds' organizational documents, their Trustees and Officers are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In addition, the Funds enter into contracts that contain a variety of indemnifications. The Funds' maximum exposure under these arrangements is unknown. However, the Funds have not had prior claims or losses pursuant to these arrangements. 8. REGULATORY EXAMS Federal and state regulatory authorities from time to time make inquiries and conduct examinations regarding compliance by Virtus and its subsidiaries (collectively "the Company") with securities and other laws and regulations affecting their registered products. There are currently no such matters which the Company believes will be material to these financial statements. 9. FEDERAL INCOME TAX INFORMATION ($ REPORTED IN THOUSANDS) At March 31, 2010, federal tax cost and aggregate gross unrealized appreciation (depreciation) of securities held by the Funds were as follows: NET UNREALIZED FEDERAL UNREALIZED UNREALIZED APPRECIATION FUND TAX COST APPRECIATION (DEPRECIATION) (DEPRECIATION) ---- -------- ------------ -------------- -------------- Growth & Income Fund ........................................ $105,496 $37,139 $(1,339) $35,800 Mid-Cap Core Fund ........................................... 550 99 (1) 98 Mid-Cap Growth Fund ......................................... 71,703 17,981 (645) 17,336 Quality Large-Cap Value Fund ................................ 42,545 5,705 (350) 5,355 Quality Small-Cap Fund ...................................... 80,703 17,913 (1,547) 16,366 Small-Cap Core Fund ......................................... 40,973 12,881 (112) 12,769 Small-Cap Growth Fund ....................................... 49,107 13,310 (905) 12,405 Small-Cap Sustainable Growth Fund ........................... 4,372 1,326 (30) 1,296 Strategic Growth Fund ....................................... 355,927 87,901 (3,679) 84,222 Tactical Allocation Fund .................................... 171,659 28,460 (956) 27,504 The Funds have capital loss carryovers which may be used to offset future capital gains, as follows: EXPIRATION YEAR ----------------------------------------------------------------------------------------------- 2011 2012 2014 2015 2016 2017 2018 TOTAL ------- ------ ------ ------ ------- ------- ------- -------- Growth & Income Fund .......... $18,605 $2,953 $ -- $ -- $ -- $ 6,192 $27,247 $ 54,997 Mid-Cap Core Fund ............. -- -- -- -- -- -- -- -- Mid-Cap Growth Fund ........... -- -- -- -- 3,884 9,046 25,590 38,520 Quality Large-Cap Value Fund .. 407 -- -- -- -- 25,023 8,385 33,815 Quality Small-Cap Fund ........ -- -- -- -- -- 2,330 16,059 18,389 Small-Cap Core Fund ........... -- -- -- -- -- 4,753 2,709 7,462 Small-Cap Growth Fund ......... 8,840 -- -- -- -- 3,055 14,911 26,806 Small-Cap Sustainable Growth Fund ................ -- -- 2 -- 310 1,243 3,489 5,044 Strategic Growth Fund ......... 13,554 330 686 4,365 32,524 78,220 10,686 140,365 Tactical Allocation Fund ...... -- -- -- -- -- 2,539 24,666 27,205 The Trust may not realize the benefit of these losses to the extent each Fund does not realize gains on investments prior to the expiration of the capital loss carryovers. The Growth & Income Fund's, the Quality Large-Cap Value Fund's and the Strategic Growth Fund's amounts include losses acquired in connection with prior year mergers. Utilization of these capital loss carryovers is subject to annual limitations. For the year ended March 31, 2010, the Strategic Growth Fund utilized $1,460 of losses deferred in prior years against current year capital gains. 69
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 The following Funds had capital loss carryovers which expired in 2010: FUND ---- Growth & Income Fund ....................................... $ 9,552 Mid-Cap Growth Fund ........................................ 30,519 Small Cap Growth Fund ...................................... 66,001 Strategic Growth Fund ...................................... 53,306 Under current tax law, foreign currency and capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the fiscal period ended March 31, 2010, the Funds deferred and recognized post-October losses as follows: CAPITAL CAPITAL CURRENCY LOSS LOSS LOSS DEFERRED RECOGNIZED RECOGNIZED --------------- ------------- ---------- Growth & Income Fund ....................................... $ -- $46,815 $-- Mid-Cap Core Fund .......................................... --(1) -- -- Mid-Cap Growth Fund ........................................ 452 22,105 -- Quality Large-Cap Value Fund ............................... 40 14,960 --(1) Quality Small-Cap Fund ..................................... -- 12,220 -- Small-Cap Core Fund ........................................ -- 3,775 -- Small-Cap Growth Fund ...................................... -- 19,659 -- Small-Cap Sustainable Growth Fund .......................... 24 3,219 -- Strategic Growth Fund ...................................... -- 17,145 -- Tactical Allocation Fund ................................... -- 30,480 69 The components of distributable earnings on a tax basis (excluding unrealized appreciation (depreciation) which is disclosed above) consist of the following: UNDISTRIBUTED UNDISTRIBUTED LONG-TERM ORDINARY CAPITAL INCOME GAINS --------------- ------------- Growth & Income Fund ....................................... $ 362 $ -- Mid-Cap Core Fund .......................................... 6 -- Mid-Cap Growth Fund ........................................ -- -- Quality Large-Cap Value Fund ............................... 317 -- Quality Small-Cap Fund ..................................... 380 -- Small-Cap Core Fund ........................................ -- -- Small-Cap Growth Fund ...................................... -- -- Small-Cap Sustainable Growth Fund .......................... -- -- Strategic Growth Fund ...................................... 10,176 7,934 Tactical Allocation Fund ................................... 58 -- The differences between the book and tax basis components of distributable earnings relate principally to the timing of recognition of income and gains for federal income tax purposes. Short-term gain distributions reported in the Statements of Changes in Net Assets, if any, are reported as ordinary income for federal tax purposes. (1) Amount less than $500. 10. RECLASSIFICATION OF CAPITAL ACCOUNTS ($ REPORTED IN THOUSANDS) For financial reporting purposes, book basis capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Permanent reclassifications can arise from differing treatment of certain income and gain transactions, nondeductible current year net operating losses, expiring capital loss carryovers and investments in passive foreign investment companies. The reclassifications have no impact on the net assets or net asset value of the Funds. As of March 31, 2010, the Funds recorded reclassifications to increase (decrease) the accounts as listed below: CAPITAL PAID IN ON SHARES OF UNDISTRIBUTED NET ACCUMULATED BENEFICIAL INVESTMENT INCOME NET REALIZED INTEREST (LOSS) GAIN (LOSS) --------------- ----------------- ------------ Growth & Income Fund ....................................... $ (9,552) $ (20) $ 9,572 Mid-Cap Core Fund .......................................... --(1) --(1) -- Mid-Cap Growth Fund ........................................ (30,982) 462 30,520 Quality Large-Cap Value Fund ............................... 1 73 (74) Quality Small-Cap Fund ..................................... -- -- -- Small-Cap Core Fund ........................................ (114) 114 -- Small-Cap Growth Fund ...................................... (66,895) 886 66,009 Small-Cap Sustainable Growth Fund .......................... (45) 45 -- Strategic Growth Fund ...................................... 62,996 661 (63,657) Tactical Allocation Fund ................................... 182 64 (246) (1) Amount less than $500. 70
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 11. CREDIT RISK AND ASSET CONCENTRATIONS In countries with limited or developing markets, investments may present greater risks than in more developed markets and the prices of such investments may be volatile. The consequences of political, social or economic changes in these markets may have disruptive effects on the market prices of these investments and the income they generate, as well as a Fund's ability to repatriate such amounts. High-yield/high-risk securities typically entail greater price volatility and/or principal and interest rate risk. There is a greater chance that an issuer will not be able to make principal and interest payments on time. Analysis of the creditworthiness of issuers of high-yield securities may be complex, and as a result, it may be more difficult for the Adviser and/or Subadviser to accurately predict risk. Lack of liquidity in an ETF could result in its value being more volatile than the underlying portfolio of securities. Sector ETFs are subject to sector risks and non-diversification risks, which may result in greater price fluctuations than the overall market. When a Fund invests in ETFs, it indirectly bears its proportionate share of the operating expenses of the underlying funds. Indirectly, the Fund is subject to all risks associated with the underlying ETFs. Certain Funds may invest a high percentage of their assets in specific sectors of the market in their pursuit of a greater investment return. Fluctuations in these sectors of concentration may have a greater impact on a Fund, positive or negative, than if a Fund did not concentrate its investments in such sectors. At March 31, 2010, the Funds listed held securities issued by various companies in specific sectors as detailed below: PERCENTAGE OF TOTAL FUND SECTOR INVESTMENTS ---- ---------------------- ------------------- Mid-Cap Growth Fund ................ Information Technology 27% Quality Small-Cap Fund ............. Industrials 27 Small-Cap Core Fund ................ Industrials 25 Small-Cap Growth Fund .............. Information Technology 33 Small-Cap Sustainable Growth Fund .. Information Technology 29 Strategic Growth Fund .............. Information Technology 37 12. PLAN OF REORGANIZATION (ALL AMOUNTS EXCEPT FOR THE PER SHARE AMOUNTS ARE REPORTED IN THOUSANDS) On November 18, 2009, the Board of Trustees of the Virtus Equity Trust approved an Agreement and Plan of Reorganization (the "Plan") applicable to the Funds listed below, which provided for the transfer of all of the assets of the merged fund for shares of the acquiring fund and the assumption of the liabilities of the merged fund. The purpose of the transaction was to eliminate the offering of overlapping Funds with similar investment objectives and similar investment strategies within the Virtus Mutual Funds, while simultaneously creating economies of scale for the surviving fund that were intended to lower fund expenses. For financial reporting purposes, assets received and shares issued by the Virtus Strategic Growth Fund were recorded at fair value; however, the cost basis of the investments received from the Virtus Capital Growth Fund was carried forward to align ongoing reporting of the Virtus Strategic Growth Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. The acquisition was accomplished by a tax-free exchange of shares on January 29, 2010. The share transactions associated with the merger are shown in Note 5 as Plan of Reorganization: 1/29/10 1/29/10 MERGED FUND SHARES ACQUIRING SHARES NET ASSET MERGED FUND OUTSTANDING FUND CONVERTED VALUE ------------------ ----------- ---------------- --------- ----------- Virtus Capital Virtus Strategic Growth Fund Growth Fund Class Class A 19,548 A 33,065 $253,489 B 347 B 596 4,025 C 146 C 274 1,853 The net assets and net unrealized appreciation (depreciation) immediately before the acquisition were as follows: UNREALIZED NET APPRECIATION ACQUIRING NET MERGED FUND ASSETS (DEPRECIATION) FUND ASSETS ------------------ ----------- ---------------- ---------------- -------- Virtus Capital Virtus Strategic Growth Fund $259,367 $53,037 Growth Fund $146,953 Assuming the acquisition had been completed on April 1, 2009, the Virtus Strategic Growth Fund results of operations for the year ended March 31, 2010, are as follows: Net investment income (loss) $ (1,698)(a) Net realized and unrealized gain (loss) on investments 128,017(b) Net increase (decrease) in assets from operations $ 126,319 (a) $(661), as reported in the Statement of Operations, plus $(1,037) Net Investment Income from the Virtus Capital Growth Fund pre-merger. (b) $78,662, as reported in the Statement of Operations, plus $49,355 Net Realized and Unrealized Gain (Loss) on Investments from the Virtus Capital Growth Fund pre-merger. 71
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 Because both the Virtus Capital Growth Fund and the Virtus Strategic Growth Fund sold and redeemed shares throughout the period, providing pro-forma information on a per-share basis is not feasible. Because the combined funds have been managed as an integrated single fund since the completion date it is also not feasible to separate the income/(losses) and gains/(losses) of the merged Capital Growth Fund that have been included in the acquired Virtus Strategic Growth Fund's Statement of Operations since January 29, 2010. On November 20, 2008, the Board of Trustees of the Virtus Equity Trust approved an Agreement and Plan of Reorganization (the "Plan") applicable to the Funds listed below, which provided for the transfer of all of the assets of the merged fund for shares of the acquiring fund and the assumption of the liabilities of the merged fund. The purpose of the transaction was to eliminate the offering of overlapping Funds with similar investment objectives and similar investment strategies within the Virtus Mutual Funds, while simultaneously creating economies of scale for the surviving funds that were intended to lower fund expenses. For financial reporting purposes, assets received and shares issued by the Virtus Strategic Growth Fund were recorded at fair value; however, the cost basis of the investments received from the Virtus All-Cap Growth Fund was carried forward to align ongoing reporting of the Virtus Strategic Growth Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. The acquisition was accomplished by a tax-free exchange of shares on April 24, 2009. The share transactions associated with the merger are shown in Note 5 as Plan of Reorganization: 4/24/09 4/24/09 MERGED FUND SHARES ACQUIRING SHARES NET ASSET MERGED FUND OUTSTANDING FUND CONVERTED VALUE -------------- ----------- ---------------- --------- ----------- Virtus All-Cap Virtus Strategic Growth Fund Growth Fund Class Class A 5,269 A 7,016 $44,358 B 243 B 291 1,633 C 625 C 749 4,197 The net assets and net unrealized appreciation (depreciation) immediately before the acquisition were as follows: UNREALIZED NET APPRECIATION ACQUIRING NET MERGED FUND ASSETS (DEPRECIATION) FUND ASSETS -------------- ------- -------------- ---------------- -------- Virtus All-Cap Virtus Strategic Growth Fund $50,188 $(5,313) Growth Fund $85,258 Assuming the acquisition had been completed on April 1, 2009, the Virtus Strategic Growth Fund results of operations for the year ended March 31, 2010, are as follows: Net investment income (loss) $ (691)(a) Net realized and unrealized gain (loss) on investments 70,591(b) Net increase (decrease) in assets from operations 69,900 (a) $(661), as reported in the Statement of Operations, plus $(30) Net Investment Income from the Virtus All-Cap Growth Fund pre-merger. (b) $78,662, as reported in the Statement of Operations, plus $(8,071) Net Realized and Unrealized Gain (Loss) on Investments from the Virtus All-Cap Growth Fund pre-merger. Because both the Virtus All-Cap Growth Fund and the Virtus Strategic Growth Fund sold and redeemed shares throughout the period, providing pro-forma information on a per-share basis is not feasible. Because the combined funds have been managed as an integrated single fund since the completion date it is also not feasible to separate the income/(losses) and gains/(losses) of the merged All-Cap Growth Fund that have been included in the acquired Virtus Strategic Growth Fund's Statement of Operations since April 24, 2009. 13. RECENT ACCOUNTING PRONOUNCEMENTS In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-06, "Improving Disclosures about Fair Value Measurements." ASU No. 2010-06 amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements. Certain disclosures required by ASU No. 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, and other required disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Management is currently evaluating the impact ASU No. 2010-06 will have on its financial statement disclosures. 14. SUBSEQUENT EVENT EVALUATIONS Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were available for issuance, and has determined that the following subsequent events require recognition or disclosure in the financial statements. Effective April 14, 2010, the fund's investment adviser will voluntarily limit the Strategic Growth Fund's total operating expenses (excluding interest, taxes and extraordinary expenses) to 1.47% for Class A Shares, 2.22% for Class B Shares, 2.22% for Class C Shares and 1.22% for Class I Shares. 72
VIRTUS EQUITY TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 This voluntary expense limitation may be modified or discontinued at any time. Under certain conditions, the adviser may recapture operating expenses reimbursed under this arrangement for a period of three years following the end of the fiscal year in which such reimbursements are made. On April 14, 2010, the Board of Trustees approved an increase in the rate of fees payable to VP Distributors in its role as Administrator and Transfer Agent to the Trust with immediate effect. The Board of Trustees of the Virtus Equity Trust (the "Board"), on behalf of the Virtus Small-Cap Growth Fund, has unanimously approved an Agreement and Plan of Reorganization ("Agreement") relating to the proposed combination of the Virtus Small-Cap Growth Fund, a series of the Virtus Equity Trust, with and into the Virtus Small-Cap Sustainable Growth Fund, also a series of the Virtus Equity Trust. MERGING FUND SURVIVING FUND ---------------------------- ---------------------------------------- Virtus Small-Cap Growth Fund Virtus Small-Cap Sustainable Growth Fund Pursuant to the Agreement, the Virtus Small-Cap Growth Fund will transfer all or substantially all of its assets to the Virtus Small-Cap Sustainable Growth Fund in exchange for shares of the Virtus Small-Cap Sustainable Growth Fund and the assumption by the Virtus Small-Cap Sustainable Growth Fund of all liabilities of the Virtus Small-Cap Growth Fund. Following the exchange, the Virtus Small-Cap Growth Fund will distribute the shares of the Virtus Small-Cap Sustainable Growth Fund to its shareholders pro rata, in liquidation of the Virtus Small-Cap Growth Fund. The effectiveness of these transactions is subject to the satisfaction of a number of conditions, including approval by shareholders of the Virtus Small-Cap Growth Fund. It is currently anticipated that these matters will be submitted for shareholder approval on June 23, 2010. Additional information about the reorganization, as well as information about the Virtus Small-Cap Sustainable Growth Fund, will be distributed to shareholders of the Virtus Small-Cap Growth Fund in the form of a Prospectus/Proxy Statement. On or about June 11, 2010, all Class B Shares of the Virtus Small-Cap Growth Fund will be converted to Class A Shares of said Fund. Shareholders holding Class B Shares at the time of the conversion will receive Class A Shares having an aggregate net asset value equal to the aggregate net asset value of their Class B Shares immediately prior to the conversion. This conversion will take place whether or not the proposed reorganization has been approved by shareholders. Assuming shareholder approval of the proposed reorganization, affected shareholders will then receive Class A Shares of the Virtus Small-Cap Sustainable Growth Fund as a result of the reorganization. The Board of Trustees of the Virtus Equity Trust (the "Board"), on behalf of the Virtus Disciplined Small-Cap Opportunities Fund, has unanimously approved an Agreement and Plan of Reorganization ("Agreement") relating to the proposed combination of the Virtus Disciplined Small-Cap Opportunities Fund, a series of the Virtus Insight Trust, with and into the Virtus Small-Cap Core Fund, a series of the Virtus Equity Trust. MERGING FUND SURVIVING FUND ----------------------------------------------- -------------------------- Virtus Disciplined Small-Cap Opportunities Fund Virtus Small-Cap Core Fund Pursuant to the Agreement, the Virtus Disciplined Small-Cap Opportunities Fund will transfer all or substantially all of its assets to the Virtus Small-Cap Core Fund in exchange for shares of the Virtus Small-Cap Core Fund and the assumption by the Virtus Small-Cap Core Fund of all liabilities of the Virtus Disciplined Small-Cap Opportunities Fund. Following the exchange, the Virtus Disciplined Small-Cap Opportunities Fund will distribute the shares of the Virtus Small-Cap Core Fund to its shareholders pro rata, in liquidation of the Virtus Disciplined Small-Cap Opportunities Fund. The effectiveness of these transactions is subject to the satisfaction of a number of conditions, including approval by shareholders of the Virtus Disciplined Small-Cap Opportunities Fund. It is currently anticipated that these matters will be submitted for shareholder approval June 23, 2010. Additional information about the reorganization, as well as information about the Virtus Small-Cap Core Fund, will be distributed to shareholders of the Virtus Disciplined Small-Cap Opportunities Fund in the form of a Prospectus/Proxy Statement. The Board of Trustees of the Virtus Equity Trust (the "Board"), on behalf of the Virtus Disciplined Small-Cap Value Fund, has unanimously approved an Agreement and Plan of Reorganization ("Agreement") relating to the proposed combination of the Virtus Disciplined Small-Cap Value Fund, a series of the Virtus Insight Trust, with and into the Virtus Quality Small-Cap Fund, a series of the Virtus Equity Trust. MERGING FUND SURVIVING FUND --------------------------------------- ----------------------------- Virtus Disciplined Small-Cap Value Fund Virtus Quality Small-Cap Fund Pursuant to the Agreement, the Virtus Disciplined Small-Cap Value Fund will transfer all or substantially all of its assets to the Virtus Quality Small-Cap Fund in exchange for shares of the Virtus Quality Small-Cap Fund and the assumption by the Virtus Quality Small-Cap Fund of all liabilities of the Virtus Disciplined Small-Cap Value Fund. Following the exchange, the Virtus Disciplined Small-Cap Value Fund will distribute the shares of the Virtus Quality Small-Cap Fund to its shareholders pro rata, in liquidation of the Virtus Disciplined Small-Cap Value Fund. The effectiveness of these transactions is subject to the satisfaction of a number of conditions, including approval by shareholders of the Virtus Disciplined Small-Cap Value Fund. It is currently anticipated that these matters will be submitted for shareholder approval June 23, 2010. Additional information about the reorganization, as well as information about the Virtus Quality Small-Cap Fund, will be distributed to shareholders of the Virtus Disciplined Small-Cap Value Fund in the form of a Prospectus/Proxy Statement. 73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PRICEWATERHOUSECOOPERS LOGO) To the Board of Trustees and Shareholders of Virtus Equity Trust In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Virtus Growth & Income Fund, Virtus Mid-Cap Core Fund, Virtus Mid-Cap Growth Fund, Virtus Quality Large-Cap Value Fund (formerly Virtus Value Opportunities Fund), Virtus Quality Small-Cap Fund, Virtus Small-Cap Core Fund, Virtus Small-Cap Growth Fund, Virtus Small-Cap Sustainable Growth Fund, Virtus Strategic Growth Fund and Virtus Tactical Allocation Fund (formerly Virtus Income & Growth) (ten series of Virtus Equity Trust, hereafter referred to as the "Funds") at March 31, 2010, the results of each of their operations for the periods then ended, and the changes in each of their net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 2010 by correspondence with the custodian, provide a reasonable basis for our opinion. (PRICEWATERHOUSECOOPERS LLP) Philadelphia, PA May 21, 2010 74
VIRTUS EQUITY TRUST TAX INFORMATION NOTICE (UNAUDITED) MARCH 31, 2010 For the fiscal year ended March 31, 2010, the Funds make the following disclosures for federal income tax purposes. Below is listed the percentages, or the maximum amount allowable, of its ordinary income dividends ("QDI") to qualify for the lower tax rates applicable to individual shareholders, and the percentage of ordinary income dividends earned by the Funds which qualify for the dividends received deduction ("DRD") for corporate shareholders. The Funds designate the amounts below as long-term capital gains dividends ("LTCG") ($ reported in thousands), or if subsequently different, the amounts will be designated in the next annual report. The actual percentages for the calendar year will be designated in the year-end tax statements. QDI DRD LTCG ------ ------ ---------- Growth & Income Fund 100% 100% $ -- Mid-Cap Core Fund 52 54 --* Mid-Cap Growth Fund 0 0 -- Quality Large-Cap Value Fund 100 100 -- Quality Small-Cap Fund 100 100 -- Small-Cap Core Fund 0 0 -- Small-Cap Growth Fund 0 0 -- Small-Cap Sustainable Growth Fund 0 0 -- Strategic Growth Fund 20 19 7,934 Tactical Allocation Fund 51 46 -- * Amount is less than $500 (not reported in thousands) 75
CONSIDERATION OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES The Board of Trustees of the Trust, along with the Boards of With respect to the sub-advisory Agreements, the Board noted Trustees of the other trusts in the Virtus Mutual Funds family that each full-service subadviser(2) provided portfolio of funds (collectively, the "Board"), are responsible for management, compliance with the respective Fund's investment determining whether to approve the establishment and policies and procedures, compliance with applicable securities continuation of each investment advisory and sub-advisory laws and assurances thereof. In considering the renewal of the agreement (each, an "Agreement") applicable to the Virtus Mutual sub-advisory Agreements, therefore, the Board considered each Funds (collectively, the "Funds"). At meetings held on November subadviser's investment management process, including (a) the 17-19, 2009, the Board, including a majority of the independent experience, capability and integrity of the subadviser's Trustees, considered and approved the continuation of each management and other personnel committed by the subadviser to Agreement, as further discussed below. In approving each its respective Fund(s); (b) the financial position of the Agreement, the Board determined that the continued retention of subadviser; (c) the quality and commitment of the subadviser's the applicable adviser or subadviser was in the best interests regulatory and legal compliance policies, procedures and of the Funds and their shareholders. The Trustees considered systems; and (d) the subadviser's brokerage and trading each Fund separately, though they also collectively took into practices. account those interests that all the Funds had in common. After considering all of the information provided to them, the In reaching their decisions, the Board considered information Trustees concluded that the nature, extent and quality of the furnished throughout the year at regular Board meetings as well services provided by VIA and each subadviser were reasonable and as information prepared specifically in connection with the beneficial to the Funds and their shareholders. annual review process. During the review process, the Board received assistance and advice from, and met separately with, INVESTMENT PERFORMANCE independent legal counsel. The Board's determination contemplated a number of factors that the Trustees believed, in The Board placed significant emphasis on its consideration of light of the legal advice furnished to them as well as their own the investment performance of the Funds, in view of its business judgment, to be relevant. Some of the factors that the importance to shareholders, and evaluated Fund performance in Board considered are described below, although the Trustees did the context of the special considerations that a not identify any particular information or factor as controlling manager-of-managers structure requires. The Board also but instead considered the Agreements in the totality of the considered that VIA continued to be proactive in seeking to circumstances. Each individual Trustee may have evaluated the replace and/or add subadvisers as necessary, with a view toward information presented differently, giving different weights to improving Fund performance over the long term. different factors. While consideration was given to performance reports and NATURE, EXTENT AND QUALITY OF SERVICES discussions at Board meetings throughout the year, particular attention in assessing such performance was given to a report The majority of the Funds(1) are managed using a "manager of (the "Lipper Report") for the Funds prepared by Lipper Inc. managers" structure that generally involves the use of one or ("Lipper") and furnished specifically for the contract renewal more subadvisers to manage some or all of a Fund's portfolio. process. (Lipper is an independent provider of investment Under this structure, Virtus Investment Advisers, Inc. ("VIA") company data retained by the Funds for this purpose.) The Lipper is responsible for evaluating and selecting subadvisers on an Report presented each Fund's short-term and long-term ongoing basis and making any recommendations to the Board performance relative to a peer group of other mutual funds and regarding hiring, retaining or replacing subadvisers. In relevant benchmarks, as selected by Lipper. The Board considered considering the Agreement with VIA, therefore, the Trustees the composition of each peer group, selection criteria and the considered VIA's process for supervising and managing the Funds' appropriateness of the benchmark used for each Fund. The Board subadvisers, including (a) VIA's ability to select and monitor also assessed each Fund's performance in the context of its the subadvisers; (b) VIA's ability to provide the services review of the fees and expenses of each Fund as well as VIA's necessary to monitor the subadvisers' compliance with the Funds' profitability. respective investment objectives, policies and restrictions as well as provide other oversight activities; and (c) VIA's The Board noted that while many of the Funds had generally ability and willingness to identify instances in which a performed in line with their respective benchmarks and peer subadviser should be replaced and to carry out the required groups during the periods measured, some of the Funds had changes. The Trustees also considered: (d) the experience, underperformed in comparison with their respective benchmarks capability and integrity of VIA's management and other and/or peer groups. Where significant, the Board extensively personnel; (e) the financial position of VIA; (f) the quality of considered the performance of the underperforming Funds and the VIA's own regulatory and legal compliance policies, procedures reasons for the performance issues. The Board discussed the and systems; (g) the nature, extent and quality of possible reasons for the underperformance with VIA, and spoke administrative and other services provided by VIA to the Funds; with representatives from VIA regarding plans to monitor and and (h) VIA's supervision of the Funds' other service providers. address performance issues during the coming year. Finally, the Board also noted the extent of benefits that are provided to Fund shareholders as a result of being part of the The Board ultimately determined, within the context of all of family of Virtus Mutual Funds, including the right to exchange its considerations in connection with the Agreements, that the investments between Funds within the same class without a sales Funds' overall investment performance was reasonable, and charge, the ability to reinvest Fund dividends into other Funds concluded that VIA's and each subadviser's performance record and the right to combine holdings in other Funds to obtain a and process in managing the Funds merited approval of the reduced sales charge. continuation of the Agreements. However, the Board noted that certain Funds' ---------------- (1) DURING THE PERIOD BEING REPORTED, THE ONLY FUNDS THAT DID NOT EMPLOY A MANAGER OF MANAGERS STRUCTURE WERE VIRTUS GROWTH & INCOME FUND, WHICH IS A SERIES OF VIRTUS EQUITY TRUST; AND VIRTUS ALTERNATIVES DIVERSIFIER FUND AND VIRTUS CA TAX-EXEMPT BOND FUND, EACH OF WHICH IS A SERIES OF VIRTUS OPPORTUNITIES TRUST. VIA ACTED AS THE ADVISER FOR THESE FUNDS WITHOUT EMPLOYING A SUBADVISER, AND THE BOARD CONSIDERED THE VIA AGREEMENT WITH RESPECT TO THESE FUNDS IN THAT CONTEXT. (2) F-SQUARED INVESTMENTS, INC. IS THE SUB-ADVISER TO VIRTUS ALPHASECTOR(SM) ALLOCATION FUND AND VIRTUS ALPHASECTOR(SM) ROTATION FUND BUT PROVIDES LIMITED SERVICES IN THIS ROLE. THE BOARD CONSIDERED BOTH THE VIA AGREEMENT AND THE APPLICABLE SUB-ADVISORY AGREEMENT IN THIS CONTEXT. 76
CONSIDERATION OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES (CONTINUED) performance would continue to be closely monitored and it addition, the Board noted that as part of the contract renewal expected that if performance over a longer period of time did process, it had voted for the advisory fees for certain of the not improve the adviser would recommend that the subadviser be Funds to be changed from flat fees to fees containing replaced in a timely manner. breakpoints and that such changes would reduce the fees paid by the Funds to VIA.(3) It was noted by the Board that Fund PROFITABILITY Management had represented that with respect to such fee changes, VIA would not reduce the quality or quantity of its The Board also considered the level of profits realized by VIA services, and that its obligations would remain the same in all and its affiliates in connection with the operation of the respects. Finally, the Board also noted that several of the Funds. In this regard, the Board reviewed the analysis presented Funds had fee waivers and/or expense caps in place to limit the regarding the overall profitability of VIA for its management of total expenses incurred by the Funds and their shareholders. the Virtus Mutual Funds, as well as its profits and those of its Based upon the information presented by VIA and Lipper, the affiliates for managing and providing other services to each Trustees then determined, in the exercise of their business Fund. In addition to the fees paid to VIA and its affiliates, judgment, that the management fees charged by VIA and the total the Trustees considered any other benefits derived by VIA or its expenses of the Funds were reasonable, both on an absolute basis affiliates from their relationship with the Funds. Specific and in comparison with the fees and expenses of other funds in attention was paid to the methodology used to allocate costs to each Fund's peer group and the industry at large. each Fund, in recognition of the fact that allocation methodologies are inherently subjective and various allocation The Board did not receive comparative fee information relating methodologies may each be reasonable while producing different specifically to sub-advisory fees, in light of the fact that the results. In this regard, the Board noted that the allocations sub-advisory fees are paid by VIA and not by the Funds, so that appeared reasonable, and concluded that the profitability to VIA Fund shareholders are not directly impacted by those fees. from each Fund was reasonable in light of the quality of all services rendered to the Funds by VIA and its affiliates. ECONOMIES OF SCALE The Board did not separately review profitability information The Board noted that the management fees for several of the for each subadviser, noting that the sub-advisory fees are paid Funds included breakpoints based on assets under management, and by VIA rather than the Funds, so that Fund shareholders are not that fee waivers and/or expense caps were also in place for directly impacted by those fees. several of the Funds. The Board determined that VIA and the Funds likely would achieve certain economies of scale, MANAGEMENT FEES AND TOTAL EXPENSES particularly in relationship to certain fixed costs, and that shareholders of the Funds would have an opportunity to benefit In evaluating the management fees and total expenses of each from these economies of scale. Fund, the Board reviewed information provided by VIA and comparisons to other funds in each Fund's peer group as In considering the sub-advisory Agreements, the Board also presented in the Lipper Report. The Board noted that certain considered the existence of any economies of scale and whether Funds had higher gross expenses when expressed as a percentage they would be passed along to the Funds' shareholders, but noted of net assets than those of such Funds' larger peers, which the that any such economies would likely be generated at the Fund Trustees considered in the context of these Funds' expectations level rather than at the subadviser level. for future growth. In ---------------- (3) DURING THE PERIOD BEING REPORTED, THE ONLY FUNDS THAT HAD SUCH CHANGES WERE VIRTUS MID-CAP VALUE FUND AND VIRTUS SMALL-CAP CORE FUND, EACH A SERIES OF VIRTUS EQUITY TRUST; VIRTUS BALANCED ALLOCATION FUND, VIRTUS CORE EQUITY FUND, VIRTUS EMERGING MARKETS OPPORTUNITIES FUND, VIRTUS SHORT/INTERMEDIATE BOND FUND AND VIRTUS VALUE EQUITY FUND, EACH A SERIES OF VIRTUS INSIGHT TRUST; AND, VIRTUS BOND FUND AND VIRTUS MARKET NEUTRAL FUND, EACH A SERIES OF VIRTUS OPPORTUNITIES TRUST. 77
RESULTS OF SHAREHOLDER MEETING VIRTUS EQUITY TRUST JUNE 4, 2009 (UNAUDITED) At a special meeting of shareholders of Virtus Tactical Allocation Fund (formerly known as Virtus Income & Growth Fund), a series of Virtus Equity Trust, held on June 4, 2009, shareholders voted on the following proposal: NUMBER OF ELIGIBLE SHARES VOTED: FOR AGAINST ABSTAIN -------------- ----------- ----------- To approve a Subadvisory Agreement between Virtus Investment Advisers, Inc. and SCM Advisors, LLC with regard to Virtus Tactical Allocation Fund ............................................................ 12,684,751.785 577,752.214 805,385.125 Shareholders of the Fund voted to approve the above proposal. RESULTS OF SHAREHOLDER MEETING VIRTUS EQUITY TRUST AUGUST 31, 2009 (UNAUDITED) At a special meeting of shareholders of Virtus Quality Large-Cap Value Fund (formerly known as Virtus Value Opportunities Fund) (the "Fund"), a series of Virtus Equity Trust, held on August 31, 2009, shareholders voted on the following proposal: NUMBER OF ELIGIBLE SHARES VOTED: FOR AGAINST ABSTAIN -------------- ----------- ----------- To approve a Subadvisory Agreement between Virtus Investment Advisers, Inc. and Kayne Anderson Rudnick Investment Management, LLC on behalf of the Fund .................................................. 3,369,868.291 86,436.526 249,831.273 Shareholders of the Fund voted to approve the above proposal. 78
FUND MANAGEMENT TABLES (UNAUDITED) Information pertaining to the Trustees and officers of the Trust as of March 31, 2010, is set forth below. The statement of additional information (SAI) includes additional information about the Trustees and is available without charge, upon request, by calling (800) 243-4361. The address of each individual, unless otherwise noted, is 100 Pearl Street, Hartford, CT 06103-4506. There is no stated term of office for Trustees of the Trust. INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------------ NAME, YEAR OF BIRTH, YEAR ELECTED AND PRINCIPAL OCCUPATION(S) NUMBER OF FUNDS DURING PAST 5 YEARS AND OVERSEEN OTHER DIRECTORSHIPS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------------ Leroy Keith, Jr. Chairman, BLOC Global Services Group, LLC (construction and redevelopment company) (2010-present). YOB: 1939 Managing Director, Almanac Capital Management (commodities business) (2007-2008). Partner, Stonington Elected: Partners, Inc. (private equity firm) (2001-2007). Director/Trustee, Evergreen Funds (88 portfolios) 45 Funds (1989-present). ------------------------------------------------------------------------------------------------------------------------------------ Philip R. McLoughlin Partner, Cross Pond Partners, LLC (strategy consulting firm) (2006-present). Director, World Trust Fund YOB: 1946 (1991-present). Chairman and Trustee, The Phoenix Edge Series Fund (2003-present). Director, DTF Elected: Tax-Free Income Fund, Inc. (1996-present), Duff & Phelps Utility and Corporate Bond Trust, Inc. 48 Funds (1996-present) and DNP Select Income Fund Inc. (2009-present). Managing Director, SeaCap Asset Management Fund I, L.P. (2009-present). Managing Director, SeaCap Partners, LLC (investment management advisory business) (2009-present). ------------------------------------------------------------------------------------------------------------------------------------ Geraldine M. McNamara Retired. Managing Director, U.S. Trust Company of New York (private bank) (1982-2006). Director, DTF YOB: 1951 Tax-Free Income Fund, Inc. (2003-present), Duff & Phelps Utility and Corporate Bond Trust, Inc. Elected: (2003-present) and DNP Select Income Fund Inc. (2009-present). 48 Funds ------------------------------------------------------------------------------------------------------------------------------------ James M. Oates Managing Director, Wydown Group (consulting firm) (1994-present). Chairman, Hudson Castle Group, Inc. YOB: 1946 (Formerly IBEX Capital Markets, Inc.) (financial services) (1997-2006). Director, Stifel Financial. Elected: Chairman and Trustee, John Hancock Trust (115 portfolios) and John Hancock Funds II (87 portfolios) 45 Funds (2005-present). Non-Executive Chairman, Hudson Castle Group, Inc. (2007-present). ------------------------------------------------------------------------------------------------------------------------------------ Richard E. Segerson Managing Director, Northway Management Company (1998-present). YOB: 1946 Elected: 45 Funds ------------------------------------------------------------------------------------------------------------------------------------ Ferdinand L.J. Verdonck Director, Galapagos N.V. (biotechnology) (2005-present). Mr. Verdonck is also a director of several YOB: 1942 non-U.S. companies. Elected: 45 Funds ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEE Each of the individuals listed below is an "interested person" of the Trust, as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. ------------------------------------------------------------------------------------------------------------------------------------ NAME, YEAR OF BIRTH, YEAR ELECTED AND PRINCIPAL OCCUPATION(S) NUMBER OF FUNDS DURING PAST 5 YEARS AND OVERSEEN OTHER DIRECTORSHIPS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------------------------------ George R. Aylward(1) Director, President and Chief Executive Officer (2008-present), Director and President (2006-2008), YOB: 1964 Chief Operating Officer (2004-2006), Vice President, Finance, (2001-2002), Virtus Investment Partners, Elected: Inc. and/or certain of its subsidiaries. Various senior officer and directorship positions with Virtus 47 Funds affiliates (2005-present). Senior Executive Vice President and President, Asset Management (2007-2008), Senior Vice President and Chief Operating Officer, Asset Management (2004-2007), Vice President and Chief of Staff (2001-2004), The Phoenix Companies, Inc. Various senior officer and directorship positions with Phoenix affiliates (2005-2008). President (2006-present), Executive Vice President (2004-2006), the Virtus Mutual Funds Family. Chairman, President and Chief Executive Officer, The Zweig Fund Inc. and The Zweig Total Return Fund Inc. (2006-present). ------------------------------------------------------------------------------------------------------------------------------------ (1) Mr. Aylward is an "interested person" as defined in the Investment Company Act of 1940, by reason of his relationship with Virtus Investment Partners, Inc. and/or its affiliates. 79
FUND MANAGEMENT TABLES (CONTINUED) (UNAUDITED) OFFICERS OF THE TRUST WHO ARE NOT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------------ POSITION(S) HELD WITH NAME, ADDRESS AND TRUST AND LENGTH OF PRINCIPAL OCCUPATION(S) YEAR OF BIRTH TIME SERVED DURING PAST 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ Nancy G. Curtiss Senior Vice President Executive Vice President, Head of Operations (2009-present), Senior Vice YOB: 1952 since 2006. President, Operations (2008-2009), Vice President, Head of Asset Management Operations (2007-2008), Vice President (2003-2007), Virtus Investment Partners, Inc. and/or certain of its subsidiaries. Ms. Curtiss is Treasurer of various other investment companies within the Virtus Mutual Funds Complex (1994-present). Assistant Treasurer (2001-2009), VP Distributors, Inc. (f/k/a Phoenix Equity Planning Corporation). ------------------------------------------------------------------------------------------------------------------------------------ Francis G. Waltman Senior Vice President Executive Vice President, Head of Product Management (2009-present), Senior YOB: 1962 since 2008. Vice President, Asset Management Product Development (2008-2009), Senior Vice President, Asset Management Product Development (2005-2007), Virtus Investment Partners, Inc. and/or certain of its subsidiaries. Director (2008-present), Director and President (2006-2007), VP Distributors, Inc. (f/k/a Phoenix Equity Planning Corporation). Director and Senior Vice President, Virtus Investment Advisers, Inc. (2008-present). ------------------------------------------------------------------------------------------------------------------------------------ Marc Baltuch Vice President and Chief Compliance Officer, Zweig-DiMenna Associates LLC (1989-present). Vice c/o Zweig-DiMenna Chief Compliance Officer President, The Zweig Total Return Fund, Inc. (2004-present). Vice Associates, LLC since 2004. President, The Zweig Fund, Inc. (2004-present). President and Director of 900 Third Avenue Watermark Securities, Inc. (1991-present). Assistant Secretary, Gotham New York, NY 10022 Advisors Inc. (1990-2005). YOB: 1945 ------------------------------------------------------------------------------------------------------------------------------------ W. Patrick Bradley Chief Financial Officer and Senior Vice President, Fund Administration (2009-present), Vice President, YOB: 1972 Treasurer, Virtus Equity Fund Administration (2007-2009), Second Vice President, Fund Control & Tax Trust, Virtus Insight Trust (2004-2006), Virtus Investment Partners, Inc. and/or certain of its and Virtus Institutional Trust subsidiaries. Vice President, Chief Financial Officer, Treasurer and (since 2006). Chief Financial Principal Accounting Officer (2006-present), Assistant Treasurer Officer and Treasurer of (2004-2006), The Phoenix Edge Series Fund. Chief Financial Officer and Virtus Opportunities Trust Treasurer (2005-present), Assistant Treasurer (2004-2006), certain funds (since 2005). within the Virtus Mutual Funds Family. ------------------------------------------------------------------------------------------------------------------------------------ Kevin J. Carr Vice President, Chief Legal Senior Vice President, Legal (2009-present), Counsel and Secretary YOB: 1954 Officer, Counsel and Secretary (2008-present) and Vice President (2008-2009), Virtus Investment Partners, since 2005. Inc. and/or certain of its subsidiaries. Vice President and Counsel, Phoenix Life Insurance Company (2005-2008). Compliance Officer of Investments and Counsel, Travelers Life & Annuity Company (January 2005-May 2005). Assistant General Counsel and certain other positions, The Hartford Financial Services Group (1995-2005). ------------------------------------------------------------------------------------------------------------------------------------ 80
VIRTUS EQUITY TRUST 101 Munson Street Greenfield, MA 01301-9668 TRUSTEES INVESTMENT ADVISER George R. Aylward Virtus Investment Adviser, Inc. Leroy Keith, Jr. 100 Pearl Street Philip R. McLoughlin, Chairman Hartford, CT 06103-4506 Geraldine M. McNamara James M. Oates PRINCIPAL UNDERWRITER Richard E. Segerson VP Distributors, Inc. Ferdinand L.J. Verdonck 100 Pearl Street Hartford, CT 06103-4506 OFFICERS George R. Aylward, President TRANSFER AGENT Nancy G. Curtiss, Senior Vice President VP Distributors, Inc. Francis G. Waltman, Senior Vice President 100 Pearl Street Marc Baltuch, Vice President and Chief Hartford, CT 06103-4506 Compliance Officer W. Patrick Bradley, Chief Financial Officer CUSTODIAN and Treasurer PFPC Trust Company Kevin J. Carr, Vice President, Chief Legal Officer, 8800 Tinicum Boulevard Counsel and Secretary Philadelphia, PA 19153-3111 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 2001 Market Street Philadelphia, PA 19103-7042 HOW TO CONTACT US Mutual Fund Services 1-800-243-1574 Adviser Consulting Group 1-800-243-4361 Telephone Orders 1-800-367-5877 Text Telephone 1-800-243-1926 Web site Virtus.com ------------------------------------------------------------------------------------------------------------------------------------ IMPORTANT NOTICE TO SHAREHOLDERS The Securities and Exchange Commission has modified mailing regulations for semiannual and annual shareholder fund reports to allow mutual fund companies to send a single copy of these reports to shareholders who share the same mailing address. If you would like additional copies, please call Mutual Fund Services at 1-800-243-1574. ------------------------------------------------------------------------------------------------------------------------------------
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------------ (VIRTUS MUTUAL FUNDS LOGO) PRSRT STD U.S. POSTAGE c/o State Street Bank and Trust Company PAID P.O. Box 8301 LANCASTER, Boston, MA 02266-8301 PA PERMIT 1793 ------------ For more information about Virtus mutual funds, please call your financial representative, contact us at 1-800-243-1574 or Virtus.com. 8015 4-10
(VIRTUS MUTUAL FUNDS LOGO) ANNUAL REPORT ---------------------------------------------------------------------------------------------------------------------------------- Virtus Balanced Fund* * Prospectus Supplement appears at the back of this annual report. ---------------------------------------------------------------------------------------------------------------------------------- TRUST NAME: March 31, 2010 Eligible VIRTUS shareholders can EQUITY sign up for TRUST eDelivery at Virtus.com NO BANK GUARANTEE NOT FDIC INSURED MAY LOSE VALUE
TABLE OF CONTENTS VIRTUS BALANCED FUND ("Balanced Fund") Message to Shareholders ..................................................................................................... 1 Disclosure of Fund Expenses ................................................................................................. 2 Fund Summary ................................................................................................................ 4 Key Investment Terms ........................................................................................................ 6 Schedule of Investments ..................................................................................................... 8 Statement of Assets and Liabilities ......................................................................................... 16 Statement of Operations ..................................................................................................... 17 Statement of Changes in Net Assets .......................................................................................... 18 Financial Highlights ........................................................................................................ 20 Notes to Financial Statements ............................................................................................... 22 Report of Independent Registered Public Accounting Firm ..................................................................... 30 Tax Information Notice ...................................................................................................... 31 Consideration of Advisory and Sub-advisory Agreements by the Board of Trustees .............................................. 32 Results of Shareholder Meeting .............................................................................................. 36 Fund Management Tables ...................................................................................................... 37 ---------------------------------------------------------------------------------------------------------------------------------- PROXY VOTING PROCEDURES (FORM N-PX) The adviser and subadviser vote proxies relating to portfolio securities in accordance with procedures that have been approved by the Trust's Board of Trustees. You may obtain a description of these procedures, along with information regarding how the Fund voted proxies during the most recent 12-month period ended June 30, 2009, free of charge, by calling toll-free 1-800-243-1574. This information is also available through the Securities and Exchange Commission's website at http://www.sec.gov. FORM N-Q INFORMATION The Trust files a complete schedule of portfolio holdings for the Fund with the Securities and Exchange Commission (the "SEC") for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC's website at http://www.sec.gov. Form N-Q may be reviewed and copied at the SEC's Public Reference Room. Information on the operation of the SEC's Public Reference Room can be obtained by calling toll-free 1-800-SEC-0330. ---------------------------------------------------------------------------------------------------------------------------------- This report is not authorized for distribution to prospective investors in the Virtus Balanced Fund unless preceded or accompanied by an effective prospectus which includes information concerning the sales charge, the Fund's record and other pertinent information.
MESSAGE TO SHAREHOLDERS Dear Fellow Shareholders of Virtus Mutual Funds: The first quarter of 2010 gave investors a taste of the kind of volatility that could be in store for some time. (PHOTO OF The quarter began with a 9 percent correction in the S&P 500(R) Index from mid-January to early February 5, GEORGE R. AYLWARD) followed by a resumption of 2009's bull market. The major indices were up more than 4 percent for the quarter and by the end of March, both the Dow Jones Industrial Average(SM) and the S&P 500 Index were up more than 65 percent from their lows on March 9, 2009. Surprisingly robust consumer spending and corporate earnings continued to support the transition of the U.S. economy out of recession toward modest growth. Unfortunately, there are some dark clouds on the horizon that may temper investors' optimism. The economy must navigate the long term impact of the unprecedented government spending to revive the global economy. Significant headwinds remain for investors, as evidenced by the current underperformance of the Chinese equity market, the solvency crisis in the Eurozone and persistently high unemployment rates in the U.S. and abroad. We believe this volatility is a reminder that investors should rely on the discipline and focus of professional investment managers and financial advisors. Ask your financial advisor to review your portfolio to ensure it reflects your current investment objectives, your tolerance for risk, and your long-term financial goals. As your advisor reviews your portfolio, we hope you will consider the wide range of equity, fixed income and alternative funds that Virtus offers. On behalf of the entire team at Virtus Investment Partners, and the investment professionals at our affiliated managers and subadvisers, we look forward to continuing to serve all your investment needs. Sincerely, /s/ George R. Aylward George R. Aylward President, Virtus Mutual Funds MAY 2010 WHENEVER YOU HAVE QUESTIONS ABOUT YOUR ACCOUNT, OR REQUIRE ADDITIONAL INFORMATION, PLEASE VISIT US ON THE WEB AT www.virtus.com OR CALL OUR SHAREOWNER SERVICE GROUP TOLL-FREE AT 800-243-1574. PERFORMANCE DATA QUOTED REPRESENTS PAST RESULTS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN PERFORMANCE SHOWN ABOVE. 1
VIRTUS BALANCED FUND DISCLOSURE OF FUND EXPENSES (UNAUDITED) FOR THE SIX-MONTH PERIOD OF OCTOBER 1, 2009 TO MARCH 31, 2010 We believe it is important for you to understand the HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES impact of costs on your investments. All mutual funds have operating expenses. As a shareholder of the Virtus Balanced The second section of the accompanying table provides Fund (the "Fund"), you incur two types of costs: (1) information about hypothetical account values and hypothetical transaction costs, including sales charges on purchases of expenses based on the Fund's actual expense ratio and an Class A shares and contingent deferred sales charges on Class B assumed rate of return of 5% per year before expenses, which is and Class C shares; and (2) ongoing costs, including investment not your Fund's actual return. The hypothetical account values advisory fees; distribution and service fees; and other and expenses may not be used to estimate the actual ending expenses. These examples are intended to help you understand account balance or expenses you paid for the period. You may your ongoing costs (in dollars) of investing in the Fund and to use this information to compare the ongoing costs of investing compare these costs with the ongoing costs of investing in in your Fund and other funds. To do so, compare these 5% other mutual funds. These examples are based on an investment hypothetical examples with the 5% hypothetical examples that of $1,000 invested at the beginning of the period and held for appear in the shareholder reports of the other funds. the entire six-month period. The following Expense Table illustrates the Fund's costs in two ways. Please note that the expenses shown in the accompanying table are meant to highlight your ongoing costs only and do not ACTUAL EXPENSES reflect any transactional costs, such as sales charges or contingent deferred sales charges. Therefore, the second The first section of the accompanying table provides section of the accompanying table is useful in comparing information about actual account values and actual expenses. ongoing costs only, and will not help you determine the You may use the information in this section, together with the relative total costs of owning different funds. In addition, if amount you invested, to estimate the expenses that you paid those transactional costs were included, your costs would have over the period. Simply divide your account value by $1,000 been higher. The calculations assume no shares were bought or (for example, an $8,600 account value divided by $1,000 = 8.6), sold during the period. Your actual costs may have been higher then multiply the result by the number in the first line under or lower depending on the amount of your investment and timing the heading entitled "Expenses Paid During Period" to estimate of any purchases or redemptions. the expenses you paid on your account during this period. 2
VIRTUS BALANCED FUND DISCLOSURE OF FUND EXPENSES (UNAUDITED) (CONTINUED) FOR THE SIX-MONTH PERIOD OF OCTOBER 1, 2009 TO MARCH 31, 2010 EXPENSE TABLE ---------------------------------------------------------------------------------------------------------------------------------- Beginning Ending Expenses Account Account Annualized Paid Value Value Expense During October 1, 2009 March 31, 2010 Ratio Period* ---------------------------------------------------------------------------------------------------------------------------------- ACTUAL Class A $1,000.00 $1,073.80 1.08% $5.58 Class B 1,000.00 1,069.50 1.83 9.44 Class C 1,000.00 1,069.50 1.83 9.44 HYPOTHETICAL (5% RETURN BEFORE EXPENSES) Class A 1,000.00 1,019.48 1.08 5.45 Class B 1,000.00 1,015.69 1.83 9.24 Class C 1,000.00 1,015.69 1.83 9.24 * Expenses are equal to the Fund's annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days (182) expenses were accrued in the most recent fiscal half-year, then divided by 365 days to reflect the one-half year period. The Fund may invest in other funds, and the annualized expense ratios noted above do not reflect fees and expenses associated with the underlying funds. If such fees and expenses were included, the expenses would have been higher. You can find more information about the Fund's expenses in the Financial Statements section that follows. For additional information on operating expenses and other shareholder costs, refer to the prospectus. 3
VIRTUS BALANCED FUND TICKER SYMBOLS: A Share: PHBLX B Share: PBCBX C Share: PSBCX - BALANCED FUND (THE "FUND") is diversified and has HOW DID THE FIXED INCOME MARKET PERFORM DURING THE FUND'S investment objectives of reasonable income, long-term FISCAL YEAR? capital growth and conservation of capital. - Beginning in March 2009, the bond market experienced an - For the fiscal year ended March 31, 2010, the Fund's Class explosive rally, particularly in the area of corporate A shares at NAV returned 35.82%, Class B shares returned credit. The rally was driven by the extraordinary measures 34.65% and Class C shares returned 34.69%. For the same initiated by the world's central banks to control the 2008 period, the S&P 500(R) Index, a broad-based equity index, financial crisis. During the period, the riskiest assets returned 49.77%; the Barclays Capital U.S. Aggregate Bond performed best. Distressed corporate bonds doubled in Index, a broad-based fixed income index, returned 7.69%; value while risk-free Treasuries actually fell in price. and the Balanced Fund Composite Index, which is the Fund's High-yield corporate bonds produced a 56% total return style-specific index appropriate for comparison, returned over the period, while commercial mortgage-backed 31.65%. securities returned 40%. Even high-grade corporate bonds performed strongly, producing a 25% total return. ALL PERFORMANCE FIGURES ASSUME REINVESTMENT OF DISTRIBUTIONS AND EXCLUDE THE EFFECT OF SALES CHARGES. - The only bonds to exhibit a negative return were U.S. PERFORMANCE DATA QUOTED REPRESENTS PAST RESULTS. PAST Treasuries, as interest rates rose by over 100 basis PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT points. Government-related bonds also lagged, with PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE agencies and agency-mortgage backed securities each SHOWN ABOVE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL producing a dismal 3%. FLUCTUATE SO YOUR SHARES WHEN REDEEMED MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE VISIT virtus.com WHAT FACTORS AFFECTED THE FUND'S EQUITY PORTFOLIO PERFORMANCE FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. DURING ITS FISCAL YEAR? HOW DID THE EQUITY MARKET PERFORM DURING THE FUND'S FISCAL - Given the strife the market had encountered in 2008 and YEAR? early 2009, the Fund managers believed that the prudent strategy was to position the fund into stocks that offered - The broad market was incredibly strong for the year ending the best relative value. They believed that the best play March 31, 2010. The U.S. stock market made a major bottom was to be found in companies with tangible assets and in early March of 2009, and has been in a powerful bull earnings visibility. Two sectors that contained companies market rise since. The combination of easy monetary policy exhibiting those qualities were Energy and Materials. and massive fiscal stimulus alleviated investor concerns Also, there was still great uncertainty in the spring of about corporate bankruptcies. Many US companies, in the 2009, which persisted well into the fall, whether or not meantime, had cut costs dramatically, repaired balance banks would be able to survive, and what the financial sheets, and pushed hard to increase worker productivity. services industry would look like. Furthermore, the This vigilance led to greater profitability and higher massive government involvement created a great deal of share prices in a variety of different stocks. doubt as to what would be left for shareholders of these stocks. Thus, the Fund managers generally avoided stocks within the Financial sector. Another area that looked like the road to recovery would be extended was Consumer Discretionary. The For information regarding the indexes and certain investment terms, see Key Investment Terms on page 6. 4
VIRTUS BALANCED FUND (CONTINUED) American consumer, with massive debt, concern about job ("CMBS"). CMBS, which had suffered dramatically in late loss, and squeezed by both lower wages and at the pump, 2008, rebounded strongly throughout the subsequent year, seemed ill equipped to spend money on anything other than enhancing the contribution made by securitized bonds to necessities. As a result, the Fund managers deployed the the Fund's performance. portfolio into Consumer Staples, some Health Care, a variety of Industrial stocks, Technology (with a business THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO bent), Energy and Materials. Areas that were under-weight MANAGEMENT ONLY THROUGH THE END OF THE PERIOD AS STATED ON THE versus the S&P were Financials, Consumer Discretionary and COVER. ANY SUCH OPINIONS ARE SUBJECT TO CHANGE AT ANY TIME Utilities. Overall the Fund beat its peer group, but fell BASED UPON MARKET CONDITIONS AND SHOULD NOT BE RELIED ON AS short of the S&P 500 Index, its benchmark over the full INVESTMENT ADVICE. year. The more conservative strategy worked for several months, however, as the recovery took hold many bank INVESTING INTERNATIONALLY, ESPECIALLY IN EMERGING MARKETS, stocks, retail stocks, and leisure stocks began to INVOLVES ADDITIONAL RISKS SUCH AS CURRENCY, POLITICAL, recover. On an absolute basis it was still a tremendous ACCOUNTING, ECONOMIC AND MARKET RISK. THE FUND MAY INVEST IN year for the Fund, and overall we are pleased with HIGH-YIELD BONDS, WHICH MAY BE SUBJECT TO GREATER CREDIT AND performance. The Fund tends to have a lower MARKET RISKS. AS INTEREST RATES RISE, EXISTING BOND PRICES FALL price-to-earnings ratio than the S&P 500 Index, which in AND CAN CAUSE THE VALUE OF AN INVESTMENT IN THE FUND TO the opinion of the managers tends to mean a less risky DECLINE. CHANGES IN INTEREST RATES WILL AFFECT THE VALUE OF portfolio. LONGER-TERM FIXED INCOME SECURITIES MORE THAN SHORTER-TERM SECURITIES. INVESTING IN THE SECURITIES OF SMALL AND MID-SIZED WHAT FACTORS AFFECTED THE FUND'S FIXED INCOME PORTFOLIO COMPANIES INVOLVES GREATER RISKS AND PRICE VOLATILITY THAN PERFORMANCE DURING ITS FISCAL YEAR? INVESTING IN LARGER, MORE ESTABLISHED COMPANIES. INVESTING IN MUNICIPAL BONDS INVOLVES MARKET RISK AND CREDIT RISK. - The fixed income portfolio outperformed its benchmark by 10.63% over the fiscal year, benefiting substantially from --------------------------------------------------------------- its overweight to corporate credit. Both investment-grade and high-yield corporate bonds contributed to performance, ASSET ALLOCATIONS with financials taking the lead role. Throughout 2009, the ----------------- Federal Government made a concerted effort to support the banking system, first by lowering interest rates and later The following table presents the portfolio holdings within by injecting capital directly. In so doing, the Federal certain sectors as a percentage of total investments at March Government was able to arrest the sector's downward price 31, 2010. spiral, and precipitate a rally that lasted throughout the year. Common Stocks 58% Energy 12% - Sector allocation also proved beneficial in the Information Technology 11% securitized products sector. The Fund reduced its exposure Consumer Staples 8% to agency mortgage-backed securities (which performed All Other Sectors in Common Stocks 27% poorly), and simultaneously increased its weighting to Corporate Bonds 18% commercial mortgage-backed securities Mortgage-Backed Securities 14% Other (includes short-term investments) 10% --- Total 100% === --------------------------------------------------------------- For information regarding the indexes and certain investment terms, see Key Investment Terms on page 6. 5
KEY INVESTMENT TERMS ADR (AMERICAN DEPOSITARY RECEIPT) REIT (REAL ESTATE INVESTMENT TRUST) Represents shares of foreign companies traded in U.S. dollars A publicly traded company that owns, develops and operates on U.S. exchanges that are held by a bank or a trust. Foreign income-producing real estate such as apartments, office companies use ADRs in order to make it easier for Americans to buildings, hotels, shopping centers and other commercial buy their shares. properties. BALANCED FUND COMPOSITE INDEX S&P 500(R) INDEX A composite index consisting of 60% S&P 500(R) Index and 40% The S&P 500(R) Index is a free-float market Barclays Capital U.S. Aggregate Bond Index. capitalization-weighted index of 500 of the largest U.S. companies. The index is calculated on a total return basis with BARCLAYS CAPITAL U.S. AGGREGATE BOND INDEX dividends reinvested. The Barclays Capital U.S. Aggregate Bond Index measures the U.S. investment grade fixed rate bond market. The index is calculated on a total return basis. THE INDEXES ARE UNMANAGED AND NOT AVAILABLE FOR DIRECT INVESTMENT; THEREFORE, THEIR PERFORMANCE DOES NOT REFLECT THE EXPENSES ASSOCIATED WITH ACTIVE MANAGEMENT OF AN ACTUAL PORTFOLIO. 6
AVERAGE ANNUAL TOTAL RETURNS(1) for periods ended 3/31/10 ---------------------------------------------------------------------------------------------------------------------------------- Inception 1 5 10 to Inception Year Years Years 3/31/10 Date ---------------------------------------------------------------------------------------------------------------------------------- CLASS A SHARES AT NAV(2) 35.82% 3.10% 2.52% -- -- ---------------------------------------------------------------------------------------------------------------------------------- CLASS A SHARES AT POP(3,4) 28.01 1.89 1.92 -- -- ---------------------------------------------------------------------------------------------------------------------------------- CLASS B SHARES AT NAV(2) 34.65 2.33 1.76 -- -- ---------------------------------------------------------------------------------------------------------------------------------- CLASS B SHARES WITH CDSC(4) 30.65 2.33 1.76 -- -- ---------------------------------------------------------------------------------------------------------------------------------- CLASS C SHARES AT NAV AND WITH CDSC(4) 34.69 -- -- 2.51% 4/19/05 ---------------------------------------------------------------------------------------------------------------------------------- S&P 500(R) INDEX 49.77 1.92 -0.68 2.42(5) --(5) ---------------------------------------------------------------------------------------------------------------------------------- BARCLAYS CAPITAL U.S. AGGREGATE BOND INDEX 7.69 5.44 6.29 5.22(5) --(5) ---------------------------------------------------------------------------------------------------------------------------------- COMPOSITE INDEX FOR BALANCED FUND 31.65 3.64 2.40 3.86(5) --(5) ---------------------------------------------------------------------------------------------------------------------------------- FUND EXPENSE RATIOS(6): A SHARES: 1.10%; B SHARES: 1.85%; C SHARES: 1.85%. ---------------------------------------------------------------------------------------------------------------------------------- ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PLEASE VISIT virtus.com FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR B SHARES DECLINE FROM 5% TO 0% OVER A FIVE-YEAR PERIOD. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES, ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE INDEX RETURNS ARE FROM CLASS C SHARES INCEPTION DATE. (6) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS TABLES IN THIS REPORT. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 ---------------------------------------------------------------------------------------------------------------------------------- This chart assumes an initial investment of $10,000 made on March 31, 2000, for Class A and Class B shares including any applicable sales charges or fees. The performance of the other share class will be greater or less than that shown based on differences in inception dates, fees and sales charges. Performance assumes reinvestment of dividends and capital gain distributions. (PERFORMANCE GRAPH) Barclays Capital Composite: Virtus Balanced Fund, Virtus Balanced Fund, U.S. Aggregate 60% S&P 500 / 40% Class A Class B S&P 500 Index Bond Index Lehman Aggregate Bond --------------------- --------------------- ------------- ---------------- --------------------- 3/31/2000 9425 10000 10000 10000 10000 3/30/2001 8859 9328 7815 11253 9079 3/28/2002 9320 9741 7834 11855 9323 3/31/2003 8188 8489 5895 13241 8274 3/31/2004 10127 10431 7965 13956 10144 3/31/2005 10381 10607 8496 14117 10603 3/31/2006 11133 11297 9493 14435 11443 3/30/2007 12223 12308 10616 15387 12560 3/31/2008 12025 12009 10077 16567 12564 3/31/2009 8904 8839 6239 17084 9630 3/31/2010 12094 11901 9344 18399 12678 For information regarding the indexes and certain investment terms, see Key Investment Terms on page 6. 7
VIRTUS BALANCED FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) PAR VALUE VALUE PAR VALUE VALUE ---------- -------- ---------- -------- U.S. GOVERNMENT SECURITIES--7.9% AGENCY--CONTINUED U.S. Treasury Bond FNMA--continued 3.500%, 2/15/39 $ 12,180 $ 9,856 6.000%, 9/1/36 $ 716 $ 764 U.S. Treasury Note 5.500%, 11/1/36 2,847 3,006 1.000%, 12/31/11 5,440 5,451 6.500%, 7/1/37 2,206 2,393 2.625%, 6/30/14 11,205 11,371 6.000%, 10/1/37 1,294 1,376 3.250%, 12/31/16 4,765 4,771 5.000%, 2/1/38 807 834 4.750%, 8/15/17 3,190 3,489 6.000%, 2/1/38 387 411 3.625%, 2/15/20 16,485 16,204 5.000%, 3/1/38 984 1,016 --------------------------------------------------------------- 5.000%, 3/1/38 828 856 TOTAL U.S. GOVERNMENT SECURITIES 6.500%, 3/1/38 6,518 7,185 (IDENTIFIED COST $50,997) 51,142 5.000%, 4/1/38 1,683 1,739 --------------------------------------------------------------- 5.500%, 4/1/38 479 505 MUNICIPAL BONDS--0.0% 5.000%, 5/1/38 2,764 2,855 NEW JERSEY--0.0% 5.500%, 6/1/38 4,993 5,268 New Jersey Turnpike Authority Taxable 5.500%, 8/1/38 79 83 Series B Prerefunded 1/1/15 @ 100 6.500%, 10/1/38 339 368 (AMBAC Insured) 4.252%, 1/1/16 5 5 6.000%, 11/1/38 1,513 1,609 --------------------------------------------------------------- 6.000%, 3/1/39 1,188 1,263 TOTAL MUNICIPAL BONDS FNMA REMICs 03-42, HC 4.500%, 12/25/17 485 506 (IDENTIFIED COST $5) 5 GNMA --------------------------------------------------------------- 6.500%, 8/15/23 52 57 MORTGAGE-BACKED SECURITIES--13.9% 6.500%, 11/15/23 486 524 AGENCY--10.7% 6.500%, 11/15/23 221 238 FHLMC 6.500%, 11/15/23 82 88 R010-AB 6.500%, 12/15/23 68 74 5.500%, 12/15/19 971 1,016 6.500%, 12/15/23 46 49 5.000%, 1/1/35 8,476 8,810 6.500%, 12/15/23 57 61 5.000%, 7/1/35 176 183 6.500%, 1/15/24 172 187 5.000%, 12/1/35 1,289 1,334 6.500%, 1/15/24 50 54 FHLMC REMICs 6.500%, 1/15/24 55 60 JA-2777 4.500%, 11/15/17 404 420 6.500%, 1/15/24 185 201 CH-2904 4.500%, 4/15/19 1,204 1,257 6.500%, 1/15/24 21 23 FNMA 6.500%, 1/15/24 7 7 6.000%, 5/1/17 139 150 6.500%, 2/15/24 301 326 4.500%, 12/1/18 1,367 1,420 6.500%, 2/15/24 97 105 4.500%, 4/1/19 290 304 6.500%, 2/15/24 34 37 4.000%, 7/1/19 52 54 6.500%, 2/15/24 11 12 4.000%, 6/1/20 905 921 6.500%, 3/15/24 76 83 4.500%, 11/1/20 2,075 2,155 6.500%, 3/15/24 179 194 6.000%, 12/1/32 310 337 6.500%, 4/15/24 323 351 6.000%, 10/1/34 233 252 6.500%, 4/15/24 21 22 6.000%, 11/1/34 8,863 9,563 6.500%, 4/15/24 54 59 6.000%, 5/1/35 442 473 6.500%, 4/15/24 13 14 5.500%, 3/1/36 4,078 4,311 6.500%, 5/15/24 7 8 6.500%, 1/15/26 19 21 6.500%, 1/15/26 50 55 6.500%, 1/15/26 163 177 See Notes to Financial Statements 8
VIRTUS BALANCED FUND SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2010 ($ reported in thousands) PAR VALUE VALUE PAR VALUE VALUE ---------- -------- ---------- -------- AGENCY--CONTINUED NON-AGENCY--CONTINUED GNMA--continued Greenwich Capital Commercial Funding 6.500%, 2/15/26 $ 50 $ 54 Corp. 6.500%, 3/15/26 76 83 07-GG9, A4 5.444%, 3/10/39 $ 2,505 $ 2,436 6.500%, 3/15/26 90 98 Lehman Brothers -- UBS Commercial 6.500%, 4/15/26 24 27 Mortgage Trust 6.500%, 4/15/26 112 122 06-C7, A3 5.347%, 11/15/38 2,230 2,238 6.500%, 6/15/28 15 17 Morgan Stanley Capital I 6.500%, 6/15/28 21 23 04-T15, A3 5.030%, 6/13/41 555 576 6.500%, 7/15/31 138 151 06-T23, A4 5.811%, 8/12/41(3) 1,255 1,328 6.500%, 11/15/31 20 22 07-T27, A4 5.649%, 6/11/42(3) 1,250 1,293 6.500%, 2/15/32 27 30 05-IQ9, A3 4.540%, 7/15/56 715 717 6.500%, 3/15/32 29 32 Wachovia Bank Commercial Mortgage Trust 6.500%, 4/15/32 49 54 05-C19, A5 4.661%, 5/15/44 3,613 3,714 6.000%, 8/15/32 351 381 07-C34, A3 5.678%, 5/15/46 1,400 1,348 -------- -------- 69,178 21,016 -------- --------------------------------------------------------------- NON-AGENCY--3.2% TOTAL MORTGAGE-BACKED SECURITIES Banc of America Commercial Mortgage, Inc. (IDENTIFIED COST $87,323) 90,194 05-1, A4 5.039%, 11/10/42(3) 320 332 --------------------------------------------------------------- 04-6, A5 4.811%, 12/10/42 445 455 ASSET-BACKED SECURITIES--0.0% 08-1, A4 6.182%, 2/10/51(3) 85 85 Associates Manufactured Housing Bear Stearns Commercial Mortgage Pass-Through-Certificate Securities 97-2, A6 7.075%, 3/15/28(3) 298 299 04-T16, A6 4.750%, 2/13/46(3) 240 244 --------------------------------------------------------------- Commercial Mortgage Pass-Through TOTAL ASSET-BACKED SECURITIES Certificates (IDENTIFIED COST $298) 299 05-C6, A4 5.168%, 6/10/44 375 394 --------------------------------------------------------------- 07-C9, A4 5.816%, 12/10/49(3) 420 420 CORPORATE BONDS--17.5% Credit Suisse Mortgage Capital CONSUMER DISCRETIONARY--2.2% Certificates Affinion Group, Inc. 06-C1, A4 5.549%, 2/15/39(3) 1,950 2,010 10.125%, 10/15/13 860 886 06-C1, A3 5.549%, 2/15/39(3) 575 596 Avis Budget Car Rental LLC/Avis Budget 06-C4, A3 5.467%, 9/15/39 2,435 2,339 Finance, Inc. 06-C5, A3 5.311%, 12/15/39 520 491 7.625%, 5/15/14 815 811 Comcast Corp. 5.700%, 7/1/19 2,385 2,490 See Notes to Financial Statements 9
VIRTUS BALANCED FUND SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2010 ($ reported in thousands) PAR VALUE VALUE PAR VALUE VALUE ---------- -------- ---------- -------- CONSUMER DISCRETIONARY--CONTINUED CONSUMER STAPLES--CONTINUED COX Communications, Inc. Lorillard Tobacco Co. 144A 6.250%, 6/1/18(4) $ 800 $ 851 8.125%, 6/23/19 $ 1,160 $ 1,278 Fortune Brands, Inc. Reynolds American, Inc. 3.000%, 6/1/12 1,050 1,052 7.300%, 7/15/15 950 1,046 Hasbro, Inc. -------- 6.300%, 9/15/17 775 830 11,704 Nebraska Book Co., Inc. -------- 10.000%, 12/1/11 1,330 1,380 ENERGY--1.4% Royal Caribbean Cruises Ltd. Aquilex Holdings LLC/Aquilex Finance 7.250%, 6/15/16 875 868 Corp. 144A Scientific Games International, Inc. 144A 11.125%, 12/15/16(4) 180 194 9.250%, 6/15/19(4) 270 288 Buckeye Partners LP Time Warner Cable, Inc. 6.050%, 1/15/18 250 265 3.500%, 2/1/15 170 170 Enterprise Products Operating LLC 5.850%, 5/1/17 435 466 7.625%, 2/15/12 420 463 5.000%, 2/1/20 1,080 1,065 Harvest Operations Corp. UPC Germany GmbH 144A 7.875%, 10/15/11 1,085 1,107 8.125%, 12/1/17(4) 1,285 1,332 Kinder Morgan Finance Co. Valassis Communications, Inc. 5.700%, 1/5/16 2,420 2,384 8.250%, 3/1/15 660 681 Petroleos Mexicanos 144A Videotron Ltee 4.875%, 3/15/15(4) 655 673 6.375%, 12/15/15 650 658 Petropower I Funding Trust 144A WMG Holdings Corp. 7.360%, 2/15/14(4) 977 964 9.500%, 12/15/14(3) 645 653 Plains All American Pipeline LP/PAA -------- Finance Corp. 14,481 4.250%, 9/1/12 235 244 -------- Rowan Cos., Inc. CONSUMER STAPLES--1.8% 7.875%, 8/1/19 430 492 Alliance One International, Inc. 144A Shell International Finance BV 10.000%, 7/15/16(4) 835 877 4.375%, 3/25/20 1,225 1,214 Altria Group, Inc. 5.500%, 3/25/40 1,225 1,201 9.250%, 8/6/19 2,160 2,625 -------- Anheuser-Busch Inbev Worldwide, Inc. 9,201 3.000%, 10/15/12 1,025 1,052 -------- ASG Consolidated LLC/ASG Finance, Inc. FINANCIALS--7.4% 11.500%, 11/1/11(3) 870 879 American Express Co. B&G Foods, Inc. 7.250%, 5/20/14 1,150 1,303 7.625%, 1/15/18 130 133 Bank of America Corp. Delhaize Group 5.750%, 8/15/16 1,290 1,321 6.500%, 6/15/17 1,250 1,380 5.650%, 5/1/18 1,295 1,310 Kraft Foods, Inc. Bank of New York/Mellon Corp. (The) 5.625%, 11/1/11 1,240 1,317 4.950%, 11/1/12 950 1,030 2.625%, 5/8/13 425 428 Barclays Bank plc Series 1, 6.125%, 2/1/18 630 689 5.000%, 9/22/16 2,105 2,164 Bear Stearns Cos., Inc. LLC (The) 7.250%, 2/1/18 900 1,040 See Notes to Financial Statements 10
VIRTUS BALANCED FUND SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2010 ($ reported in thousands) PAR VALUE VALUE PAR VALUE VALUE ---------- -------- ---------- -------- FINANCIALS--CONTINUED FINANCIALS--CONTINUED Capital One Financial Corp. Prudential Financial, Inc. 7.375%, 5/23/14 $ 1,225 $ 1,400 3.625%, 9/17/12 $ 1,705 $ 1,753 Capital One Capital VI Rabobank Nederland NV 144A 8.875%, 5/15/40 380 414 11.000%, 12/31/49(3)(4) 1,040 1,338 Citigroup, Inc. Regions Financial Corp. 5.000%, 9/15/14 910 909 0.455%, 6/26/12(3) 2,215 2,025 5.500%, 10/15/14 1,225 1,268 Royal Bank of Scotland Group plc 4.875%, 5/7/15 1,235 1,219 6.400%, 10/21/19 550 550 Credit Suisse New York Simon Property Group LP 5.000%, 5/15/13 900 967 6.750%, 5/15/14 1,260 1,378 CVS Pass-Through Trust 144A SunTrust Banks, Inc. 7.507%, 1/10/32(4) 374 416 5.250%, 11/5/12 1,290 1,361 Developers Diversified Realty Corp. Teachers Insurance & Annuity Association 5.000%, 5/3/10 2,195 2,198 of America 144A Ford Motor Credit Co. LLC 6.850%, 12/16/39(4) 580 629 7.500%, 8/1/12 685 710 UBS Preferred Funding Trust I General Electric Capital Corp. 8.622%, 10/29/49(3) 710 703 2.800%, 1/8/13 1,570 1,589 Wachovia Bank NA 5.500%, 1/8/20 1,380 1,408 5.000%, 8/15/15 600 622 GMAC, Inc. Wachovia Corp. 0.000%, 6/15/15 690 445 4.875%, 2/15/14 1,145 1,186 Icahn Enterprises LP/Icahn Enterprises Westfield Capital Corp. Ltd./Westfield Finance Corp. Finance Authority 144A 8.000%, 1/15/18(4) 1,550 1,502 144A 4.375%, 11/15/10(4) 175 178 ING Capital Funding Trust III 144A 5.125%, 11/15/14(4) 1,175 1,210 8.439%, 12/31/49(3) 1,260 1,197 -------- International Lease Finance Corp. 48,047 144A 8.625%, 9/15/15(4) 125 128 -------- 144A 8.750%, 3/15/17(4) 590 605 HEALTH CARE--0.5% JPMorgan Chase & Co. Boston Scientific Corp. 5.125%, 9/15/14 970 1,025 6.000%, 1/15/20 515 488 3.700%, 1/20/15 785 790 Express Scripts, Inc. Series 1, 5.250%, 6/15/12 1,250 1,333 7.900%, 12/31/49(3) 536 571 Novartis Capital Corp. Macquarie Group Ltd. 144A 1.900%, 4/24/13 180 180 7.300%, 8/1/14(4) 2,410 2,691 Talecris Biotherapeutics Holdings Corp. Metropolitan Life Global Funding I 144A 144A 2.875%, 9/17/12(4) 1,445 1,469 7.750%, 11/15/16(4) 720 727 Morgan Stanley Thermo Fisher Scientific, Inc. 144A 6.000%, 4/28/15 1,150 1,232 2.150%, 12/28/12(4) 500 498 6.625%, 4/1/18 1,175 1,253 -------- Northern Trust Co. (The) 3,226 6.500%, 8/15/18 800 895 -------- PNC Funding Corp. 5.125%, 2/8/20 640 645 See Notes to Financial Statements 11
VIRTUS BALANCED FUND SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2010 ($ reported in thousands) PAR VALUE VALUE PAR VALUE VALUE ---------- -------- ---------- -------- INDUSTRIALS--0.7% TELECOMMUNICATION SERVICES--CONTINUED Corrections Corp. of America France Telecom SA 7.750%, 6/1/17 $ 1,185 $ 1,244 4.375%, 7/8/14 $ 410 $ 432 Hutchison Whampoa International Ltd. 144A GCI, Inc. 144A 5.750%, 9/11/19(4) 525 545 8.625%, 11/15/19(4) 425 435 Pitney Bowes, Inc. Global Crossing Ltd. 144A 4.750%, 5/15/18 1,250 1,262 12.000%, 9/15/15(4) 655 730 Travelport LLC NII Capital Corp. 144A 9.875%, 9/1/14 1,155 1,213 8.875%, 12/15/19(4) 1,055 1,097 Waste Management, Inc. Qwest Corp. 5.000%, 3/15/14 175 186 7.875%, 9/1/11 1,885 1,998 -------- 6.500%, 6/1/17 570 594 4,450 Sprint Capital Corp. -------- 8.375%, 3/15/12 1,955 2,043 INFORMATION TECHNOLOGY--0.5% Telecom Italia Capital SA Fiserv, Inc. 6.999%, 6/4/18 1,000 1,082 6.125%, 11/20/12 1,220 1,328 7.175%, 6/18/19 1,170 1,263 Intuit, Inc. Telefonica Emisiones SAU 5.750%, 3/15/17 221 234 5.877%, 7/15/19 860 921 Viasat, Inc. 144A Virgin Media Finance plc 8.875%, 9/15/16(4) 120 123 8.375%, 10/15/19 475 490 Xerox Corp. Windstream Corp. 4.250%, 2/15/15 795 801 7.000%, 3/15/19 1,420 1,331 6.750%, 2/1/17 1,040 1,148 -------- -------- 13,066 3,634 -------- -------- UTILITIES--0.4% MATERIALS--0.6% AmeriGas Partners LP Ball Corp. 7.250%, 5/20/15 1,000 1,020 6.750%, 9/15/20 345 353 CMS Energy Corp. Boise Paper Holdings LLC 144A 6.250%, 2/1/20 885 879 8.000%, 4/1/20(4) 75 75 FirstEnergy Solutions Corp. Dow Chemical Co. (The) 6.050%, 8/15/21 480 481 6.000%, 10/1/12 1,240 1,350 -------- 5.900%, 2/15/15 1,080 1,169 2,380 Holcim U.S. Finance S.A.R.L. & Cie S.C.S --------------------------------------------------------------- 144A 6.000%, 12/30/19(4) 515 535 TOTAL CORPORATE BONDS Huntsman International LLC (IDENTIFIED COST $109,395) 114,021 144A 8.625%, 3/15/20(4) 150 151 --------------------------------------------------------------- Solutia, Inc. 7.875%, 3/15/20 195 199 SHARES -------- ---------- 3,832 PREFERRED STOCK--0.0% -------- FINANCIALS--0.0% TELECOMMUNICATION SERVICES--2.0% GMAC, Inc. Series G Pfd. Citizen Communications Co. 7.00% 144A(4) 181 138 6.250%, 1/15/13 640 650 --------------------------------------------------------------- TOTAL PREFERRED STOCK (IDENTIFIED COST $57) 138 --------------------------------------------------------------- See Notes to Financial Statements 12
VIRTUS BALANCED FUND SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE ---------- -------- ---------- -------- COMMON STOCKS--57.7% INDUSTRIALS--CONTINUED CONSUMER DISCRETIONARY--1.4% Foster Wheeler AG(2) 266,000 $ 7,219 McDonald's Corp. 140,000 $ 9,341 L-3 Communications Holdings, Inc. 89,000 8,155 -------- Union Pacific Corp. 115,000 8,429 CONSUMER STAPLES--7.8% -------- Altria Group, Inc. 430,000 8,824 49,074 Bunge Ltd. 120,000 7,396 -------- Clorox Co. (The) 139,000 8,915 INFORMATION TECHNOLOGY--10.5% Costco Wholesale Corp. 132,000 7,882 Cisco Systems, Inc.(2) 333,000 8,668 PepsiCo, Inc. 135,000 8,931 Corning, Inc. 440,000 8,892 Philip Morris International, Inc. 167,000 8,711 Hewlett-Packard Co. 167,000 8,876 -------- International Business Machines Corp. 66,000 8,465 50,659 Microsoft Corp. 286,000 8,371 -------- Nokia Oyj Sponsored ADR 551,000 8,563 ENERGY--11.6% QUALCOMM, Inc. 195,600 8,213 Chesapeake Energy Corp. 315,000 7,447 Research In Motion Ltd.(2) 113,000 8,356 Chevron Corp. 107,000 8,114 -------- ConocoPhillips 156,000 7,982 68,404 Halliburton Co. 276,000 8,316 -------- Massey Energy Co. 159,000 8,314 MATERIALS--5.2% Occidental Petroleum Corp. 101,000 8,539 Alcoa, Inc. 594,000 8,458 Petroleo Brasileiro SA ADR 185,000 8,231 Freeport-McMoRan Copper & Gold, Inc. 98,000 8,187 Valero Energy Corp. 439,000 8,648 Nucor Corp. 185,000 8,395 Williams Cos., Inc. (The) 423,000 9,771 Potash Corp. of Saskatchewan, Inc. 72,000 8,593 -------- -------- 75,362 33,633 -------- -------- FINANCIALS--2.6% TELECOMMUNICATION SERVICES--2.5% Goldman Sachs Group, Inc. (The) 47,000 8,019 AT&T, Inc. 333,000 8,604 Hudson City Bancorp, Inc. 617,700 8,747 Verizon Communications, Inc. 248,000 7,693 -------- -------- 16,766 16,297 -------- -------- HEALTH CARE--7.5% UTILITIES--1.1% Biogen Idec, Inc.(2) 146,000 8,375 Exelon Corp. 170,000 7,448 Gilead Sciences, Inc.(2) 171,000 7,777 --------------------------------------------------------------- Johnson & Johnson 125,000 8,150 TOTAL COMMON STOCKS Shire plc ADR 125,000 8,245 (IDENTIFIED COST $284,711) 375,590 St. Jude Medical, Inc.(2) 201,000 8,251 --------------------------------------------------------------- UnitedHealth Group, Inc. 239,000 7,808 EXCHANGE TRADED FUNDS--1.3% -------- PowerShares Deutsche Bank Agriculture 48,606 Fund(2) 336,000 8,145 -------- --------------------------------------------------------------- INDUSTRIALS--7.5% TOTAL EXCHANGE TRADED FUNDS Caterpillar, Inc. 135,000 8,485 (IDENTIFIED COST $8,340) 8,145 Continental Airlines, Inc. Class B(2) 411,000 9,030 --------------------------------------------------------------- DryShips, Inc.(2) 1,328,000 7,756 TOTAL LONG-TERM INVESTMENTS--98.3% (IDENTIFIED COST $541,126) 639,534 --------------------------------------------------------------- See Notes to Financial Statements 13
VIRTUS BALANCED FUND SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2010 ($ reported in thousands) SHARES VALUE ---------- -------- SHORT-TERM INVESTMENTS--1.5% COUNTRY WEIGHTINGS as of 3/31/10+ MONEY MARKET MUTUAL FUNDS--1.5% -------------------------------------------------------------- BlackRock Liquidity Funds TempFund United States (includes short-term investments) 86% Portfolio -- Institutional Shares Canada 3 (seven-day effective yield 0.119%) 9,772,294 $ 9,772 Bermuda 2 --------------------------------------------------------------- United Kingdom 2 TOTAL SHORT-TERM INVESTMENTS Brazil 1 (IDENTIFIED COST $9,772) 9,772 Finland 1 --------------------------------------------------------------- Switzerland 1 TOTAL INVESTMENTS--99.8% Other 4 (IDENTIFIED COST $550,898) 649,306(1) -------------------------------------------------------------- Other Assets and Liabilities--0.2% 1,075 Total 100% -------- -------------------------------------------------------------- NET ASSETS--100.0% $650,381 ======== + % of total investments as of March 31, 2010 ABBREVIATIONS: ADR American Depositary Receipt AMBAC American Municipal Bond Assurance Corporation FHLMC Federal Home Loan Mortgage Corporation ("Freddie Mac") FNMA Federal National Mortgage Association ("Fannie Mae") GNMA Government National Mortgage Association ("Ginnie Mae") REMIC Real Estate Mortgage Investment Conduit FOOTNOTE LEGEND (1) Federal Income Tax Information: For tax information at March 31, 2010, see the Federal Income Tax Information Note 8 in the Notes to Financial Statements. (2) Non-income producing. (3) Variable or step coupon security; interest rate shown reflects the rate currently in effect. (4) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At March 31, 2010, these securities amounted to a value of $20,399 or 3.1% of net assets. Security abbreviation definitions are located under Key Investment Terms on page 6. See Notes to Financial Statements 14
VIRTUS BALANCED FUND SCHEDULE OF INVESTMENTS (CONTINUED) MARCH 31, 2010 ($ reported in thousands) The following table provides a summary of inputs used to value the Fund's net assets as of March 31, 2010 (see Security Valuation Note 2A in the Notes to Financial Statements):
Level 2 - Level 3 - Significant Significant Total Value at Level 1 - Observable Unobservable March 31, 2010 Quoted Prices Inputs Inputs -------------- ------------- ----------- ------------ INVESTMENT IN SECURITIES: Debt Securities: U.S. Government Securities $ 51,142 $ -- $ 51,142 $-- Asset-Backed Securities 299 -- 299 -- Mortgage-Backed Securities 90,194 -- 90,194 -- Municipal Securities 5 -- 5 -- Corporate Debt 114,021 -- 114,021 -- Equity Securities: Preferred Stock 138 138 -- -- Common Stocks 375,590 375,590 -- -- Exchange Traded Funds 8,145 8,145 -- -- Short-Term Investments 9,772 9,772 -- -- -------- -------- -------- --- Total Investments $649,306 $393,645 $255,661 $-- ======== ======== ======== ===
There are no Level 3 (significant unobservable inputs) priced securities. The following is a reconciliation of assets of the Fund for Level 3 investments for which significant unobservable inputs were used to determine fair value:
Corporate Debt --------- INVESTMENTS IN SECURITIES: BALANCE AS OF MARCH 31, 2009 ................................................................... $1,056 Accrued discounts/premiums(a) .................................................................. 3 Realized gain (loss)(b) ........................................................................ -- Change in unrealized appreciation (depreciation)(b) ............................................ 114 Net purchases (sales)(d) ....................................................................... (209) Transfers in and/or out of Level 3(c) .......................................................... (964) ------ BALANCE AS OF MARCH 31, 2010 ................................................................... $ -- ======
(a) Disclosed in the Statement of Operations under interest income. (b) Disclosed in the Statement of Operations under Net realized and unrealized gain (loss) on investments. (c) "Transfers in and/or out" represent the ending value as of March 31, 2010, for any investment security where a change in the pricing level occurred from the beginning to the end of the period. (d) Includes paydowns. Level 3 securities are without an active market or market participants and therefore are internally fair valued. These internally fair valued securities derive their valuation based on the review of inputs such as, but not limited to, similar securities, liquidity factors, capital structure, and credit analysis. See Notes to Financial Statements 15
VIRTUS BALANCED FUND STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 2010 (Reported in thousands except shares and per share amounts)
ASSETS Investment in securities at value(1) ................................................................. $ 649,306 Receivables Dividends and interest ............................................................................ 2,864 Investment securities sold ........................................................................ 388 Fund shares sold .................................................................................. 4 Prepaid expenses ..................................................................................... 40 ----------- Total assets ................................................................................... 652,602 ----------- LIABILITIES Payables Fund shares repurchased ........................................................................... 1,047 Investment securities purchased ................................................................... 379 Investment advisory fee ........................................................................... 304 Distribution and service fees ..................................................................... 169 Administration fee ................................................................................ 47 Transfer agent fees and expenses .................................................................. 130 Professional fees ................................................................................. 32 Trustees' fee and expenses ........................................................................ 8 Other accrued expenses ............................................................................ 105 ----------- Total liabilities .............................................................................. 2,221 ----------- NET ASSETS ........................................................................................... $ 650,381 =========== NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest .................................................. $ 668,939 Accumulated undistributed net investment income (loss) ............................................ 439 Accumulated undistributed net realized gain (loss) ................................................ (117,405) Net unrealized appreciation (depreciation) on investments ......................................... 98,408 ----------- NET ASSETS ........................................................................................... $ 650,381 =========== CLASS A Net asset value (net assets/shares outstanding) per share ............................................ $ 12.54 Maximum offering price per share NAV/(1-5.75%) ....................................................... $ 13.31 Shares of beneficial interest outstanding, no par value, unlimited authorization ..................... 47,936,873 Net Assets ........................................................................................... $ 601,065 CLASS B Net asset value (net assets/shares outstanding) and offering price per share ......................... $ 12.48 Shares of beneficial interest outstanding, no par value, unlimited authorization ..................... 368,039 Net Assets ........................................................................................... $ 4,594 CLASS C Net asset value (net assets/shares outstanding) and offering price per share ......................... $ 12.47 Shares of beneficial interest outstanding, no par value, unlimited authorization ..................... 3,586,086 Net Assets ........................................................................................... $ 44,722 (1) Investment in securities at cost ................................................................. $ 550,898
See Notes to Financial Statements 16
VIRTUS BALANCED FUND STATEMENT OF OPERATIONS YEAR ENDED MARCH 31, 2010 (Reported in thousands)
INVESTMENT INCOME Interest ........................................................................................ $ 11,965 Dividends ....................................................................................... 8,026 Foreign taxes withheld .......................................................................... (83) -------- Total investment income ...................................................................... 19,908 -------- EXPENSES Investment advisory fees ........................................................................ 3,481 Service fees, Class A ........................................................................... 1,460 Distribution and service fees, Class B .......................................................... 56 Distribution and service fees, Class C .......................................................... 433 Administration fees ............................................................................. 538 Transfer agent fees and expenses ................................................................ 943 Printing fees and expenses ...................................................................... 249 Professional fees ............................................................................... 68 Custodian fees .................................................................................. 59 Trustees fee and expenses ....................................................................... 56 Registration fees ............................................................................... 47 Miscellaneous expenses .......................................................................... 104 -------- Total expenses ............................................................................... 7,494 -------- NET INVESTMENT INCOME (LOSS) ....................................................................... 12,414 -------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments ......................................................... 31,617 Net realized gain (loss) on foreign currency transactions ....................................... 1 Net change in unrealized appreciation (depreciation) on investments ............................. 144,215 Net change in unrealized appreciation (depreciation) on foreign currency translation ............ --(1) -------- NET GAIN (LOSS) ON INVESTMENTS ..................................................................... 175,833 -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .................................... $188,247 ========
(1) Amount is less than $500 (not reported in thousands). See Notes to Financial Statements 17
VIRTUS BALANCED FUND STATEMENT OF CHANGES IN NET ASSETS (Reported in thousands)
Year Ended Year Ended March 31, 2010 March 31, 2009 -------------- -------------- INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) .............................................................. $ 12,414 $ 21,305 Net realized gain (loss) .................................................................. 31,618 (146,122) Net change in unrealized appreciation (depreciation) ...................................... 144,215 (85,888) --------- --------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .................................. 188,247 (210,705) --------- --------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income, Class A ............................................................ (11,811) (20,336) Net investment income, Class B ............................................................ (72) (202) Net investment income, Class C ............................................................ (566) (1,155) Net realized long-term gains, Class A ..................................................... -- (2,742) Net realized long-term gains, Class B ..................................................... -- (39) Net realized long-term gains, Class C ..................................................... -- (206) --------- --------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS .................................... (12,449) (24,680) --------- --------- FROM SHARE TRANSACTIONS: SALE OF SHARES Class A (882 and 978 shares, respectively) ................................................ 10,092 11,036 Class B (27 and 64 shares, respectively) .................................................. 316 711 Class C (37 and 52 shares, respectively) .................................................. 415 551 REINVESTMENT OF DISTRIBUTIONS Class A (909 and 1,850 shares, respectively) .............................................. 10,538 20,839 Class B (6 and 19 shares, respectively) ................................................... 67 219 Class C (40 and 101 shares, respectively) ................................................. 459 1,132 SHARES REPURCHASED Class A (7,784 and 9,700 shares, respectively) ............................................ (89,960) (108,927) Class B (291 and 371 shares, respectively) ................................................ (3,324) (4,233) Class C (475 and 777 shares, respectively) ................................................ (5,445) (8,695) --------- --------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS .................................... (76,842) (87,367) --------- --------- CAPITAL CONTRIBUTIONS Fair Funds settlement(1) .................................................................. 2 -- --------- --------- NET INCREASE (DECREASE) IN NET ASSETS ........................................................ 98,958 (322,752) --------- --------- NET ASSETS Beginning of year ............................................................................ 551,423 874,175 --------- --------- END OF YEAR .................................................................................. $ 650,381 $ 551,423 ========= ========= Accumulated undistributed net investment income (loss) at end of period ...................... $ 439 $ 385
(1) The Fund was a recipient of a portion of a distribution from a Fair Fund established by the United States Securities and Exchange Commission. The proceeds received were part of the Millennium Partners, L.P. and Bear Stearns & Co., Inc. settlements. See Notes to Financial Statements 18
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VIRTUS BALANCED FUND FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
NET NET ASSET NET REALIZED TOTAL DIVIDENDS DISTRIBUTIONS VALUE, INVESTMENT AND FROM FROM NET FROM NET BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT REALIZED OF PERIOD (LOSS)(1) GAIN (LOSS) OPERATIONS INCOME GAINS ------------------------------------------------------------------------------------------------------------------------------- CLASS A 4/1/09 to 3/31/10 $ 9.42 0.23 3.12 3.35 (0.23) -- 4/1/08 to 3/31/09 13.19 0.35 (3.71) (3.36) (0.36) (0.05) 11/1/07 to 3/31/08 15.48 0.16 (1.28) (1.12) (0.19) (0.98) 11/1/06 to 10/31/07 15.74 0.35 1.16 1.51 (0.35) (1.42) 11/1/05 to 10/31/06 14.55 0.34 1.53 1.87 (0.34) (0.34) 11/1/04 to 10/31/05 14.98 0.32 0.18 0.50 (0.32) (0.61) CLASS B 4/1/09 to 3/31/10 $ 9.39 0.15 3.09 3.24 (0.15) -- 4/1/08 to 3/31/09 13.13 0.26 (3.67) (3.41) (0.28) (0.05) 11/1/07 to 3/31/08 15.41 0.11 (1.27) (1.16) (0.14) (0.98) 11/1/06 to 10/31/07 15.69 0.24 1.13 1.37 (0.23) (1.42) 11/1/05 to 10/31/06 14.50 0.23 1.53 1.76 (0.23) (0.34) 11/1/04 to 10/31/05 14.93 0.21 0.18 0.39 (0.21) (0.61) CLASS C 4/1/09 to 3/31/10 $ 9.38 0.14 3.10 3.24 (0.15) -- 4/1/08 to 3/31/09 13.12 0.26 (3.67) (3.41) (0.28) (0.05) 11/1/07 to 3/31/08 15.40 0.11 (1.27) (1.16) (0.14) (0.98) 11/1/06 to 10/31/07 15.68 0.23 1.14 1.37 (0.23) (1.42) 11/1/05 to 10/31/06 14.49 0.23 1.53 1.76 (0.23) (0.34) 4/19/05(5) to 10/31/05 14.47 0.10 0.01 0.11 (0.09) --
(1) Computed using average shares outstanding. (2) Sales charges are not reflected in total return calculation. (3) Annualized. (4) Not annualized. (5) Inception date. (6) The Fund may invest in other funds and the annualized expense ratios do not reflect the fees and expenses associated with the underlying funds. See Notes to Financial Statements 20
RATIO OF NET NET NET INVESTMENT CHANGE ASSET ASSETS, RATIO OF INCOME (LOSS) IN NET VALUE, END OF EXPENSES TO TO AVERAGE PORTFOLIO TOTAL ASSET END OF TOTAL PERIOD AVERAGE NET TURNOVER DISTRIBUTIONS VALUE PERIOD RETURN(2) (IN THOUSANDS) NET ASSETS(6) ASSETS RATE --------------------------------------------------------------------------------------------------------- (0.23) 3.12 $12.54 35.82% $ 601,065 1.13% 2.02% 111% (0.41) (3.77) 9.42 (25.95) 508,204 1.10 3.02 91 (1.17) (2.29) 13.19 (7.62)(4) 801,724 1.12(3) 2.65(3) 21(4) (1.77) (0.26) 15.48 10.26 919,363 1.12 2.31 54 (0.68) 1.19 15.74 13.29 973,751 1.08 2.29 78 (0.93) (0.43) 14.55 3.21 1,000,790 1.05 2.16 58 (0.15) 3.09 $12.48 34.65% $ 4,594 1.88% 1.29% 111% (0.33) (3.74) 9.39 (26.40) 5,869 1.85 2.24 91 (1.12) (2.28) 13.13 (7.94)(4) 11,992 1.87(3) 1.91(3) 21(4) (1.65) (0.28) 15.41 9.41 15,013 1.87 1.58 54 (0.57) 1.19 15.69 12.43 20,676 1.83 1.54 78 (0.82) (0.43) 14.50 2.47 19,970 1.80 1.39 58 (0.15) 3.09 $12.47 34.69% $ 44,722 1.88% 1.27% 111% (0.33) (3.74) 9.38 (26.42) 37,350 1.85 2.26 91 (1.12) (2.28) 13.12 (7.94)(4) 60,459 1.87(3) 1.91(3) 21(4) (1.65) (0.28) 15.40 9.42 71,326 1.87 1.56 54 (0.57) 1.19 15.68 12.44 76,874 1.83 1.54 78 (0.09) 0.02 14.49 0.75(4) 81,111 1.80(3) 1.22(3) 58(4)
See Notes to Financial Statements 21
VIRTUS BALANCED FUND NOTES TO FINANCIAL STATEMENTS MARCH 31, 2010 1. ORGANIZATION Virtus Equity Trust (the "Trust") is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. As of the date of this report, 12 funds of the Trust are offered for sale, of which the Balanced Fund (the "Fund") is reported in this annual report. The Fund's investment objective is outlined in the Fund summary page. The Fund offers Class A shares and Class C shares. Effective December 1, 2009 (the "Closing Date"), Class B Shares of the Fund are no longer available for purchase by new or existing shareholders, except by existing shareholders through Qualifying Transactions (for information regarding Qualifying Transactions refer to the Fund's prospectus). Class A shares are sold with a front-end sales charge of up to 5.75% with some exceptions. Generally, Class A shares are not subject to any charges by the Fund when redeemed; however, a 1% contingent deferred sales charge ("CDSC") may be imposed on certain redemptions made within a certain period following purchases on which a finder's fee has been paid. Prior to January 29, 2010, the CDSC was imposed on certain redemptions made within one year following purchases on which a finder's fee had been paid. As of January 29, 2010, the period for which such CDSC applies for the Fund was modified to be 18 months. In each case, the CDSC period begins on the last day of the month proceeding the month in which the purchase was made. Class B shares are sold with a contingent deferred sales charge, which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with a 1% contingent deferred sales charge, if applicable, if redeemed within one year of purchase. Each class of shares has identical voting, dividend, liquidation and other rights and the same terms and conditions, except that each class bears different distribution and/or service expenses and has exclusive voting rights with respect to its distribution plan. Income and other expenses and realized and unrealized gains and losses of the Fund are borne pro rata by the holders of each class of shares. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates, and those differences could be significant. A. SECURITY VALUATION: Equity securities are valued at the official closing price (typically last sale) on the exchange on which the securities are primarily traded, or if no closing price is available, at the last bid price. 22
VIRTUS BALANCED FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 Debt securities are valued on the basis of broker quotations or valuations provided by a pricing service, which utilizes information with respect to recent sales, market transactions in comparable securities, quotations from dealers, and various relationships between securities in determining value. Due to continued volatility in the current market, valuations developed through pricing techniques may materially vary from the actual amounts realized upon sale of the securities. As required, some securities and assets may be valued at fair value as determined in good faith by or under the direction of the Trustees. Certain foreign securities may be fair valued in cases where closing prices are not readily available or are deemed not reflective of readily available market prices. For example, significant events (such as movement in the U.S. securities market, or other regional and local developments) may occur between the time that foreign markets close (where the security is principally traded) and the time that the Fund calculates its net asset value (generally, the close of the NYSE) that may impact the value of securities traded in those foreign markets. In such cases, the Fund fair values foreign securities using an external pricing service which considers the correlation of the trading patterns of the foreign securities to the intraday trading in the U.S. markets for investments such as American depositary receipts, financial futures, exchange-traded funds and certain indexes, as well as prices for similar securities. Because the frequency of significant events is not predictable, fair valuation of certain foreign common stocks may occur on a frequent basis. Investments in underlying funds are valued at each fund's closing net asset value determined as of the close of business of the New York Stock Exchange (generally 4:00 p.m. Eastern time). Short-term investments having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market. The Fund utilizes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: - Level 1 - quoted prices in active markets for identical securities - Level 2 - prices determined using other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) - Level 3 - prices determined using significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) A summary of the inputs used to value the Fund's net assets by each major security type is disclosed at the end of the Schedule of Investments. B. SECURITY TRANSACTIONS AND RELATED INCOME: Security transactions are recorded on the trade date. Dividend income is recorded on the ex-dividend date, or in the case of certain foreign securities, as soon as the Fund is notified. Interest income is recorded on the accrual basis. The Fund amortizes premiums and accretes discounts using the effective interest method. Realized gains and losses are determined on the identified cost basis. 23
VIRTUS BALANCED FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 Dividend income is recorded using management's estimate of the income included in distributions received from REIT investments. Distributions received in excess of this estimated amount are recorded as a reduction of the cost of investments or reclassified to capital gains. The actual amounts of income, return of capital, and capital gains are only determined by each REIT after its fiscal year-end, and may differ from the estimated amounts. C. INCOME TAXES: The Fund is treated as a separate taxable entity. It is the policy of the Fund to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes or excise taxes has been made. The Trust may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Each fund of the Trust will accrue such taxes and recoveries as applicable based upon current interpretations of the tax rules and regulations that exist in the markets in which they invest. The Fund has adopted the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Fund to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund has determined that there was no effect on the financial statements from the adoption of this authoritative guidance. The Fund does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months. The Fund files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Fund is subject to examination by federal, state and local jurisdictions, where applicable. As of March 31, 2010, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations is from the year 2007 forward (with limited exceptions). D. DISTRIBUTIONS TO SHAREHOLDERS: Distributions are recorded by the Fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences may include the treatment of non-taxable dividends, market premium and discount, non-deductible expenses, expiring capital loss carryovers, foreign currency gain or loss, gain or loss on futures contracts, partnerships, operating losses and losses deferred due to wash sales. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital paid in on shares of beneficial interest. E. EXPENSES: Expenses incurred by the Trust with respect to more than one fund are allocated in proportion to the net assets of each fund, except where allocation of direct expenses to each fund or an alternative allocation method can be more appropriately made. 24
VIRTUS BALANCED FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 F. FOREIGN CURRENCY TRANSLATION: Foreign securities and other assets and liabilities are valued using the foreign currency exchange rate effective at the end of the reporting period. Cost of investments is translated at the currency exchange rate effective at the trade date. The gain or loss resulting from a change in currency exchange rates between the trade and settlement date of a portfolio transaction is treated as a gain or loss on foreign currency. Likewise, the gain or loss resulting from a change in currency exchange rates between the date income is accrued and the date it is paid is treated as a gain or loss on foreign currency. The Trust does not isolate that portion of the results of operations arising from changes in exchange rates or from fluctuations which arise due to changes in the market prices of securities. G. LOAN AGREEMENTS: The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the lender) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. Direct indebtedness of emerging countries involves a risk that the government entities responsible for the repayment of the debt may be unable, or unwilling, to pay the principal and interest when due. At March 31, 2010, the Fund did not hold any loan agreements. H. SECURITIES LENDING: The Fund may loan securities to qualified brokers through an agreement with PFPC Trust Co. ("PFPC"). Under the terms of the agreement, the Fund is required to maintain collateral with a market value not less than 100% of the market value of loaned securities. Collateral is adjusted daily in connection with changes in the market value of securities on loan. Collateral may consist of cash and securities issued by the U.S. Government. Cash collateral is invested in a short-term money market fund. Dividends earned on the collateral and premiums paid by the borrower are recorded as income by the Fund net of fees charged by PFPC for its services in connection with this securities lending program. Lending portfolio securities involves a risk of delay in the recovery of the loaned securities or in the foreclosure on collateral. At March 31, 2010, the Fund did not have any securities on loan. 25
VIRTUS BALANCED FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 I. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS: The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued and delayed delivery securities on the trade date. The Fund maintains collateral for the securities purchased. Securities purchased on a when-issued or delayed delivery basis begin earning interest on the settlement date. 3. INVESTMENT ADVISORY FEE AND RELATED PARTY TRANSACTIONS ($ REPORTED IN THOUSANDS EXCEPT AS NOTED) A. ADVISER: Virtus Investment Advisers, Inc. ("VIA"), an indirect, wholly-owned subsidiary of Virtus Investment Partners, Inc. ("Virtus"), is Adviser (the "Adviser") to the Fund. For managing or directing the management of the investments of the Fund, the Adviser is entitled to a fee based upon the following annual rates as a percentage of the average daily net assets of the Fund 0.55% of the first $1 billion; 0.50% of $1+ billion through $2 billion; and 0.45% of $2+ billion. The Adviser manages the Fund's investment program and general operations of the Fund, including oversight of the Fund's subadviser. B. SUBADVISER: The subadviser manages the investments of the Fund, for which it is paid a fee by the Adviser. Effective June 8, 2009, SCM Advisors LLC ("SCM"), became the subadviser of the Fund's Fixed Income Portfolio. SCM is an affiliate of Virtus. For the period April 1, 2009 through June 7, 2009, Goodwin Capital Advisers, Inc. served as the subadviser for the Fund's Fixed Income Portfolio. The Adviser manages the Fund's Equity Portfolio. C. DISTRIBUTOR: As the distributor of the Fund's shares, VP Distributors, Inc. ("VP Distributors"), an indirect wholly-owned subsidiary of Virtus, has advised the Fund that for the fiscal year ended March 31, 2010, it retained Class A net commissions of $24; Class B deferred sales charges of $7; and Class C deferred sales charges of $ --*. In addition, the Fund pays VP Distributors distribution and/or service fees at the annual rate of 0.25% for Class A shares, 1.00% for Class B shares, and 1.00% for Class C shares applied to the average daily net assets of each respective class. Under certain circumstances, shares of certain Virtus Mutual Funds may be exchanged for shares of the same class of certain other Virtus Mutual Funds on the basis of the relative net asset values per share at the time of the exchange. On exchanges with share classes that carry a contingent deferred sales charge, the CDSC schedule of the original shares purchased continues to apply. * Amount is less than $500 (not reported in thousands). 26
VIRTUS BALANCED FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 D. ADMINISTRATION AND TRANSFER AGENT SERVICES: VP Distributors serves as the Administrator to the Trust. For the period ended March 31, 2010, VP Distributors received administration fees totaling $460 which is included in the Statement of Operations. A portion of these fees was paid to a sub-administrator for certain accounting and administration services. VP Distributors also serves as the Trust's transfer agent. For the period ended March 31, 2010, VP Distributors received transfer agent fees totaling $859 which is included in the Statement of Operations. A portion of these fees was paid to various outside companies for certain sub-transfer agency services. 4. PURCHASES AND SALES OF SECURITIES ($ REPORTED IN THOUSANDS) Purchases and sales of investment securities (excluding U.S. Government and agency securities and short-term securities) during the period ended March 31, 2010, were as follows:
PURCHASES SALES --------- -------- $322,988 $478,415
Purchases or sales of long-term U.S. Government and agency securities during the period ended March 31, 2010 were as follows:
PURCHASES SALES --------- -------- $354,996 $278,801
5. CREDIT RISK AND ASSET CONCENTRATIONS In countries with limited or developing markets, investments may present greater risks than in more developed markets, and the prices of such investments may be volatile. The consequences of political, social or economic changes in these markets may have disruptive effects on the market prices of these investments and the income they generate, as well as the Fund's ability to repatriate such amounts. High-yield/high-risk securities typically entail greater price volatility and/or principal and interest rate risk. There is a greater chance that an issuer will not be able to make principal and interest payments on time. Analysis of the creditworthiness of issuers of high-yield securities may be complex, and as a result, it may be more difficult for the Adviser and/or subadviser to accurately predict risk. Lack of liquidity in an ETF could result in its value being more volatile than the underlying portfolio of securities. Sector ETFs are subject to sector risks and non-diversification risks, which may result in greater price fluctuations than the overall market. Because the Fund invests in ETFs, it indirectly bears its proportionate share of the operating expenses of the underlying funds. Indirectly, the Fund is subject to all risks associated with the underlying ETFs. The Fund may invest a high percentage of its assets in specific sectors of the market in its pursuit of a greater investment return. Fluctuations in these sectors of concentration may have a greater impact on the Fund, positive or negative, than if the Fund did not concentrate its investments in such sectors. 27
VIRTUS BALANCED FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 6. INDEMNIFICATIONS Under the Fund's organizational documents, its Trustees and Officers are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, the Fund enters into contracts that contain a variety of indemnifications. The Fund's maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these arrangements. 7. REGULATORY EXAMS Federal and state regulatory authorities from time to time make inquiries and conduct examinations regarding compliance by Virtus and its subsidiaries (collectively "the Company") with securities and other laws and regulations affecting their registered products. There are currently no such matters which the Company believes will be material to these financial statements. 8. FEDERAL INCOME TAX INFORMATION ($ REPORTED IN THOUSANDS) At March 31, 2010, federal tax cost and aggregate gross unrealized appreciation (depreciation) of securities held by the Fund were as follows:
NET UNREALIZED FEDERAL UNREALIZED UNREALIZED APPRECIATION TAX COST APPRECIATION DEPRECIATION (DEPRECIATION) -------- ------------ ------------ -------------- $553,205 $100,058 $(3,957) $96,101 The Fund has capital loss carryovers which may be used to offset future capital gains, as follows:
EXPIRATION YEAR -------------------------------- 2017 2018 TOTAL ------ -------- -------- $9,922 $105,177 $115,099 The Fund may not realize the benefit of these losses to the extent the Fund does not realize gains on investments prior to the expiration of the capital loss carryovers. The Fund had $739 of capital loss carryover which expired in 2010. Under current tax law, foreign currency and capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following tax year. For the year ended March 31, 2010, the Fund deferred post-October losses as follows:
CAPITAL LOSS CURRENCY LOSS RECOGNIZED RECOGNIZED ------------ ------------- $136,472 $156 The components of distributable earnings on a tax basis (excluding unrealized appreciation (depreciation) which is disclosed in the first table above) consists of undistributed ordinary income of $439 and undistributed long-term capital gains of $0. 28
VIRTUS BALANCED FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 The differences between the book and tax basis components of distributable earnings relate principally to the timing of recognition of income and gains for federal income tax purposes. Short-term gain distributions reported in the Statement of Changes in Net Assets, if any, are reported as ordinary income for federal tax purposes. 9. RECLASSIFICATION OF CAPITAL ACCOUNTS ($ REPORTED IN THOUSANDS) For financial reporting purposes, book basis capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Permanent reclassifications can arise from differing treatment of certain income and gain transactions, nondeductible current year net operating losses, expiring capital loss carryovers and investments in passive foreign investment companies. The reclassifications have no impact on the net assets or net asset value of the Fund. As of March 31, 2010, the Fund recorded reclassifications to increase (decrease) the accounts as listed below:
CAPITAL PAID IN ON SHARES OF UNDISTRIBUTED ACCUMULATED BENEFICIAL NET INVESTMENT NET REALIZED INTEREST INCOME (LOSS) GAIN (LOSS) ------------ -------------- ------------ $(735) $89 $646
10. RECENT ACCOUNTING PRONOUNCEMENTS In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about Fair Value Measurements." ASU 2010-06 amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements. Certain disclosures required by ASU No. 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, and other required disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Management is currently evaluating the impact ASU No. 2010-06 will have on its financial statement disclosures. 11. SUBSEQUENT EVENT EVALUATIONS Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were available for issuance, and has determined that the following subsequent event requires recognition or disclosure in the financial statements. On April 14, 2010, the Board of Trustees approved an increase in the rate of fees payable to VP Distributors in its role as Administrator and Transfer Agent to the Trust with immediate effect. 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PRICEWATERHOUSECOOPERS PCW LOGO) To the Board of Trustees of Virtus Equity Trust and Shareholders of Virtus Balanced Fund In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Virtus Balanced Fund, a series of Virtus Equity Trust, (hereafter referred to as the "Fund") at March 31, 2010, the results of its operations for the year then ended and the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 2010 by correspondence with the custodian, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Philadelphia, PA May 21, 2010 30
VIRTUS BALANCED FUND TAX INFORMATION NOTICE (UNAUDITED) MARCH 31, 2010 ---------------------------------------------------------------------------------------------------------------------------------- For the fiscal year ended March 31, 2010, the Balanced Fund makes the following disclosures for federal income tax purposes. Below is listed the percentages, or the maximum amount allowable, of its ordinary income dividends ("QDI") to qualify for the lower tax rates applicable to individual shareholders, and the percentage of ordinary income dividends earned by the Fund which qualifies for the dividends received deduction ("DRD") for corporate shareholders. The Fund designates the amount below as long-term capital gains dividends ("LTCG") ($ reported in thousands), or if subsequently different, the amount will be designated in the next annual report. The actual percentages for the calendar year will be designated in the year-end tax statements.
QDI DRD LTCG --- --- ---- 65% 59% $-- ---------------------------------------------------------------------------------------------------------------------------------- 31
CONSIDERATION OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES The Board of Trustees of the Trust, along with the Boards of Trustees of the other trusts in the Virtus Mutual Funds family of funds (collectively, the "Board"), are responsible for determining whether to approve the establishment and continuation of each investment advisory and sub-advisory agreement (each, an "Agreement") applicable to the Virtus Mutual Funds (collectively, the "Funds"). At meetings held on November 17-19, 2009, the Board, including a majority of the independent Trustees, considered and approved the continuation of each Agreement, as further discussed below. In approving each Agreement, the Board determined that the continued retention of the applicable adviser or subadviser was in the best interests of the Funds and their shareholders. The Trustees considered each Fund separately, though they also collectively took into account those interests that all the Funds had in common. In reaching their decisions, the Board considered information furnished throughout the year at regular Board meetings as well as information prepared specifically in connection with the annual review process. During the review process, the Board received assistance and advice from, and met separately with, independent legal counsel. The Board's determination contemplated a number of factors that the Trustees believed, in light of the legal advice furnished to them as well as their own business judgment, to be relevant. Some of the factors that the Board considered are described below, although the Trustees did not identify any particular information or factor as controlling but instead considered the Agreements in the totality of the circumstances. Each individual Trustee may have evaluated the information presented differently, giving different weights to different factors. NATURE, EXTENT AND QUALITY OF SERVICES The majority of the Funds(1) are managed using a "manager of managers" structure that generally involves the use of one or more subadvisers to manage some or all of a Fund's portfolio. Under this structure, Virtus Investment Advisers, Inc. ("VIA") is responsible for evaluating and selecting subadvisers on an ongoing basis and making any recommendations to the Board regarding hiring, retaining or replacing subadvisers. In considering the Agreement with VIA, therefore, the Trustees considered VIA's process for supervising and managing the Funds' subadvisers, including (a) VIA's ability to select and monitor the subadvisers; (b) VIA's ability to provide the services necessary to monitor the subadvisers' compliance with the Funds' respective investment objectives, policies and restrictions as well as provide other oversight activities; and (c) VIA's ability and willingness to identify instances in which a subadviser should be replaced and to carry out the required changes. The Trustees also considered: (d) the experience, capability and integrity of VIA's management and other personnel; (e) the financial position of VIA; (f) the quality of VIA's own regulatory and legal compliance policies, procedures and systems; (g) the nature, extent and quality of administrative and other services provided by VIA to the Funds; and (h) VIA's supervision of the Funds' other service providers. Finally, the Board also noted the extent of benefits that are provided to Fund shareholders as a result of being part of the family of Virtus Mutual Funds, including the right to exchange investments between Funds within the same class without a sales charge, the ability to reinvest Fund dividends into other Funds and the right to combine holdings in other Funds to obtain a reduced sales charge. ---------- (1) During the period being reported, the only Funds that did not employ a manager of managers structure were Virtus Growth & Income Fund, which is a series of Virtus Equity Trust; and Virtus Alternatives Diversifier Fund and Virtus CA Tax-Exempt Bond Fund, each of which is a series of Virtus Opportunities Trust. VIA acted as the adviser for these Funds without employing a subadviser, and the Board considered the VIA Agreement with respect to these Funds in that context. 32
CONSIDERATION OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES (CONTINUED) With respect to the sub-advisory Agreements, the Board noted that each full-service subadviser(2) provided portfolio management, compliance with the respective Fund's investment policies and procedures, compliance with applicable securities laws and assurances thereof. In considering the renewal of the sub-advisory Agreements, therefore, the Board considered each subadviser's investment management process, including (a) the experience, capability and integrity of the subadviser's management and other personnel committed by the subadviser to its respective Fund(s); (b) the financial position of the subadviser; (c) the quality and commitment of the subadviser's regulatory and legal compliance policies, procedures and systems; and (d) the subadviser's brokerage and trading practices. After considering all of the information provided to them, the Trustees concluded that the nature, extent and quality of the services provided by VIA and each subadviser were reasonable and beneficial to the Funds and their shareholders. INVESTMENT PERFORMANCE The Board placed significant emphasis on its consideration of the investment performance of the Funds, in view of its importance to shareholders, and evaluated Fund performance in the context of the special considerations that a manager-of-managers structure requires. The Board also considered that VIA continued to be proactive in seeking to replace and/or add subadvisers as necessary, with a view toward improving Fund performance over the long term. While consideration was given to performance reports and discussions at Board meetings throughout the year, particular attention in assessing such performance was given to a report (the "Lipper Report") for the Funds prepared by Lipper Inc. ("Lipper") and furnished specifically for the contract renewal process. (Lipper is an independent provider of investment company data retained by the Funds for this purpose.) The Lipper Report presented each Fund's short-term and long-term performance relative to a peer group of other mutual funds and relevant benchmarks, as selected by Lipper. The Board considered the composition of each peer group, selection criteria and the appropriateness of the benchmark used for each Fund. The Board also assessed each Fund's performance in the context of its review of the fees and expenses of each Fund as well as VIA's profitability. The Board noted that while many of the Funds had generally performed in line with their respective benchmarks and peer groups during the periods measured, some of the Funds had underperformed in comparison with their respective benchmarks and/or peer groups. Where significant, the Board extensively considered the performance of the underperforming Funds and the reasons for the performance issues. The Board discussed the possible reasons for the underperformance with VIA, and spoke with representatives from VIA regarding plans to monitor and address performance issues during the coming year. The Board ultimately determined, within the context of all of its considerations in connection with the Agreements, that the Funds' overall investment performance was reasonable, and concluded that VIA's and each subadviser's performance record and process in managing the Funds merited approval of the continuation of the Agreements. However, the Board noted that certain Funds' performance would continue to be closely monitored and it expected that if performance over a longer period of time did not improve the adviser would recommend that the subadviser be replaced in a timely manner. ---------- (2) F-Squared Investments, Inc. is the sub-adviser to Virtus AlphaSector(SM) Allocation Fund and Virtus AlphaSector(SM) Rotation Fund but provides limited services in this role. The Board considered both the VIA Agreement and the applicable sub-advisory Agreement in this context. 33
CONSIDERATION OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES (CONTINUED) PROFITABILITY The Board also considered the level of profits realized by VIA and its affiliates in connection with the operation of the Funds. In this regard, the Board reviewed the analysis presented regarding the overall profitability of VIA for its management of the Virtus Mutual Funds, as well as its profits and those of its affiliates for managing and providing other services to each Fund. In addition to the fees paid to VIA and its affiliates, the Trustees considered any other benefits derived by VIA or its affiliates from their relationship with the Funds. Specific attention was paid to the methodology used to allocate costs to each Fund, in recognition of the fact that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this regard, the Board noted that the allocations appeared reasonable, and concluded that the profitability to VIA from each Fund was reasonable in light of the quality of all services rendered to the Funds by VIA and its affiliates. The Board did not separately review profitability information for each subadviser, noting that the sub-advisory fees are paid by VIA rather than the Funds, so that Fund shareholders are not directly impacted by those fees. MANAGEMENT FEES AND TOTAL EXPENSES In evaluating the management fees and total expenses of each Fund, the Board reviewed information provided by VIA and comparisons to other funds in each Fund's peer group as presented in the Lipper Report. The Board noted that certain Funds had higher gross expenses when expressed as a percentage of net assets than those of such Funds' larger peers, which the Trustees considered in the context of these Funds' expectations for future growth. In addition, the Board noted that as part of the contract renewal process, it had voted for the advisory fees for certain of the Funds to be changed from flat fees to fees containing breakpoints and that such changes would reduce the fees paid by the Funds to VIA.(3) It was noted by the Board that Fund Management had represented that with respect to such fee changes, VIA would not reduce the quality or quantity of its services, and that its obligations would remain the same in all respects. Finally, the Board also noted that several of the Funds had fee waivers and/or expense caps in place to limit the total expenses incurred by the Funds and their shareholders. Based upon the information presented by VIA and Lipper, the Trustees then determined, in the exercise of their business judgment, that the management fees charged by VIA and the total expenses of the Funds were reasonable, both on an absolute basis and in comparison with the fees and expenses of other funds in each Fund's peer group and the industry at large. The Board did not receive comparative fee information relating specifically to sub-advisory fees, in light of the fact that the sub-advisory fees are paid by VIA and not by the Funds, so that Fund shareholders are not directly impacted by those fees. ---------- (3) During the period being reported, the only Funds that had such changes were Virtus Mid-Cap Value Fund and Virtus Small-Cap Core Fund, each a series of Virtus Equity Trust; Virtus Balanced Allocation Fund, Virtus Core Equity Fund, Virtus Emerging Markets Opportunities Fund, Virtus Short/Intermediate Bond Fund and Virtus Value Equity Fund, each a series of Virtus Insight Trust; and, Virtus Bond Fund and Virtus Market Neutral Fund, each a series of Virtus Opportunities Trust. 34
CONSIDERATION OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES (CONTINUED) ECONOMIES OF SCALE The Board noted that the management fees for several of the Funds included breakpoints based on assets under management, and that fee waivers and/or expense caps were also in place for several of the Funds. The Board determined that VIA and the Funds likely would achieve certain economies of scale, particularly in relationship to certain fixed costs, and that shareholders of the Funds would have an opportunity to benefit from these economies of scale. In considering the sub-advisory Agreements, the Board also considered the existence of any economies of scale and whether they would be passed along to the Funds' shareholders, but noted that any such economies would likely be generated at the Fund level rather than at the subadviser level. 35
RESULTS OF SHAREHOLDER MEETING VIRTUS EQUITY TRUST JUNE 4, 2009 (UNAUDITED) At a special meeting of shareholders of Virtus Balanced Fund, a series of Virtus Equity Trust, held on June 4, 2009, shareholders voted on the following proposal: NUMBER OF ELIGIBLE SHARES VOTED:
FOR AGAINST ABSTAIN -------------- ------------- ------------- To approve a Subadvisory Agreement between Virtus Investment Advisers, Inc. and SCM Advisors, LLC with regard to Virtus Balanced Fund .............................................. 26,434,182.016 1,141,201.906 2,290,879.143
Shareholders of the Fund voted to approve the above proposal. 36
FUND MANAGEMENT TABLES (UNAUDITED) Information pertaining to the Trustees and officers of the Trust as of March 31, 2010, is set forth below. The statement of additional information (SAI) includes additional information about the Trustees and is available without charge, upon request, by calling (800) 243-4361. The address of each individual, unless otherwise noted, is 100 Pearl Street, Hartford, CT 06103-4506. There is no stated term of office for Trustees of the Trust. INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------ NAME,YEAR OF BIRTH, PRINCIPAL OCCUPATION(S) YEAR ELECTED AND DURING PAST 5 YEARS AND NUMBER OF FUNDS OVERSEEN OTHER DIRECTORSHIPS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------ Leroy Keith, Jr. Chairman, BLOC Global Services Group, LLC (construction and redevelopment YOB: 1939 company) (2010-present). Managing Director, Almanac Capital Management Elected: (commodities business) (2007-2008). Partner, Stonington Partners, Inc. (private 45 Funds equity firm) (2001-2007). Director/Trustee, Evergreen Funds (88 portfolios) (1989-present). ------------------------------------------------------------------------------------------------------------ Philip R. McLoughlin Partner, Cross Pond Partners, LLC (strategy consulting firm) (2006-present). YOB: 1946 Director, World Trust Fund (1991-present). Chairman and Trustee, The Phoenix Elected: Edge Series Fund (2003-present). Director, DTF Tax-Free Income Fund, Inc. (1996- 48 Funds present), Duff & Phelps Utility and Corporate Bond Trust, Inc. (1996-present) and DNP Select Income Fund Inc. (2009-present). Managing Director, SeaCap Asset Management Fund I, L.P. (2009-present). Managing Director, SeaCap Partners, LLC (investment management advisory business) (2009-present). ------------------------------------------------------------------------------------------------------------ Geraldine M. McNamara Retired. Managing Director, U.S. Trust Company of New York (private bank) YOB: 1951 (1982-2006). Director, DTF Tax-Free Income Fund, Inc. (2003-present), Duff & Elected: Phelps Utility and Corporate Bond Trust, Inc. (2003-present) and DNP Select 48 Funds Income Fund Inc. (2009-present). ------------------------------------------------------------------------------------------------------------ James M. Oates Managing Director, Wydown Group (consulting firm) (1994-present). Chairman, YOB: 1946 Hudson Castle Group, Inc. (Formerly IBEX Capital Markets, Inc.) (financial Elected: services) (1997-2006). Director, Stifel Financial. Chairman and Trustee, John 45 Funds Hancock Trust (115 portfolios) and John Hancock Funds II (87 portfolios) (2005- present). Non-Executive Chairman, Hudson Castle Group, Inc. (2007-present). ------------------------------------------------------------------------------------------------------------ Richard E. Segerson Managing Director, Northway Management Company (1998-present). YOB: 1946 Elected: 45 Funds ------------------------------------------------------------------------------------------------------------ Ferdinand L.J. Verdonck Director, Galapagos N.V. (biotechnology) (2005-present). Mr. Verdonck is also a YOB: 1942 director of several non-U.S. companies. Elected: 45 Funds ------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE Each of the individuals listed below is an "interested person" of the Trust, as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder.
------------------------------------------------------------------------------------------------------------ NAME,YEAR OF BIRTH, PRINCIPAL OCCUPATION(S) YEAR ELECTED AND DURING PAST 5 YEARS AND NUMBER OF FUNDS OVERSEEN OTHER DIRECTORSHIPS HELD BY TRUSTEE ------------------------------------------------------------------------------------------------------------ George R. Aylward(1) Director, President and Chief Executive Officer (2008-present), Director and YOB: 1964 President (2006-2008), Chief Operating Officer (2004-2006), Vice President, Elected: Finance, (2001-2002), Virtus Investment Partners, Inc. and/or certain of its 47 Funds subsidiaries. Various senior officer and directorship positions with Virtus affiliates (2005-present). Senior Executive Vice President and President, Asset Management (2007-2008), Senior Vice President and Chief Operating Officer, Asset Management (2004-2007), Vice President and Chief of Staff (2001-2004), The Phoenix Companies, Inc. Various senior officer and directorship positions with Phoenix affiliates (2005-2008). President (2006-present), Executive Vice President (2004-2006), the Virtus Mutual Funds Family. Chairman, President and Chief Executive Officer, The Zweig Fund Inc. and The Zweig Total Return Fund Inc. (2006-present). ------------------------------------------------------------------------------------------------------------ (1) Mr. Aylward is an "interested person" as defined in the Investment Company Act of 1940, by reason of his relationship with Virtus Investment Partners, Inc. and/or its affiliates. 37
FUND MANAGEMENT TABLES (UNAUDITED) (CONTINUED) OFFICERS OF THE TRUST WHO ARE NOT TRUSTEES
------------------------------------------------------------------------------------------------------------ POSITION(S) HELD WITH NAME, ADDRESS AND TRUST AND LENGTH OF PRINCIPAL OCCUPATION(S) YEAR OF BIRTH TIME SERVED DURING PAST 5 YEARS ------------------------------------------------------------------------------------------------------------ Nancy G. Curtiss Senior Vice President Executive Vice President, Head of Operations YOB: 1952 since 2006. (2009-present), Senior Vice President, Operations (2008-2009), Vice President, Head of Asset Management Operations (2007-2008), Vice President (2003-2007), Virtus Investment Partners, Inc. and/or certain of its subsidiaries. Ms. Curtiss is Treasurer of various other investment companies within the Virtus Mutual Funds Complex (1994-present). Assistant Treasurer (2001-2009), VP Distributors, Inc. (f/k/a Phoenix Equity Planning Corporation). ------------------------------------------------------------------------------------------------------------ Francis G. Waltman Senior Vice President Executive Vice President, Head of Product YOB: 1962 since 2008. Management (2009-present), Senior Vice President, Asset Management Product Development (2008-2009), Senior Vice President, Asset Management Product Development (2005- 2007), Virtus Investment Partners, Inc. and/or certain of its subsidiaries. Director (2008-present), Director and President (2006-2007), VP Distributors, Inc. (f/k/a Phoenix Equity Planning Corporation). Director and Senior Vice President, Virtus Investment Advisers, Inc. (2008-present). ------------------------------------------------------------------------------------------------------------ Marc Baltuch Vice President and Chief Compliance Officer, Zweig-DiMenna c/o Zweig-DiMenna Chief Compliance Officer Associates LLC (1989-present). Vice President, Associates, LLC since 2004. The Zweig Total Return Fund, Inc. (2004-present). 900 Third Avenue Vice President, The Zweig Fund, Inc. (2004- New York, NY 10022 present). President and Director of Watermark YOB: 1945 Securities, Inc. (1991-present). Assistant Secretary, Gotham Advisors Inc. (1990-2005). ------------------------------------------------------------------------------------------------------------ W. Patrick Bradley Chief Financial Officer and Senior Vice President, Fund Administration (2009- YOB: 1972 Treasurer, Virtus Equity Trust, present), Vice President, Fund Administration Virtus Insight Trust and Virtus (2007-2009), Second Vice President, Fund Institutional Trust (since 2006). Control & Tax (2004-2006), Virtus Investment Chief Financial Officer and Partners, Inc. and/or certain of its subsidiaries. Treasurer of Virtus Opportunities Vice President, Chief Financial Officer, Treasurer Trust (since 2005). and Principal Accounting Officer (2006-present), Assistant Treasurer (2004-2006), The Phoenix Edge Series Fund. Chief Financial Officer and Treasurer (2005-present), Assistant Treasurer (2004-2006), certain funds within the Virtus Mutual Funds Family. ------------------------------------------------------------------------------------------------------------ Kevin J. Carr Vice President, Chief Legal Senior Vice President, Legal (2009-present), YOB: 1954 Officer, Counsel and Secretary Counsel and Secretary (2008-present) and Vice since 2005. President (2008-2009), Virtus Investment Partners, Inc. and/or certain of its subsidiaries. Vice President and Counsel, Phoenix Life Insurance Company (2005-2008). Compliance Officer of Investments and Counsel, Travelers Life & Annuity Company (January 2005-May 2005). Assistant General Counsel and certain other positions, The Hartford Financial Services Group (1995-2005). ------------------------------------------------------------------------------------------------------------ 38
VIRTUS EQUITY TRUST 101 Munson Street Greenfield, MA 01301-9668 TRUSTEES INVESTMENT ADVISER George R. Aylward Virtus Investment Advisers, Inc. Leroy Keith, Jr. 100 Pearl Street Philip R. McLoughlin, Chairman Hartford, CT 06103-4506 Geraldine M. McNamara James M. Oates PRINCIPAL UNDERWRITER Richard E. Segerson VP Distributors, Inc. Ferdinand L.J. Verdonck 100 Pearl Street Hartford, CT 06103-4506 OFFICERS George R. Aylward, President TRANSFER AGENT Nancy G. Curtiss, Senior Vice President VP Distributors, Inc. Francis G. Waltman, Senior Vice President 100 Pearl Street Marc Baltuch, Vice President and Chief Compliance Officer Hartford, CT 06103-4506 W. Patrick Bradley, Chief Financial Officer and Treasurer Kevin J. Carr, Vice President, Chief Legal Officer, Counsel CUSTODIAN and Secretary PFPC Trust Company 8800 Tinicum Boulevard Philadelphia, PA 19153-3111 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 2001 Market Street Philadelphia, PA 19103-7042 HOW TO CONTACT US Mutual Fund Services 1-800-243-1574 Adviser Consulting Group 1-800-243-4361 Telephone Orders 1-800-367-5877 Text Telephone 1-800-243-1926 Web site Virtus.com ---------------------------------------------------------------------------------------------------------------------------------- IMPORTANT NOTICE TO SHAREHOLDERS The Securities and Exchange Commission has modified mailing regulations for semiannual and annual shareholder fund reports to allow mutual fund companies to send a single copy of these reports to shareholders who share the same mailing address. If you would like additional copies, please call Mutual Fund Services at 1-800-243-1574. ----------------------------------------------------------------------------------------------------------------------------------
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VIRTUS BALANCED FUND, A SERIES OF VIRTUS EQUITY TRUST Supplement dated April 30, 2010 to the Prospectus dated June 22, 2009, as supplemented IMPORTANT NOTICE TO INVESTORS Effective April 14, 2010, Virtus Equity Trust and VP Distributors, Inc., distributor, administrator and transfer agent of Virtus Mutual Funds, have modified the fee schedules under the Administration Agreement and the Transfer Agency Agreement Accordingly, expense information for the below-named fund is hereby revised as described below. BALANCED FUND On page 10 of the fund's prospectus, the Fees and Expenses table is hereby revised by replacing the Annual Fund Operating Expenses portion of the table with the following:
-------------------------------------------------------------------------------------------------------------------- ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE OF THE VALUE OF CLASS A CLASS B CLASS C YOUR INVESTMENT) SHARES SHARES SHARES -------------------------------------------------------------------------------------------------------------------- Management Fees 0.55% 0.55% 0.55% -------------------------------------------------------------------------------------------------------------------- Distribution and Shareholder Servicing (12b-1) Fees 0.25% 1.00% 1.00% -------------------------------------------------------------------------------------------------------------------- Other Expenses(d) 0.38% 0.38% 0.38% -------------------------------------------------------------------------------------------------------------------- TOTAL ANNUAL FUND OPERATING EXPENSES(d) 1.18% 1.93% 1.93% -------------------------------------------------------------------------------------------------------------------- (d) Restated to reflect current fees on current assets.
Also on page 11, the Example table is hereby replaced with the following: ---------------------------------------------------------------------------------------------------------------- CLASS SHARE STATUS 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------------------------------------------------------------------------- Class A Sold or Held $688 $928 $1,187 $1,924 ---------------------------------------------------------------------------------------------------------------- Class B Sold $596 $806 $1,042 $2,059 -------------------------------------------------------------------------------------------- Held $196 $606 $1,042 $2,059 ---------------------------------------------------------------------------------------------------------------- Class C Sold $296 $606 $1,042 $2,254 -------------------------------------------------------------------------------------------- Held $196 $606 $1,042 $2,254 ---------------------------------------------------------------------------------------------------------------- INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE PROSPECTUS FOR FUTURE REFERENCE.
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(VIRTUS MUTUAL FUNDS LOGO) PRSRT STD U.S. POSTAGE c/o State Street Bank and Trust Company PAID P.O. Box 8301 LANCASTER, Boston, MA 02266-8301 PA PERMIT 1793 For more information about Virtus mutual funds, please call your financial representative, contact us at 1-800-243-1574 or Virtus.com 8013 4-10
(VIRTUS MUTUAL FUNDS LOGO) ANNUAL REPORT ---------------------------------------------------------------------------------------------------------------------------------- Virtus Mid-Cap Value Fund ---------------------------------------------------------------------------------------------------------------------------------- TRUST NAME: March 31, 2010 Eligible VIRTUS shareholders can EQUITY sign up for TRUST eDelivery at Virtus.com NO BANK GUARANTEE NOT FDIC INSURED MAY LOSE VALUE
TABLE OF CONTENTS VIRTUS MID-CAP VALUE FUND ("Mid-Cap Value Fund") Message to Shareholders ..................................................................................................... 1 Disclosure of Fund Expenses ................................................................................................. 2 Fund Summary ................................................................................................................ 4 Schedule of Investments ..................................................................................................... 7 Statement of Assets and Liabilities ......................................................................................... 9 Statement of Operations ..................................................................................................... 10 Statement of Changes in Net Assets .......................................................................................... 11 Financial Highlights ........................................................................................................ 12 Notes to Financial Statements ............................................................................................... 14 Report of Independent Registered Public Accounting Firm ..................................................................... 20 Tax Information Notice ...................................................................................................... 21 Consideration of Advisory and Sub-advisory Agreements by the Board of Trustees .............................................. 22 Fund Management Tables ...................................................................................................... 26 ---------------------------------------------------------------------------------------------------------------------------------- PROXY VOTING PROCEDURES (FORM N-PX) The adviser and subadviser vote proxies relating to portfolio securities in accordance with procedures that have been approved by the Trust's Board of Trustees. You may obtain a description of these procedures, along with information regarding how the Fund voted proxies during the most recent 12-month period ended June 30, 2009, free of charge, by calling toll-free 1-800-243-1574. This information is also available through the Securities and Exchange Commission's website at http://www.sec.gov. FORM N-Q INFORMATION The Trust files a complete schedule of portfolio holdings for the Fund with the Securities and Exchange Commission (the "SEC") for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC's website at http://www.sec.gov. Form N-Q may be reviewed and copied at the SEC's Public Reference Room. Information on the operation of the SEC's Public Reference Room can be obtained by calling toll-free 1-800-SEC-0330. ---------------------------------------------------------------------------------------------------------------------------------- This report is not authorized for distribution to prospective investors in the Virtus Mid-Cap Value Fund unless preceded or accompanied by an effective prospectus which includes information concerning the sales charge, the Fund's record and other pertinent information.
MESSAGE TO SHAREHOLDERS Dear Fellow Shareholders of Virtus Mutual Funds: The first quarter of 2010 gave investors a taste of the kind of volatility that could be in store for some time. (PHOTO OF The quarter began with a 9 percent correction in the S&P 500(R) Index from mid-January to early February 5, GEORGE R. AYLWARD) followed by a resumption of 2009's bull market. The major indices were up more than 4 percent for the quarter and by the end of March, both the Dow Jones Industrial Average(SM) and the S&P 500 Index were up more than 65 percent from their lows on March 9, 2009. Surprisingly robust consumer spending and corporate earnings continued to support the transition of the U.S. economy out of recession toward modest growth. Unfortunately, there are some dark clouds on the horizon that may temper investors' optimism. The economy must navigate the long term impact of the unprecedented government spending to revive the global economy. Significant headwinds remain for investors, as evidenced by the current underperformance of the Chinese equity market, the solvency crisis in the Eurozone and persistently high unemployment rates in the U.S. and abroad. We believe this volatility is a reminder that investors should rely on the discipline and focus of professional investment managers and financial advisors. Ask your financial advisor to review your portfolio to ensure it reflects your current investment objectives, your tolerance for risk, and your long-term financial goals. As your advisor reviews your portfolio, we hope you will consider the wide range of equity, fixed income and alternative funds that Virtus offers. On behalf of the entire team at Virtus Investment Partners, and the investment professionals at our affiliated managers and subadvisers, we look forward to continuing to serve all your investment needs. Sincerely, /s/ George R. Aylward George R. Aylward President, Virtus Mutual Funds MAY 2010 WHENEVER YOU HAVE QUESTIONS ABOUT YOUR ACCOUNT, OR REQUIRE ADDITIONAL INFORMATION, PLEASE VISIT US ON THE WEB AT www.virtus.com OR CALL OUR SHAREOWNER SERVICE GROUP TOLL-FREE AT 800-243-1574. PERFORMANCE DATA QUOTED REPRESENTS PAST RESULTS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN PERFORMANCE SHOWN ABOVE. 1
VIRTUS MID-CAP VALUE FUND DISCLOSURE OF FUND EXPENSES (UNAUDITED) FOR THE SIX-MONTH PERIOD OF OCTOBER 1, 2009 TO MARCH 31, 2010 We believe it is important for you to understand the HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES impact of costs on your investment. All mutual funds have operating expenses. As a shareholder of the Virtus Mid-Cap The second section of the accompanying table provides Value Fund (the "Fund"), you may incur two types of costs: (1) information about hypothetical account values and hypothetical transaction costs, including sales charges on purchases of expenses based on the Fund's actual expense ratio and an Class A shares and contingent deferred sales charges on Class C assumed rate of return of 5% per year before expenses, which is shares; and (2) ongoing costs, including investment advisory not your Fund's actual return. The hypothetical account values fees; distribution and service fees; and other expenses. Class and expenses may not be used to estimate the actual ending I shares are sold without a sales charge and do not incur account balance or expenses you paid for the period.You may use distribution and service fees. These examples are intended to this information to compare the ongoing costs of investing in help you understand your ongoing costs (in dollars) of your Fund and other funds. To do so, compare these 5% investing in the Fund and to compare these costs with the hypothetical examples with the 5% hypothetical examples that ongoing costs of investing in other mutual funds. These appear in the shareholder reports of the other funds. examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period. The Please note that the expenses shown in the accompanying following Expense Table illustrates the Fund's costs in two table are meant to highlight your ongoing costs only and do not ways. reflect any transactional costs, such as sales charges or contingent deferred sales charges. Therefore, the second line ACTUAL EXPENSES of the accompanying table is useful in comparing ongoing costs only, and will not help you determine the relative total costs The first section of the accompanying table provides of owning different funds. In addition, if those transactional information about actual account values and actual expenses. costs were included, your costs would have been higher. The You may use the information in this line, together with the calculations assume no shares were bought or sold during the amount you invested, to estimate the expenses that you paid period. Your actual costs may have been higher or lower, over the period. Simply divide your account value by $1,000 depending on the amount of your investment and the timing of (for example, an $8,600 account value divided by $1,000 = 8.6), any purchases or redemptions. then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. 2
VIRTUS MID-CAP VALUE FUND DISCLOSURE OF FUND EXPENSES (UNAUDITED) (CONTINUED) FOR THE SIX-MONTH PERIOD OF OCTOBER 1, 2009 TO MARCH 31, 2010 EXPENSE TABLE ---------------------------------------------------------------------------------------------------------------------------------- Beginning Ending Expenses Account Account Annualized Paid Value Value Expense During October 1, 2009 March 31, 2010 Ratio Period* ---------------------------------------------------------------------------------------------------------------------------------- ACTUAL Class A $1,000.00 $1,135.30 1.47% $ 7.83 Class C 1,000.00 1,131.10 2.22 11.80 Class I 1,000.00 1,136.40 1.23 6.55 HYPOTHETICAL (5% RETURN BEFORE EXPENSES) Class A 1,000.00 1,017.51 1.47 7.42 Class C 1,000.00 1,013.72 2.22 11.21 Class I 1,000.00 1,018.72 1.23 6.21 * Expenses are equal to the Fund's annualized expense ratio, which includes waived fees and reimbursed expenses, if applicable, multiplied by the average account value over the period, multiplied by the number of days (182) expenses were accrued in the most recent fiscal half-year, then divided by 365 to reflect the period. The Fund may invest in other funds, and the annualized expense ratios noted above do not reflect fees and expenses associated with the underlying funds. If such fees and expenses were included, the expenses would have been higher. You can find more information about the Fund's expenses in the Financial Statements section that follows. For additional information on operating expenses and other shareholder costs, refer to the prospectus. 3
TICKER SYMBOLS: MID-CAP VALUE FUND A Share: FMIVX C Share: FMICX I Share: PIMVX - MID-CAP VALUE FUND (THE "FUND") is diversified and has an Staples and Healthcare, though all were positive, lagged investment objective of long-term growth of capital. THERE the benchmark. Interestingly, the record bounce in stock IS NO GUARANTEE THAT THE FUND WILL ACHIEVE ITS OBJECTIVE. prices over the past year was led by companies with the weakest credit ratings. Some have referred to last year as - For the fiscal year ended March 31, 2010, the Fund's Class a "junk rally," with the lowest quality companies doing A shares at NAV returned 66.04%, Class C shares returned the best. That, in our view, is not likely to continue. 64.71% and Class I shares returned 66.39%. For the same The focus going forward will be on companies' earnings. period, the Russell Midcap(R) Index, a broad-based equity Companies that are able to successfully restructure their index, returned 67.71%; and the Russell Midcap(R) Value operations to unleash higher earnings, will be prime Index, the Fund's style-specific benchmark, returned beneficiaries in the stock pickers' market we foresee. We 72.41%. believe the portfolio is attractively valued and well positioned to continue to deliver strong results in such ALL PERFORMANCE FIGURES ASSUME REINVESTMENT OF an environment. DISTRIBUTIONS AND EXCLUDE THE EFFECT OF SALES CHARGES. PERFORMANCE DATA QUOTED REPRESENTS PAST RESULTS. PAST WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE DURING ITS FISCAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT YEAR? PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN ABOVE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL - We are pleased with the Fund's results, though it trailed FLUCTUATE SO YOUR SHARES WHEN REDEEMED MAY BE WORTH MORE the very strong performance of its benchmark. Marching to OR LESS THAN THEIR ORIGINAL COST. PLEASE VISIT VIRTUS.COM their own drumbeat of operational and financial FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. restructuring, an eclectic number of stocks in the portfolio posted triple digit gains. Notably, stocks in HOW DID THE MARKET PERFORM DURING THE FUND'S FISCAL YEAR? our Industrial, Materials and Consumer Discretionary sectors rose significantly, while stocks in the Utility - The markets had a dramatic rally from their March lows of sector lagged. Relative to the benchmark, two factors 2009. Clearly, investors who stayed the course during the accounted for the relative underperformance, one market crisis, have seen a substantial recovery in their quantitative and the other qualitative. First, our portfolio over the past year. However, even with its historical void in the Financial sector detracted stellar performance, the market would have to rise another significantly from relative results, as this sector, given 34% to match its previous all-time high set in October its large weighting, was a stellar performer within the 2007. benchmark. Second, is our "balanced" approach in managing the portfolio between economic-sensitive (CONSUMER - The Russell Midcap(R) Value Index outperformed all the DISCRETIONARY, INDUSTRIALS) and defensive (CONSUMER major benchmarks, spurting 72.4%, and recorded its best STAPLES, UTILITY) restructuring stocks. While this quarterly gain ever in the 3rd quarter of 2009. For the "balanced" approach had the short-term effect of shaving year, Financial Services (+73%), Basic Materials (+101%) off some relative performance points, we believe it is and Consumer Discretionary (+120%) were the main drivers. prudent given the many economic and financial Utilities, Technology, Consumer uncertainties that still abound. 4
MID-CAP VALUE FUND (CONTINUED) THE PRECEDING INFORMATION IS THE OPINION OF THE PORTFOLIO --------------------------------------------------------------- MANAGEMENT ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. ANY SUCH OPINIONS ARE ASSET ALLOCATIONS SUBJECT TO CHANGE AT ANY TIME BASED UPON MARKET CONDITIONS ----------------- AND SHOULD NOT BE RELIED ON AS INVESTMENT ADVICE. The following table presents the portfolio holdings within INVESTING IN THE SECURITIES OF SMALL AND MID-SIZED certain sectors as a percentage of total investments at March COMPANIES INVOLVES GREATER RISKS AND PRICE VOLATILITY THAN 31, 2010. INVESTING IN LARGER, MORE ESTABLISHED COMPANIES. Industrials 23% Materials 19% Consumer Discretionary 17% Consumer Staples 15% Energy 14% Utilities 10% Other (includes short-term investments) 2% --- Total 100% === --------------------------------------------------------------- KEY INVESTMENT TERMS ADR (AMERICAN DEPOSITARY RECEIPT) RUSSELL MIDCAP(R) VALUE INDEX Represents shares of foreign companies traded in U.S. dollars on The Russell Midcap(R) Value Index is a market U.S. exchanges that are held by a bank or a trust. Foreign capitalization-weighted index of medium-capitalization, companies use ADRs in order to make it easier for Americans to value-oriented stocks of U.S. companies. The index is buy their shares. calculated on a total return basis with dividends reinvested. RUSSELL MIDCAP(R) INDEX SPONSORED ADR The Russell Midcap(R) Index is a market capitalization-weighted An ADR which is issued with the cooperation of the company index of medium-capitalization stocks of U.S. companies. The whose stock will underlie the ADR. These shares carry all the index is calculated on a total return basis with dividends rights of the common share such as voting rights. ADRs must be reinvested. sponsored to be able to trade on the NYSE. THE INDEXES ARE UNMANAGED AND NOT AVAILABLE FOR DIRECT INVESTMENT; THEREFORE, THEIR PERFORMANCE DOES NOT REFLECT THE EXPENSES ASSOCIATED WITH ACTIVE MANAGEMENT OF AN ACTUAL PORTFOLIO. 5
AVERAGE ANNUAL TOTAL RETURNS(1) for periods ended 3/31/10 ---------------------------------------------------------------------------------------------------------------------------------- Inception 1 5 10 to Inception Year Years Years 3/31/10 Date ---------------------------------------------------------------------------------------------------------------------------------- CLASS A SHARES AT NAV(2) 66.04% 2.66% 10.29% -- -- ---------------------------------------------------------------------------------------------------------------------------------- CLASS A SHARES AT POP(3, 4) 56.49 1.46 9.64 -- -- ---------------------------------------------------------------------------------------------------------------------------------- CLASS C SHARES AT NAV AND WITH CDSC(4) 64.71 1.89 -- 3.64% 10/22/04 ---------------------------------------------------------------------------------------------------------------------------------- CLASS I SHARES AT NAV 66.39 -- -- 0.31 3/10/08 ---------------------------------------------------------------------------------------------------------------------------------- RUSSELL MIDCAP(R) INDEX 67.71 4.20 4.84 --(5) --(5) ---------------------------------------------------------------------------------------------------------------------------------- RUSSELL MIDCAP(R) VALUE INDEX 72.41 3.71 8.46 --(6) --(6) ---------------------------------------------------------------------------------------------------------------------------------- FUND EXPENSE RATIOS(7): A SHARES: 1.45%; C SHARES: 2.20%; I SHARES: 1.20%. ---------------------------------------------------------------------------------------------------------------------------------- ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PLEASE VISIT virtus.com FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CLASS C SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR CERTAIN REDEMPTIONS OF CLASS A SHARES ARE 1% IN THE FIRST 18 MONTHS AND 0% THEREAFTER. CDSC CHARGES FOR ALL REDEMPTIONS OF CLASS C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) THE INDEX RETURNED 6.36% FOR CLASS C SHARES AND 1.53% FOR CLASS I SHARES FROM THE INCEPTION DATE OF THE RESPECTIVE SHARE CLASSES. (6) THE INDEX RETURNED 6.13% FOR CLASS C SHARES AND 1.43% FOR CLASS I SHARES FROM THE INCEPTION DATE OF THE RESPECTIVE SHARE CLASSES. (7) THE EXPENSE RATIOS OF THE FUND ARE SET FORTH ACCORDING TO THE PROSPECTUS FOR THE FUND EFFECTIVE 6/22/09 AND MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHT TABLES IN THIS REPORT. SEE THE FINANCIAL HIGHLIGHTS FOR MORE CURRENT EXPENSE RATIOS. GROWTH OF $10,000 for periods ended 3/31 This chart assumes an initial investment of $10,000 made on March 31, 2000, for Class A shares including any applicable sales charges or fees. The performance of the other share classes will be greater or less than that shown based on differences in inception dates, fees and sales charges. Performance assumes reinvestment of dividends and capital gain distributions. (PERFORMANCE GRAPH) Virtus Mid-Cap Russell Midcap(R) Russell Midcap(R) Value Fund, Class A Index Value Index ------------------- ----------------- ----------------- 3/31/2000 9425 10000 10000 3/31/2001 12564 8801 11382 3/31/2002 15518 9674 13027 3/31/2003 11780 7594 10467 3/31/2004 18379 11454 15867 3/31/2005 22011 13063 18777 3/31/2006 23813 15877 22588 3/31/2007 29956 17749 26458 3/37/08 26335 16166 22723 3/31/2009 15119 9568 13064 3/31/2010 25104 16048 22523 For information regarding the indexes and certain investment terms, see Key Investment Terms on page 5. 6
VIRTUS MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 ($ reported in thousands) SHARES VALUE SHARES VALUE ---------- -------- ---------- -------- COMMON STOCKS--97.8% MATERIALS--CONTINUED Owens-Illinois, Inc.(2) 486,150 $ 17,278 CONSUMER DISCRETIONARY--16.9% Packaging Corp. of Big Lots, Inc.(2) 474,400 $ 17,278 America 331,150 8,150 Fortune Brands, Inc. 257,100 12,472 Rockwood Holdings, Home Depot, Inc. (The) 341,850 11,059 Inc.(2) 127,980 3,407 Penney (J.C.) Co., Inc. 460,800 14,824 Weyerhaeuser Co. 207,700 9,402 TJX Cos., Inc. (The) 333,850 14,195 -------- -------- 77,534 69,828 -------- -------- UTILITIES--10.4% CONSUMER STAPLES--14.6% Dominion Resources, Inc. 300,850 12,368 Del Monte Foods Co. 990,450 14,461 Duke Energy Corp. 476,234 7,772 Koninklijke Ahold NV Dynegy, Inc. Class A(2) 2,420,900 3,050 Sponsored ADR 1,208,400 16,011 Mirant Corp.(2) 502,900 5,462 Safeway, Inc. 606,900 15,087 ONEOK, Inc. 314,050 14,336 Sara Lee Corp. 1,049,500 14,619 -------- -------- 42,988 60,178 -------------------------------------------------------------- -------- TOTAL COMMON STOCKS ENERGY--14.5% (IDENTIFIED COST $399,172) 404,709 Devon Energy Corp. 193,140 12,444 -------------------------------------------------------------- El Paso Corp. 1,213,450 13,154 TOTAL LONG-TERM INVESTMENTS--97.8% Spectra Energy Corp. 842,042 18,971 (IDENTIFIED COST $399,172) 404,709 Williams Cos., Inc. (The) 674,000 15,569 -------------------------------------------------------------- -------- 60,138 SHORT-TERM INVESTMENTS--2.4% -------- INDUSTRIALS--22.7% MONEY MARKET MUTUAL FUNDS--2.4% Con-way, Inc. 247,400 8,689 BlackRock Liquidity Funds Masco Corp. 783,600 12,161 TempFund Portfolio - Owens Corning, Inc.(2) 379,550 9,656 Institutional Shares Raytheon Co. 187,300 10,699 (seven-day effective Republic Services, Inc. 588,402 17,075 yield 0.119%) 9,940,646 9,941 Thomas & Betts Corp.(2) 322,150 12,641 -------- USG Corp.(2) 500,400 8,587 -------------------------------------------------------------- Waste Management, Inc. 422,150 14,535 TOTAL SHORT-TERM INVESTMENTS -------- (IDENTIFIED COST $9,941) 9,941 94,043 -------------------------------------------------------------- -------- MATERIALS--18.7% TOTAL INVESTMENTS--100.2% Ball Corp. 246,900 13,179 (IDENTIFIED COST $409,113) 414,650(1) Crown Holdings, Inc.(2) 623,000 16,796 Other assets and liabilities, net--(0.2)% (882) Dow Chemical Co. (The) 315,250 9,322 -------- NET ASSETS--100.0% $413,768 ======== ABBREVIATIONS ADR American Depositary Receipt Security abbreviation definitions are located under Key Investment Terms on page 5. See Notes to Financial Statements 7
VIRTUS MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS MARCH 31, 2010 (CONTINUED) ($ reported in thousands) FOOTNOTE LEGEND (1) Federal Income Tax Information: For tax information at March 31, 2010, see Note 8, Federal Income Tax Information in the Notes to Financial Statements. (2) Non-income producing. The following table provides a summary of inputs used to value the Fund's net assets as of March 31, 2010 (see Security Valuation Note 2A in the Notes to Financial Statements): Total Value at Level 1 - March 31, 2010 Quoted Prices ------------------- ------------------ INVESTMENT IN SECURITIES: Equity Securities: Common Stocks $404,709 $404,709 Short-Term Investments 9,941 9,941 -------- -------- Total Investments $414,650 $414,650 ======== ======== There are no Level 2 (significant observable inputs) or Level 3 (significant unobservable inputs) priced securities. See Notes to Financial Statements 8
VIRTUS MID-CAP VALUE FUND STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 2010 (Reported in thousands except shares and per share amounts) ASSETS Investment in securities at value(1) ............................................................... $ 414,650 Receivables Fund shares sold ................................................................................ 755 Dividends ....................................................................................... 406 Prepaid expenses ................................................................................... 31 ----------- Total assets ................................................................................. 415,842 ----------- LIABILITIES Payables Fund shares repurchased ......................................................................... 1,348 Investment advisory fee ......................................................................... 262 Distribution and service fees ................................................................... 123 Administration fee .............................................................................. 29 Transfer agent fees and expenses ................................................................ 236 Professional fees ............................................................................... 27 Trustees' fee and expenses ...................................................................... 5 Other accrued expenses .......................................................................... 44 ----------- Total liabilities ............................................................................ 2,074 ----------- NET ASSETS ......................................................................................... $ 413,768 =========== NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest ................................................... $ 545,517 Accumulated undistributed net investment income (loss) ............................................. 1,680 Accumulated undistributed net realized gain (loss) ................................................. (138,966) Net unrealized appreciation (depreciation) on investments .......................................... 5,537 ----------- NET ASSETS ......................................................................................... $ 413,768 =========== CLASS A Net asset value (net assets/shares outstanding) per share .......................................... $ 20.47 Maximum offering price per share NAV/(1-5.75%) ..................................................... $ 21.72 Shares of beneficial interest outstanding, no par value, unlimited authorization ................... 15,140,285 Net Assets ......................................................................................... $ 309,899 CLASS C Net asset value (net assets/shares outstanding) and offering price per share ....................... $ 19.93 Shares of beneficial interest outstanding, no par value, unlimited authorization ................... 3,401,282 Net Assets ......................................................................................... $ 67,799 CLASS I Net asset value (net assets/shares outstanding) and offering price per share ....................... $ 20.49 Shares of beneficial interest outstanding, no par value, unlimited authorization ................... 1,760,275 Net Assets ......................................................................................... $ 36,070 (1) Investment in securities at cost ............................................................... $ 409,113 See Notes to Financial Statements 9
VIRTUS MID-CAP VALUE FUND STATEMENT OF OPERATIONS YEAR ENDED MARCH 31, 2010 (Reported in thousands) INVESTMENT INCOME Dividends ................................................................. $ 8,371 Foreign taxes withheld .................................................... (74) -------- Total investment income ................................................ 8,297 -------- EXPENSES Investment advisory fees .................................................. 2,850 Service fees, Class A ..................................................... 720 Distribution and service fees, Class C .................................... 686 Administration fees ....................................................... 320 Transfer agent fees and expenses .......................................... 1,209 Printing fees and expenses ................................................ 67 Registration fees ......................................................... 50 Professional fees ......................................................... 40 Trustees' fee and expenses ................................................ 33 Custodian fees ............................................................ 26 Miscellaneous expenses .................................................... 62 -------- Total expenses ......................................................... 6,063 -------- NET INVESTMENT INCOME (LOSS) ................................................. 2,234 -------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments ................................... (60,291) Net change in unrealized appreciation (depreciation) on investments ....... 240,632 -------- NET GAIN (LOSS) ON INVESTMENTS ............................................... 180,341 -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .............. $182,575 ======== See Notes to Financial Statements 10
VIRTUS MID-CAP VALUE FUND STATEMENT OF CHANGES IN NET ASSETS (Reported in thousands) Year Ended Year Ended March 31, 2010 March 31, 2009 -------------- -------------- INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) .............................. $ 2,234 $ 3,397 Net realized gain (loss) .................................. (60,291) (78,498) Net change in unrealized appreciation (depreciation) ...... 240,632 (180,367) --------- --------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .. 182,575 (255,468) --------- --------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income, Class A ............................ (2,280) (1,303) Net investment income, Class C ............................ (364) -- Net investment income, Class I ............................ (155) (64) Net realized short-term gains, Class A .................... -- (3,277) Net realized short-term gains, Class C .................... -- (922) Net realized short-term gains, Class I .................... -- (78) Net realized long-term gains, Class A ..................... -- (8,573) Net realized long-term gains, Class C ..................... -- (2,412) Net realized long-term gains, Class I ..................... -- (203) --------- --------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS .... (2,799) (16,832) --------- --------- FROM SHARE TRANSACTIONS: SALE OF SHARES Class A (3,210 and 5,327 shares, respectively) ............ 55,793 93,863 Class C (201 and 330 shares, respectively) ................ 3,335 5,974 Class I (1,124 and 1,034 shares, respectively) ............ 20,088 19,274 REINVESTMENT OF DISTRIBUTIONS Class A (125 and 484 shares, respectively) ................ 1,818 10,413 Class C (19 and 107 shares, respectively) ................. 264 2,357 Class I (9 and 16 shares, respectively) ................... 133 343 SHARES REPURCHASED Class A (6,425 and 11,002 shares, respectively) ........... (111,807) (189,457) Class C (1,533 and 2,498 shares, respectively) ............ (26,022) (42,735) Class I (326 and 102 shares, respectively) ................ (5,645) (1,510) --------- --------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS .... (62,043) (101,478) --------- --------- NET INCREASE (DECREASE) IN NET ASSETS ........................ 117,733 (373,778) NET ASSETS Beginning of period .......................................... 296,035 669,813 --------- --------- END OF PERIOD ................................................ $ 413,768 $ 296,035 ========= ========= Accumulated undistributed net investment income (loss) at end of period ................................................. $ 1,680 $ 2,245 See Notes to Financial Statements 11
VIRTUS MID-CAP VALUE FUND FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD NET NET ASSET NET REALIZED TOTAL DIVIDENDS DISTRIBUTIONS VALUE, INVESTMENT AND FROM FROM NET FROM NET BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT REALIZED OF PERIOD (LOSS)(1) GAIN (LOSS) OPERATIONS INCOME GAINS ------------------------------------------------------------------------------------------------------- CLASS A 4/1/09 to 3/31/10 $12.44 0.12 8.04 8.16 (0.13) -- 4/1/08 to 3/31/09 22.27 0.15 (9.39) (9.24) (0.06) (0.53) 7/1/07 to 3/31/08 27.40 0.05 (4.08) (4.03) (0.03) (1.07) 7/1/06 to 6/30/07 21.72 0.18 5.66 5.84 (0.10) (0.06) 7/1/05 to 6/30/06 19.63 0.10 2.05 2.15 (0.05) (0.01) 7/1/04 to 6/30/05(4) 17.04 0.08 2.55 2.63 (0.04) -- CLASS C 4/1/09 to 3/31/10 $12.17 (0.01) 7.85 7.84 (0.08) -- 4/1/08 to 3/31/09 21.87 0.01 (9.18) (9.17) -- (0.53) 7/1/07 to 3/31/08 27.04 (0.09) (4.01) (4.10) -- (1.07) 7/1/06 to 6/30/07 21.53 (0.03) 5.60 5.57 -- (0.06) 7/1/05 to 6/30/06 19.54 (0.05) 2.05 2.00 -- (0.01) 10/22/04(8) to 6/30/05 17.77 (0.04) 1.84 1.80 (0.03) -- CLASS I 4/1/09 to 3/31/10 $12.44 0.15 8.05 8.20 (0.15) -- 4/1/08 to 3/31/09 22.27 0.20 (9.39) (9.19) (0.11) (0.53) 3/10/08(8) to 3/31/08 21.20 --(3) 1.07 1.07 -- -- (1) Computed using average shares outstanding. (2) Sales charges, where applicable, are not reflected in the total return calculation. (3) Amount is less than $0.005. (4) Due to a reorganization on October 22, 2004, the Mid-Cap Value Fund is the successor of the FMI Sasco Contrarian Value Fund. The Mid-Cap Value Fund Class A treats the past performance of the FMI Sasco Contrarian Value Fund as its own. (5) Represents a blended net operating ratio. (6) Annualized. (7) Not annualized. (8) Inception date. (9) The Fund may invest in other funds and the annualized expense ratios do not reflect the fees and expenses associated with the underlying funds. See Notes to Financial Statements 12
RATIO RATIO OF GROSS OF NET EXPENSES TO RATIO OF NET NET EXPENSES AVERAGE NET CHANGE ASSET ASSETS, TO NET ASSETS INVESTMENT IN NET VALUE, END OF AVERAGE (BEFORE INCOME (LOSS) PORTFOLIO TOTAL ASSET END OF TOTAL PERIOD NET WAIVERS AND TO AVERAGE TURNOVER DISTRIBUTIONS VALUE PERIOD RETURN(2) (IN THOUSANDS) ASSETS(9) REIMBURSEMENTS)(9) NET ASSETS RATE ------------------------------------------------------------------------------------------------------------------------- (0.13) 8.03 $20.47 66.04% $309,899 1.47% 1.47% 0.71% 15% (0.59) (9.83) 12.44 (42.59) 226,815 1.45 1.45 0.83 11 (1.10) (5.13) 22.27 (14.90)(7) 521,552 1.35(5)(6) 1.42(6) 0.24(6) 14(7) (0.16) 5.68 27.40 26.91 842,524 1.27 1.31 0.68 7 (0.06) 2.09 21.72 11.07 187,701 1.25 1.42 0.50 16 (0.04) 2.59 19.63 15.39 97,771 1.25 1.65 0.49 9 (0.08) 7.76 $19.93 64.71% $ 67,799 2.22% 2.22% (0.03)% 15% (0.53) (9.70) 12.17 (43.01) 57,366 2.19 2.19 0.08 11 (1.07) (5.17) 21.87 (15.36)(7) 148,156 2.10(5)(6) 2.17(6) (0.50)(6) 14(7) (0.06) 5.51 27.04 25.89 229,293 2.01 2.06 (0.11) 7 (0.01) 1.99 21.53 10.26 99,987 2.00 2.17 (0.25) 16 (0.03) 1.77 19.54 10.13(7) 37,934 2.00(6) 2.29(6) (0.28)(6) 9(7) (0.15) 8.05 $20.49 66.39% $ 36,070 1.23% 1.23% 0.87% 15% (0.64) (9.83) 12.44 (42.42) 11,854 1.24 1.24 1.21 11 -- 1.07 22.27 5.05(7) 105 1.54(6) 1.54(6) (0.05)(6) 14(7) See Notes to Financial Statements 13
VIRTUS MID-CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS MARCH 31, 2010 1. ORGANIZATION Virtus Equity Trust (the "Trust") is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. As of the date of this report, 12 funds of the Trust are offered for sale, of which the Mid-Cap Value Fund (the "Fund") is reported in this annual report. The Fund's investment objective is outlined in the Fund's summary page. The Fund offers Class A shares, Class C shares and Class I shares. Class A shares are sold with a front-end sales charge of up to 5.75% with some exceptions. Generally, Class A shares are not subject to any charges by the Fund when redeemed; however, a 1% contingent deferred sales charge ("CDSC") may be imposed on certain redemptions made within a certain period following purchases on which a finder's fee has been paid. Prior to January 29, 2010, CDSC was imposed on certain redemptions made within one year following purchases on which a finder's fee had been paid. As of January 29, 2010, the period for which such CDSC applies for the Fund was modified to be 18 months. In each case, the CDSC period begins on the last day of the month preceding the month in which the purchase was made. Class C shares are sold with a 1% contingent deferred sales charge, if applicable, if redeemed within one year of purchase. Class I shares are sold without a sales charge. Each class of shares has identical voting, dividend, liquidation and other rights and the same terms and conditions, except that each class bears different distribution and/or service expenses and has exclusive voting rights with respect to its distribution plan. Class I shares bear no distribution and/or service expenses. Income and other expenses and realized and unrealized gains and losses of the Fund are borne pro rata by the holders of each class of shares. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates, and those differences could be significant. A. SECURITY VALUATION: Equity securities are valued at the official closing price (typically last sale) on the exchange on which the securities are primarily traded, or if no closing price is available, at the last bid price. Debt securities are valued on the basis of broker quotations or valuations provided by a pricing service, which utilizes information with respect to recent sales, market transactions in comparable securities, quotations from dealers, and various relationships between securities in determining value. Due to continued volatility in the current market, valuations developed through pricing techniques may materially vary from the actual amounts realized upon sale of the securities. 14
VIRTUS MID-CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 As required, some securities and assets may be valued at fair value as determined in good faith by or under the direction of the Trustees. Certain foreign securities may be fair valued in cases where closing prices are not readily available or are deemed not reflective of readily available market prices. For example, significant events (such as movement in the U.S. securities market, or other regional and local developments) may occur between the time that foreign markets close (where the security is principally traded) and the time that the Fund calculates its net asset value (generally, the close of the NYSE) that may impact the value of securities traded in those foreign markets. In such cases, the Fund fair values foreign securities using an external pricing service which considers the correlation of the trading patterns of the foreign securities to the intraday trading in the U.S. markets for investments such as American depositary receipts, financial futures, exchange-traded funds and certain indexes, as well as prices for similar securities. Because the frequency of significant events is not predictable, fair valuation of certain foreign common stocks may occur on a frequent basis. Investments in underlying funds are valued at each fund's closing net asset value determined as of the close of business of the New York Stock Exchange (generally 4:00 p.m. Eastern time). The Fund utilizes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: - Level 1 - quoted prices in active markets for identical securities - Level 2 - prices determined using other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) - Level 3 - prices determined using significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) A summary of the inputs used to value the Fund's net assets by each major security type is disclosed at the end of the Schedule of Investments. B. SECURITY TRANSACTIONS AND RELATED INCOME: Security transactions are recorded on the trade date. Dividend income is recorded on the ex-dividend date, or in the case of certain foreign securities, as soon as the Fund is notified. Interest income is recorded on the accrual basis. The Fund amortizes premiums and accretes discounts using the effective interest method. Realized gains and losses are determined on the identified cost basis. C. INCOME TAXES: The Fund is treated as a separate taxable entity. It is the policy of the Fund to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes or excise taxes has been made. The Trust may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Each fund of the Trust will accrue such taxes and recoveries as applicable based upon current interpretations of the tax rules and regulations that exist in the markets in which they invest. 15
VIRTUS MID-CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 The Fund has adopted the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Fund to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund has determined that there was no effect on the financial statements from the adoption of this authoritative guidance. The Fund does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months. The Fund files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Fund is subject to examination by federal, state and local jurisdictions, where applicable. As of March 31, 2010, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations is from the year 2007 forward (with limited exceptions). D. DISTRIBUTIONS TO SHAREHOLDERS: Distributions are recorded by the Fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences may include the treatment of non-taxable dividends, market premium and discount, non-deductible expenses, expiring capital loss carryovers, foreign currency gain or loss, gain or loss on futures contracts, partnerships, operating losses and losses deferred due to wash sales. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital paid in on shares of beneficial interest. E. EXPENSES: Expenses incurred by the Trust with respect to more than one fund are allocated in proportion to the net assets of each fund, except where allocation of direct expenses to each fund or an alternative allocation method can be more appropriately made. F. FOREIGN CURRENCY TRANSLATION: Foreign securities and other assets and liabilities are valued using the foreign currency exchange rate effective at the end of the reporting period. Cost of investments is translated at the currency exchange rate effective at the trade date. The gain or loss resulting from a change in currency exchange rates between the trade and settlement date of a portfolio transaction is treated as a gain or loss on foreign currency. Likewise, the gain or loss resulting from a change in currency exchange rates between the date income is accrued and the date it is paid is treated as a gain or loss on foreign currency. The Trust does not isolate that portion of the results of operations arising from changes in exchange rates or from fluctuations which arise due to changes in the market prices of securities. 3. INVESTMENT ADVISORY FEE AND RELATED PARTY TRANSACTIONS ($ REPORTED IN THOUSANDS EXCEPT AS NOTED) A. ADVISER: Virtus Investment Advisers, Inc. ("VIA"), an indirect, wholly-owned subsidiary of Virtus Investment Partners, Inc. ("Virtus"), is Adviser (the "Adviser") to the Fund. 16
VIRTUS MID-CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 For managing or directing the management of the investments of the Fund, the Adviser is entitled to a fee based upon the annual rate of 0.75% of the Fund's first $1 billion of average daily net assets and 0.70% of the Fund's average daily net assets in excess of $1 billion. The Adviser manages the Fund's investment program and general operations of the Fund, including oversight of the Fund's subadviser. B. SUBADVISER: The subadviser manages the investments of the Fund, for which it is paid a fee by the Adviser. Sasco Capital, Inc. ("Sasco") serves as the Fund's subadviser. C. EXPENSE LIMITATIONS: Effective August 23, 2007, the Adviser may recapture expenses waived or reimbursed under arrangements previously in effect within three years following the end of the fiscal year in which such waiver or reimbursement occurred. The Fund must pay its ordinary operating expenses before the Adviser is entitled to any reimbursement and must remain in compliance with any applicable expense limitations. All or a portion of the following Adviser reimbursed expenses may be recaptured by the end of the fiscal year ended as follows: 2011 TOTAL ---- ----- $385 $385 D. DISTRIBUTOR: As the distributor of the Fund's shares, VP Distributors, Inc. ("VP Distributors"), an indirect wholly-owned subsidiary of Virtus, has advised the Fund that for the fiscal year ended March 31, 2010, it retained Class A net commissions of $11 and Class C deferred sales charges of $4. In addition, the Fund pays VP Distributors distribution and/or service fees at the annual rate of 0.25% for Class A shares and 1.00% for Class C shares applied to the average daily net assets of each respective Class. There are no distribution and/or service fees for Class I. Under certain circumstances, shares of certain Virtus Mutual Funds may be exchanged for shares of the same class of certain other Virtus Mutual Funds on the basis of the relative net asset values per share at the time of the exchange. On exchanges with share classes that carry a contingent deferred sales charge, the CDSC schedule of the original shares purchased continues to apply. E. ADMINISTRATION AND TRANSFER AGENT SERVICES: VP Distributors serves as the Administrator to the Trust. For the period ended March 31, 2010, VP Distributors received administration fees totaling $273 which is included in the Statement of Operations. A portion of these fees was paid to a sub-administrator for certain accounting and administration services. VP Distributors also serves as the Trust's transfer agent. For the period ended March 31, 2010, VP Distributors received transfer agent fees totaling $1,167 which is included in the Statement of Operations. A portion of these fees was paid to various outside companies for certain sub-transfer agency services. 17
VIRTUS MID-CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 4. PURCHASES AND SALES OF SECURITIES ($ REPORTED IN THOUSANDS) Purchases and sales of investment securities (excluding U.S. Government and agency securities and short-term securities) during the period ended March 31, 2010, were as follows: PURCHASES SALES --------- -------- $52,897 $122,846 There were no purchases or sales of long-term U.S. Government and agency securities during the period ended March 31, 2010. 5. CREDIT RISK AND ASSET CONCENTRATIONS In countries with limited or developing markets, investments may present greater risks than in more developed markets, and the prices of such investments may be volatile. The consequences of political, social or economic changes in these markets may have disruptive effects on the market prices of these investments and the income they generate, as well as the Fund's ability to repatriate such amounts. The Fund may invest a high percentage of its assets in specific sectors of the market in its pursuit of a greater investment return. Fluctuations in these sectors of concentration may have a greater impact on the Fund, positive or negative, than if the Fund did not concentrate its investments in such sectors. 6. INDEMNIFICATIONS Under the Fund's organizational documents, its Trustees and Officers are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, the Fund enters into contracts that contain a variety of indemnifications. The Fund's maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these arrangements. 7. REGULATORY EXAMS Federal and state regulatory authorities from time to time make inquiries and conduct examinations regarding compliance by Virtus and its subsidiaries (collectively "the Company") with securities and other laws and regulations affecting their registered products. There are currently no such matters which the Company believes will be material to these financial statements. 8. FEDERAL INCOME TAX INFORMATION ($ REPORTED IN THOUSANDS) At March 31, 2010, federal tax cost and aggregate gross unrealized appreciation (depreciation) of securities held by the Fund were as follows. NET UNREALIZED FEDERAL UNREALIZED UNREALIZED APPRECIATION TAX COST APPRECIATION (DEPRECIATION) (DEPRECIATION) -------- ------------ -------------- -------------- $409,756 $72,031 $(67,137) $4,894 18
VIRTUS MID-CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2010 The Fund has capital loss carryovers which may be used to offset future capital gains as follows. EXPIRATION YEAR ---------------------------- 2017 2018 TOTAL ------ -------- -------- $4,364 $129,264 $133,628 The Fund may not realize the benefit of these losses to the extent the Fund does not realize gains on investments prior to the expiration of these capital loss carryovers. Under current tax law, foreign currency and capital losses realized after October 31, may be deferred and treated as occurring on the first day of the following fiscal year. For the fiscal period ended March 31, 2010, the Fund deferred post-October capital losses of $4,694, and recognized post-October capital losses of $74,134. The components of distributable earnings on a tax basis (excluding unrealized appreciation (depreciation) which is disclosed in the first table above) consist of undistributed ordinary income of $1,680 and undistributed long-term capital gains of $0. The differences between the book and tax basis components of distributable earnings relate principally to the timing of recognition of income and gains for federal income tax purposes. Short-term gain distributions reported in the Statements of Changes in Net Assets, if any, are reported as ordinary income for federal tax purposes. 9. RECENT ACCOUNTING PRONOUNCEMENTS In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-06, "Improving Disclosures about Fair Value Measurements." ASU No. 2010-06 amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements. Certain disclosures required by ASU No. 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, and other required disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Management is currently evaluating the impact ASU No. 2010-06 will have on its financial statement disclosures. 10. SUBSEQUENT EVENT EVALUATIONS Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were available for issuance, and has determined that the following subsequent events require recognition or disclosure in the financial statements. Effective April 14, 2010, the Adviser will voluntarily limit the Fund's total operating expenses (excluding interest, taxes and extraordinary expenses) to 1.48% for Class A shares, 2.23% for Class C shares and 1.23% for Class I shares. This voluntary expense limitation may be modified or discontinued at any time. Under certain conditions, the adviser may recapture operating expenses reimbursed under this arrangement for a period of three years following the end of the fiscal year in which such reimbursements are made. On April 14, 2010, the Board of Trustees approved an increase in the rate of fees payable to VP Distributors in its role as Administrator and Transfer Agent to the Trust with immediate effect. 19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PRICEWATERHOUSECOOPERS LOGO) To the Board of Trustees of Virtus Equity Trust and Shareholders of Virtus Mid-Cap Value Fund In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Virtus Mid-Cap Value Fund, a series of Virtus Equity Trust, (hereafter referred to as the "Fund") at March 31, 2010, the results of its operations for the year then ended and the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 2010 by correspondence with the custodian, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Philadelphia, PA May 21, 2010 20
VIRTUS MID-CAP VALUE FUND TAX INFORMATION NOTICE (UNAUDITED) MARCH 31, 2010 For the fiscal year ended March 31, 2010, the Mid-Cap Value Fund makes the following disclosures for federal income tax purposes. Below is listed the percentages, or the maximum amount allowable, of its ordinary income dividends ("QDI") to qualify for the lower tax rates applicable to individual shareholders, and the percentage of ordinary income dividends earned by the Fund which qualifies for the dividends received deduction ("DRD") for corporate shareholders. The Fund designates the amount below as long-term capital gains dividends ("LTCG") ($ reported in thousands), or if subsequently different, the amount will be designated in the next annual report. The actual percentages for the calendar year will be designated in year-end tax statements. QDI DRD LTCG ----- ----- ---- 100% 100% $-- 21
CONSIDERATION OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES The Board of Trustees of the Trust, along with the Boards of Trustees of the other trusts in the Virtus Mutual Funds family of funds (collectively, the "Board"), are responsible for determining whether to approve the establishment and continuation of each investment advisory and sub-advisory agreement (each, an "Agreement") applicable to the Virtus Mutual Funds (collectively, the "Funds"). At meetings held on November 17-19, 2009, the Board, including a majority of the independent Trustees, considered and approved the continuation of each Agreement, as further discussed below. In approving each Agreement, the Board determined that the continued retention of the applicable adviser or subadviser was in the best interests of the Funds and their shareholders. The Trustees considered each Fund separately, though they also collectively took into account those interests that all the Funds had in common. In reaching their decisions, the Board considered information furnished throughout the year at regular Board meetings as well as information prepared specifically in connection with the annual review process. During the review process, the Board received assistance and advice from, and met separately with, independent legal counsel. The Board's determination contemplated a number of factors that the Trustees believed, in light of the legal advice furnished to them as well as their own business judgment, to be relevant. Some of the factors that the Board considered are described below, although the Trustees did not identify any particular information or factor as controlling but instead considered the Agreements in the totality of the circumstances. Each individual Trustee may have evaluated the information presented differently, giving different weights to different factors. NATURE, EXTENT AND QUALITY OF SERVICES The majority of the Funds(1) are managed using a "manager of managers" structure that generally involves the use of one or more subadvisers to manage some or all of a Fund's portfolio. Under this structure, Virtus Investment Advisers, Inc. ("VIA") is responsible for evaluating and selecting subadvisers on an ongoing basis and making any recommendations to the Board regarding hiring, retaining or replacing subadvisers. In considering the Agreement with VIA, therefore, the Trustees considered VIA's process for supervising and managing the Funds' subadvisers, including (a) VIA's ability to select and monitor the subadvisers; (b) VIA's ability to provide the services necessary to monitor the subadvisers' compliance with the Funds' respective investment objectives, policies and restrictions as well as provide other oversight activities; and (c) VIA's ability and willingness to identify instances in which a subadviser should be replaced and to carry out the required changes. The Trustees also considered: (d) the experience, capability and integrity of VIA's management and other personnel; (e) the financial position of VIA; (f) the quality of VIA's own regulatory and legal compliance policies, procedures and systems; (g) the nature, extent and quality of administrative and other services provided by VIA to the Funds; and (h) VIA's supervision of the Funds' other service providers. Finally, the Board also noted the extent of benefits that are provided to Fund shareholders as a result of being part of the family of Virtus Mutual Funds, including the right to exchange investments between Funds within the same class ---------- (1) During the period being reported, the only Funds that did not employ a manager of managers structure were Virtus Growth & Income Fund, which is a series of Virtus Equity Trust; and Virtus Alternatives Diversifier Fund and Virtus CA Tax-Exempt Bond Fund, each of which is a series of Virtus Opportunities Trust. VIA acted as the adviser for these Funds without employing a subadviser, and the Board considered the VIA Agreement with respect to these Funds in that context. 22
CONSIDERATION OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES (CONTINUED) without a sales charge, the ability to reinvest Fund dividends into other Funds and the right to combine holdings in other Funds to obtain a reduced sales charge. With respect to the sub-advisory Agreements, the Board noted that each full-service subadviser(2) provided portfolio management, compliance with the respective Fund's investment policies and procedures, compliance with applicable securities laws and assurances thereof. In considering the renewal of the sub-advisory Agreements, therefore, the Board considered each subadviser's investment management process, including (a) the experience, capability and integrity of the subadviser's management and other personnel committed by the subadviser to its respective Fund(s); (b) the financial position of the subadviser; (c) the quality and commitment of the subadviser's regulatory and legal compliance policies, procedures and systems; and (d) the subadviser's brokerage and trading practices. After considering all of the information provided to them, the Trustees concluded that the nature, extent and quality of the services provided by VIA and each subadviser were reasonable and beneficial to the Funds and their shareholders. INVESTMENT PERFORMANCE The Board placed significant emphasis on its consideration of the investment performance of the Funds, in view of its importance to shareholders, and evaluated Fund performance in the context of the special considerations that a manager-of-managers structure requires. The Board also considered that VIA continued to be proactive in seeking to replace and/or add subadvisers as necessary, with a view toward improving Fund performance over the long term. While consideration was given to performance reports and discussions at Board meetings throughout the year, particular attention in assessing such performance was given to a report (the "Lipper Report") for the Funds prepared by Lipper Inc. ("Lipper") and furnished specifically for the contract renewal process. (Lipper is an independent provider of investment company data retained by the Funds for this purpose.) The Lipper Report presented each Fund's short-term and long-term performance relative to a peer group of other mutual funds and relevant benchmarks, as selected by Lipper. The Board considered the composition of each peer group, selection criteria and the appropriateness of the benchmark used for each Fund. The Board also assessed each Fund's performance in the context of its review of the fees and expenses of each Fund as well as VIA's profitability. The Board noted that while many of the Funds had generally performed in line with their respective benchmarks and peer groups during the periods measured, some of the Funds had underperformed in comparison with their respective benchmarks and/or peer groups. Where significant, the Board extensively considered the performance of the underperforming Funds and the reasons for the performance issues. The Board discussed the possible reasons for the underperformance with VIA, and spoke with representatives from VIA regarding plans to monitor and address performance issues during the coming year. ---------- (2) F-Squared Investments, Inc. is the sub-adviser to Virtus AlphaSector(SM) Allocation Fund and Virtus AlphaSector(SM) Rotation Fund but provides limited services in this role. The Board considered both the VIA Agreement and the applicable sub-advisory Agreement in this context. 23
CONSIDERATION OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES (CONTINUED) The Board ultimately determined, within the context of all of its considerations in connection with the Agreements, that the Funds' overall investment performance was reasonable, and concluded that VIA's and each subadviser's performance record and process in managing the Funds merited approval of the continuation of the Agreements. However, the Board noted that certain Funds' performance would continue to be closely monitored and it expected that if performance over a longer period of time did not improve the adviser would recommend that the subadviser be replaced in a timely manner. PROFITABILITY The Board also considered the level of profits realized by VIA and its affiliates in connection with the operation of the Funds. In this regard, the Board reviewed the analysis presented regarding the overall profitability of VIA for its management of the Virtus Mutual Funds, as well as its profits and those of its affiliates for managing and providing other services to each Fund. In addition to the fees paid to VIA and its affiliates, the Trustees considered any other benefits derived by VIA or its affiliates from their relationship with the Funds. Specific attention was paid to the methodology used to allocate costs to each Fund, in recognition of the fact that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this regard, the Board noted that the allocations appeared reasonable, and concluded that the profitability to VIA from each Fund was reasonable in light of the quality of all services rendered to the Funds by VIA and its affiliates. The Board did not separately review profitability information for each subadviser, noting that the sub-advisory fees are paid by VIA rather than the Funds, so that Fund shareholders are not directly impacted by those fees. MANAGEMENT FEES AND TOTAL EXPENSES In evaluating the management fees and total expenses of each Fund, the Board reviewed information provided by VIA and comparisons to other funds in each Fund's peer group as presented in the Lipper Report. The Board noted that certain Funds had higher gross expenses when expressed as a percentage of net assets than those of such Funds' larger peers, which the Trustees considered in the context of these Funds' expectations for future growth. In addition, the Board noted that as part of the contract renewal process, it had voted for the advisory fees for certain of the Funds to be changed from flat fees to fees containing breakpoints and that such changes would reduce the fees paid by the Funds to VIA.(3) It was noted by the Board that Fund Management had represented that with respect to such fee changes, VIA would not reduce the quality or quantity of its services, and that its obligations would remain the same in all respects. Finally, the Board also noted that several of the Funds had fee waivers and/or expense caps in place to limit the total expenses incurred by the Funds and their shareholders. Based upon the information presented by VIA and Lipper, the Trustees then determined, in the exercise of their business judgment, that the management fees charged by VIA and the total expenses of the Funds were reasonable, both on an absolute basis and in comparison with the fees and expenses of other funds in each Fund's peer group and the industry at large. ---------- (3) During the period being reported, the only Funds that had such changes were Virtus Mid-Cap Value Fund and Virtus Small-Cap Core Fund, each a series of Virtus Equity Trust; Virtus Balanced Allocation Fund, Virtus Core Equity Fund, Virtus Emerging Markets Opportunities Fund, Virtus Short/Intermediate Bond Fund and Virtus Value Equity Fund, each a series of Virtus Insight Trust; and, Virtus Bond Fund and Virtus Market Neutral Fund, each a series of Virtus Opportunities Trust. 24
CONSIDERATION OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES (CONTINUED) The Board did not receive comparative fee information relating specifically to sub-advisory fees, in light of the fact that the sub-advisory fees are paid by VIA and not by the Funds, so that Fund shareholders are not directly impacted by those fees. ECONOMIES OF SCALE The Board noted that the management fees for several of the Funds included breakpoints based on assets under management, and that fee waivers and/or expense caps were also in place for several of the Funds. The Board determined that VIA and the Funds likely would achieve certain economies of scale, particularly in relationship to certain fixed costs, and that shareholders of the Funds would have an opportunity to benefit from these economies of scale. In considering the sub-advisory Agreements, the Board also considered the existence of any economies of scale and whether they would be passed along to the Funds' shareholders, but noted that any such economies would likely be generated at the Fund level rather than at the subadviser level. 25
FUND MANAGEMENT TABLES (UNAUDITED) Information pertaining to the Trustees and officers of the Trust as of March 31, 2010, is set forth below. The statement of additional information (SAI) includes additional information about the Trustees and is available without charge, upon request, by calling (800) 243-4361. The address of each individual, unless otherwise noted, is 100 Pearl Street, Hartford, CT 06103-4506. There is no stated term of office for Trustees of the Trust. INDEPENDENT TRUSTEES NAME, YEAR OF BIRTH, PRINCIPAL OCCUPATION(S) YEAR ELECTED AND DURING PAST 5 YEARS AND NUMBER OF FUNDS OVERSEEN OTHER DIRECTORSHIPS HELD BY TRUSTEE -------------------------- ----------------------------------------------------------------------------------------------------- Leroy Keith, Jr. Chairman, BLOC Global Services Group, LLC (construction and redevelopment company) (2010-present). YOB: 1939 Managing Director, Almanac Capital Management (commodities business) (2007-2008). Partner, Stonington Elected: Partners, Inc. (private equity firm) (2001-2007). Director/Trustee, Evergreen Funds (88 portfolios) 45 Funds (1989-present). Philip R. McLoughlin Partner, Cross Pond Partners, LLC (strategy consulting firm) (2006-present). Director, World Trust YOB: 1946 Fund (1991-present). Chairman and Trustee, The Phoenix Edge Series Fund (2003-present). Director, Elected: DTF Tax-Free Income Fund, Inc. (1996- present), Duff & Phelps Utility and Corporate Bond Trust, Inc. 48 Funds (1996-present) and DNP Select Income Fund Inc. (2009-present). Managing Director, SeaCap Asset Management Fund I, L.P. (2009-present). Managing Director, SeaCap Partners, LLC (investment management advisory business) (2009-present). Geraldine M. McNamara Retired. Managing Director, U.S. Trust Company of New York (private bank) (1982-2006). Director, YOB: 1951 DTF Tax-Free Income Fund, Inc. (2003-present), Duff & Phelps Utility and Corporate Bond Trust, Inc. Elected: (2003-present) and DNP Select Income Fund Inc. (2009-present). 48 Funds James M. Oates Managing Director, Wydown Group (consulting firm) (1994-present). Chairman, Hudson Castle Group, Inc. YOB: 1946 (Formerly IBEX Capital Markets, Inc.) (financial services) (1997-2006). Director, Stifel Financial. Elected: Chairman and Trustee, John Hancock Trust (115 portfolios) and John Hancock Funds II (87 portfolios) 45 Funds (2005- present). Non-Executive Chairman, Hudson Castle Group, Inc. (2007-present). Richard E. Segerson Managing Director, Northway Management Company (1998-present). YOB: 1946 Elected: 45 Funds Ferdinand L.J. Verdonck Director, Galapagos N.V. (biotechnology) (2005-present). Mr. Verdonck is also a director of several YOB: 1942 non-U.S. companies. Elected: 45 Funds INTERESTED TRUSTEE Each of the individuals listed below is an "interested person" of the Trust, as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. NAME, YEAR OF BIRTH, PRINCIPAL OCCUPATION(S) YEAR ELECTED AND DURING PAST 5 YEARS AND NUMBER OF FUNDS OVERSEEN OTHER DIRECTORSHIPS HELD BY TRUSTEE -------------------------- ----------------------------------------------------------------------------------------------------- George R. Aylward(1) Director, President and Chief Executive Officer (2008-present), Director and President (2006-2008), YOB: 1964 Chief Operating Officer (2004-2006), Vice President, Finance, (2001- 2002), Virtus Investment Elected: Partners, Inc. and/or certain of its subsidiaries. Various senior officer and directorship positions 47 Funds with Virtus affiliates (2005-present). Senior Executive Vice President and President, Asset Management (2007-2008), Senior Vice President and Chief Operating Officer, Asset Management (2004-2007), Vice President and Chief of Staff (2001-2004), The Phoenix Companies, Inc. Various senior officer and directorship positions with Phoenix affiliates (2005-2008). President (2006-present), Executive Vice President (2004-2006), the Virtus Mutual Funds Family. Chairman, President and Chief Executive Officer, The Zweig Fund Inc. and The Zweig Total Return Fund Inc. (2006-present). ---------------- (1) Mr. Aylward is an "interested person" as defined in the Investment Company Act of 1940, by reason of his relationship with Virtus Investment Partners, Inc. and/or its affiliates. 26
FUND MANAGEMENT TABLES (UNAUDITED) (CONTINUED) OFFICERS OF THE TRUST WHO ARE NOT TRUSTEES POSITION(S) HELD WITH NAME, ADDRESS AND TRUST AND LENGTH OF PRINCIPAL OCCUPATION(S) YEAR OF BIRTH TIME SERVED DURING PAST 5 YEARS -------------------------- ----------------------------------- ---------------------------------------------------------------- Nancy G. Curtiss Senior Vice President Executive Vice President, Head of Operations (2009-present), YOB: 1952 since 2006. Senior Vice President, Operations (2008-2009), Vice President, Head of Asset Management Operations (2007-2008), Vice President (2003-2007), Virtus Investment Partners, Inc. and/or certain of its subsidiaries. Ms. Curtiss is Treasurer of various other investment companies within the Virtus Mutual Funds Complex (1994-present). Assistant Treasurer (2001-2009), VP Distributors, Inc. (f/k/a Phoenix Equity Planning Corporation). Francis G. Waltman Senior Vice President Executive Vice President, Head of Product Management YOB: 1962 since 2008. (2009-present), Senior Vice President, Asset Management Product Development (2008-2009), Senior Vice President, Asset Management Product Development (2005- 2007), Virtus Investment Partners, Inc. and/or certain of its subsidiaries. Director (2008-present), Director and President (2006-2007), VP Distributors, Inc. (f/k/a Phoenix Equity Planning Corporation). Director and Senior Vice President, Virtus Investment Advisers, Inc. (2008-present). Marc Baltuch Vice President and Chief Compliance Officer, Zweig-DiMenna Associates LLC c/o Zweig-DiMenna Chief Compliance Officer (1989-present). Vice President, The Zweig Total Return Fund, Associates, LLC since 2004. Inc. (2004-present). Vice President, The Zweig Fund, Inc. (2004- 900 Third Avenue present). President and Director of Watermark Securities, Inc. New York, NY 10022 (1991-present). Assistant Secretary, Gotham Advisors Inc. YOB: 1945 (1990-2005). W. Patrick Bradley Chief Financial Officer and Senior Vice President, Fund Administration (2009- present), YOB: 1972 Treasurer, Virtus Equity Trust, Vice President, Fund Administration (2007-2009), Second Virtus Insight Trust and Virtus Vice President, Fund Control & Tax (2004-2006), Virtus Institutional Trust (since 2006). Investment Partners, Inc. and/or certain of its subsidiaries. Chief Financial Officer and Vice President, Chief Financial Officer, Treasurer and Principal Treasurer of Virtus Opportunities Accounting Officer (2006-present), Assistant Treasurer Trust (since 2005). (2004-2006), The Phoenix Edge Series Fund. Chief Financial Officer and Treasurer (2005-present), Assistant Treasurer (2004-2006), certain funds within the Virtus Mutual Funds Family. Kevin J. Carr Vice President, Chief Legal Senior Vice President, Legal (2009-present), Counsel and YOB: 1954 Officer, Counsel and Secretary Secretary (2008-present) and Vice President (2008-2009), since 2005. Virtus Investment Partners, Inc. and/or certain of its subsidiaries. Vice President and Counsel, Phoenix Life Insurance Company (2005-2008). Compliance Officer of Investments and Counsel, Travelers Life & Annuity Company (January 2005-May 2005). Assistant General Counsel and certain other positions, The Hartford Financial Services Group (1995-2005). 27
VIRTUS EQUITY TRUST 101 Munson Street Greenfield, MA 01301-9668 TRUSTEES INVESTMENT ADVISER George R. Aylward Virtus Investment Advisers, Inc. Leroy Keith, Jr. 100 Pearl Street Philip R. McLoughlin, Chairman Hartford, CT 06103-4506 Geraldine M. McNamara James M. Oates PRINCIPAL UNDERWRITER Richard E. Segerson VP Distributors, Inc. Ferdinand L.J. Verdonck 100 Pearl Street Hartford, CT 06103-4506 OFFICERS George R. Aylward, President TRANSFER AGENT Nancy G. Curtiss, Senior Vice President VP Distributors, Inc. Francis G. Waltman, Senior Vice President 100 Pearl Street Marc Baltuch, Vice President and Chief Compliance Officer Hartford, CT 06103-4506 W. Patrick Bradley, Chief Financial Officer and Treasurer Kevin J. Carr, Vice President, Chief Legal Officer, CUSTODIAN Counsel and Secretary PFPC Trust Company 8800 Tinicum Boulevard Philadelphia, PA 19153-3111 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 2001 Market Street Philadelphia, PA 19103-7042 HOW TO CONTACT US Mutual Fund Services 1-800-243-1574 Adviser Consulting Group 1-800-243-4361 Telephone Orders 1-800-367-5877 Text Telephone 1-800-243-1926 Web site virtus.com ---------------------------------------------------------------------------------------------------------------------------------- IMPORTANT NOTICE TO SHAREHOLDERS The Securities and Exchange Commission has modified mailing regulations for semiannual and annual shareholder fund reports to allow mutual fund companies to send a single copy of these reports to shareholders who share the same mailing address. If you would like additional copies, please call Mutual Fund Services at 1-800-243-1574. ----------------------------------------------------------------------------------------------------------------------------------
(VIRTUS MUTUAL FUNDS LOGO) ------------ PRSRT STD c/o State Street Bank and Trust Company U.S. POSTAGE P.O. Box 8301 PAID Boston, MA 02266-8301 LANCASTER, PA PERMIT 1793 ------------ For more information about Virtus mutual funds, please call your financial representative, contact us at 1-800-243-1574 or virtus.com 8014 4-10
ITEM 2. CODE OF ETHICS. (a) The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. (c) There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics described in Item 2(b) of the instructions for completion of Form N-CSR (d) The registrant has not granted any waivers, during the period covered by this report, including an implicit waiver, from a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of the instructions for completion of this Item. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant's Board of Trustees has determined that the Registrant has an "audit committee financial expert" serving on its Audit Committee. (a)(2) Each of James M. Oates and Richard E. Segerson has been determined by the Registrant to possess the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an "audit committee financial expert." Mr. Oates and Mr. Segerson are each "independent" trustees pursuant to paragraph (a)(2) of Item 3 to Form N-CSR. (a)(3) Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Audit Fees ---------- (a) The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal years ended March 31, 2009 and March 31, 2010 are $226,942 and $328,985, respectively. Audit-Related Fees ------------------ (b) The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item for fiscal years ended March 31, 2009 and March 31, 2010 are $52,301 and $28,868, respectively. Tax Fees -------- (c) The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning for fiscal years ended March 31, 2009 and March 31, 2010 are $96,643 and $61,918, respectively. "Tax Fees" are those primarily associated with review of the Trust's tax provision and qualification as a regulated investment company (RIC) in connection with audits of the Trust's financial statement, review of year-end distributions by the Fund to avoid excise tax for the Trust, periodic discussion with management on tax issues affecting the Trust, and reviewing and signing the Fund's federal income tax returns. All Other Fees -------------- (d) The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are for fiscal years ended March 31, 2009 and March 31, 2010 are $0 and $0, respectively. (e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. The Virtus Equity Trust (the "Fund") Board has adopted policies and procedures with regard to the pre-approval of services provided by PwC. Audit, audit-related and tax compliance services provided to the Fund on an annual basis require specific pre-approval by the Board. As noted above, the Board must also approve other non-audit services provided to the Fund and those non-audit services provided to the Fund's Affiliated Service Providers that relate directly to the operations and financial reporting of the Fund. Certain of these non-audit services that the Board believes are a) consistent with the SEC's auditor independence rules and b) routine and recurring services that will not impair the independence of the independent auditors may be approved by the Board without consideration on a specific case-by-case basis ("general pre-approval"). The Audit Committee has determined that Mr. James M. Oates, Chair of the Audit Committee, may provide pre-approval for such services that meet the above requirements in the event such approval is sought between regularly scheduled meetings. In any event, the Board is informed of each service approved subject to general pre-approval at the next regularly scheduled in-person board meeting. (e)(2) The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows: (b) 100% for fiscal years ended March 31, 2009 and March 31, 2010 (c) 100% for fiscal years ended March 31, 2009 and March 31, 2010 (d) Not applicable for fiscal years ended March 31, 2009 and March 31, 2010 (f) The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less than fifty percent. (g) The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for fiscal years ended March 31, 2009 and March 31, 2010 are $1,731,894 and $405,058, respectively. (h) The registrant's audit committee of the board of directors has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. INVESTMENTS. (a) Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. (b) Not applicable. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of trustees, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of ethics, or any amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) Virtus Equity Trust ------------------------------------------------------------------- By (Signature and Title)* /s/ George R. Aylward ------------------------------------------------------- George R. Aylward, President (principal executive officer) Date June 4, 2010 --------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ George R. Aylward ------------------------------------------------------- George R. Aylward, President (principal executive officer) Date June 4, 2010 --------------------------------------------------------------------------- By (Signature and Title)* /s/ W. Patrick Bradley ------------------------------------------------------- W. Patrick Bradley, Chief Financial Officer and Treasurer (principal financial officer) Date June 4, 2010 ---------------------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature.