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: 811-22473

Stone Harbor Emerging Markets Income Fund

(Exact name of registrant as specified in charter)

1290 Broadway, Suite 1100

Denver, CO 80203

(Address of principal executive offices) (Zip code)

Adam J. Shapiro, Esq.

c/o Stone Harbor Investment Partners LP

31 West 52nd Street, 16th Floor

New York, NY 10019

(Name and address of agent for service)

With copies To:

Michael G. Doherty, Esq.

Ropes & Gray LLP

1211 Avenue of the Americas

New York, NY 10036

Registrant’s telephone number, including area code: (303) 623-2577

Date of fiscal year end: November 30

Date of reporting period: December 1, 2013 – May 31, 2014

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Item 1.

Reports to Stockholders.

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Distribution Policy

May 31, 2014

Stone Harbor Emerging Markets Income Fund (the “Fund”), acting pursuant to a Securities and Exchange Commission exemptive order and with the approval of the Fund’s Board of Trustees (the “Board”), has adopted a plan, consistent with its investment objectives and policies to support a level distribution of income, capital gains and/or return of capital (the “Plan”). In accordance with the Plan, the Fund currently distributes $0.18 per share on a monthly basis.

The fixed amount distributed per share is subject to change at the discretion of the Fund’s Board. Under the Plan, the Fund will typically distribute most or all of its available investment income to its shareholders, consistent with its primary investment objectives and as required by the Internal Revenue Code of 1986, as amended (the “Code”). The Fund may also distribute long term capital gains and short term capital gains and return capital to shareholders in order to maintain a level distribution. Each monthly distribution to shareholders is expected to be at the fixed amount established by the Board, except for extraordinary distributions and potential distribution rate increases or decreases to enable the Fund to comply with the distribution requirements imposed by the Code.

Shareholders should not draw any conclusions about the Fund’s investment performance from the amount of these distributions or from the terms of the Plan. The Fund’s total return performance on net asset value is presented in its financial highlights table. The Board may amend, suspend or terminate the Fund’s Plan without prior notice if it deems such action to be in the best interest of the Fund or its shareholders. The suspension or termination of the Plan could have the effect of creating a trading discount (if the Fund’s stock is trading at or above net asset value) or widening an existing trading discount. The Fund is subject to risks that could have an adverse impact on its ability to maintain level distributions. Examples of potential risks include, but are not limited to, economic downturns impacting the markets, investments in foreign securities, foreign currency fluctuations and changes in the Code. Please refer to the Fund’s prospectus for a more complete description of its risks.

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Table of Contents

 

 

 

Shareholder Letter			2
Summary of Portfolio Holdings			4
Growth of $10,000 Investment			5
Statement of Investments			6
Statement of Assets & Liabilities			14
Statement of Operations			15
Statements of Changes in Net Assets			16
Statement of Cash Flows			17
Financial Highlights			18
Notes to Financial Statements			19
Summary of Dividend Reinvestment Plan			28
Additional Information			29
Board Approval of Investment Advisory Agreement			31
Trustees & Officers			33
Benchmark Descriptions			37

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Stone Harbor Emerging Markets Income Fund		Shareholder Letter
		May 31, 2014 (Unaudited)

 

Dear Investor,

The Stone Harbor Emerging Markets Income Fund (“EDF” or “Fund”) seeks to maximize total return, which consists of income on its investments and capital appreciation. The Fund invests in fixed income securities and related instruments that are economically tied to emerging markets (EM) countries, including sovereign external debt, local currency debt (non-U.S. dollar), and corporate debt from EM issuers.

Our investment thesis is straightforward - despite significant recent market volatility, we believe EM debt markets continue to offer attractive investment opportunities for total return investors. EM countries generate the majority of global growth today and their share of global economic output has nearly doubled in the past decade. Furthermore, inflation in EM countries has fallen substantially and remains subdued, particularly in comparison to the hyperinflationary periods of the 1990s. And unlike many advanced economies, most EM countries maintain prudent debt levels and substantially lower fiscal deficits, in our opinion. In addition, EM debt still offers higher yields than advanced economy debt, even though EMs have better relative fundamentals in most cases, based on our analysis.

Macroeconomic developments in advanced economies are important inputs into our assessment of the outlook for EM debt returns. The impact of developments outside the emerging markets on emerging market valuations has been a critical variable in the performance of emerging market assets since the end of the 2008 financial crisis. These factors, including weaker-than-expected economic growth and uncertainty about the future direction of developed market central bank policies weighed heavily on the Fund’s performance during its last fiscal year, in our view. During the first six months of this current fiscal year, these same factors have helped drive strong performance as investor confidence in continued economic expansion has combined with greater clarity on future central bank steps, particularly at the U.S. Federal Reserve.

We believe that a key advantage we have in managing EDF is the latitude to seek to adjust the risk in the portfolio based on our fundamental economic and credit views, as well as our assessment of the macroeconomic environment. We can seek to adjust risk and potential return opportunities by allocating to three distinct sectors of EM debt — hard currency sovereigns, local currency sovereigns and corporates — each of which tend to behave differently in various macroeconomic environments.

In addition, we can vary the amount of leverage used by the Fund depending on our confidence in our return expectations. In general, we employ leverage to seek higher returns. However, when uncertainty rises, and with it greater perceived risks, we can also reduce leverage so that the Fund has less exposure to EM debt.

Performance Review

The total return on net asset value (NAV) of EDF for the six months ending May 31, 2014 was 12.48% (net of all expenses). For the same period, the Fund maintained an average discount to its NAV of 5.61%¹. Market tracking indices² for the three sectors of EM debt — external sovereign debt, local currency debt and corporate debt — delivered total returns of 8.83%, 4.37% and 5.84%, respectively, during the reporting period. The first two months of the period generated mixed results as investor concerns about the macroeconomic environment lingered into the new calendar year. By the end of January, investors developed greater visibility on macroeconomic factors and returned their focus to the very compelling valuations in emerging markets debt that followed the relatively poor performance during the previous period.

In the Fund’s exposure to sovereign debt, our holdings in U.S. dollar-denominated debt of Venezuela had a strong positive impact on returns. We invested in Venezuela based on our assessment of the country’s ability and willingness to repay debt from U.S. dollar cash flows generated from oil exports. We also believed that Venezuela’s government had strong incentives to prioritize oil export cash flows for debt service of external debt in order to maintain relationships with integrated global oil companies that invest in Venezuela’s Orinoco oil belt, which contains some of the world’s largest proven oil reserves. Venezuela’s political situation has been quite chaotic in the aftermath of President Chavez’s death. Despite this political volatility, investors were attracted to Venezuela’s high yield and its ongoing commitment to continue servicing its debt.

Throughout the reporting period, leverage consisted primarily of short-term reverse repurchase agreements through which the Fund borrowed funds by selling securities under the obligation to repurchase them at a later date at a fixed price. The implied borrowing costs of the repurchase agreements averaged approximately 0.51% per annum. The level of gross leverage reached a maximum of 33.3% of total assets on January 23, 2014 and a minimum of 22.6% on January 16, 2014. By the end of the reporting period, leverage was 29.1%. Net leverage (gross leverage less cash held) remained lower than gross leverage throughout the period. The Fund’s management team varied borrowing levels to reflect the team’s outlook on EM debt, increasing borrowings when it felt opportunities had improved and reducing borrowings when, in the team’s judgment, macroeconomic risks had risen.

Market Review and Outlook

In our view, the total returns for EM indices² for the reporting period were driven by a combination of events in developed markets and valuations in emerging markets. Market tracking indices for the three sectors of EM debt — external sovereign debt, local currency debt and corporate debt — delivered total returns of 8.83%, 4.37% and 5.84%, respectively during the reporting period. These strong returns reflect improved investor clarity regarding the Fed’s asset purchase program and increased conviction that global growth, while remaining slow, is rebounding. The sell-off in EM during the Fund’s previous fiscal year continued into the early months of this six month period. That sell-off created some compelling valuations across the EM universe and investors responded. During the early months of this period, index yields on external sovereign debt exceeded 6% while those on local currency debt exceeded 7%. These attractive valuations drove a rally in EM that continues today.

 

2		www.shiplpcef.com

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Stone Harbor Emerging Markets Income Fund		Shareholder Letter
		May 31, 2014 (Unaudited)

 

An important factor driving emerging market returns during the previous period was the level of outflows from emerging market debt mutual funds. According to Emerging Portfolio Fund Research (EPFR), outflows from U.S. and European based emerging market debt mutual funds exceeded 14% of the total assets invested in these funds. We believe this selling ignored the strong fundamental case for emerging markets but it had an undeniably negative impact on the market and our Fund. This retail mutual fund selling has been reversed in recent months, contributing to the appreciation in EM assets. Interestingly, institutional flows to EM were positive throughout the entire review period.

Our fundamental views on emerging markets are unchanged. We continue to forecast that China should maintain a growth rate above 7% over the next year and that many EM country growth rates should improve in the next 12-18 months. In our view, expectations for improved U.S. growth, together with recent depreciation of emerging market currencies and prior monetary easing by EM central banks, will support EM growth in the months ahead. But we believe this process will take time. Government deficits in most EM countries remain at healthy levels, particularly compared to the U.S., Japan and many developed European countries. We believe investors are again focusing on the relative strengths of EM fundamentals.

In the past, we have detailed some of the key risks to our constructive outlook for emerging market debt. Today, those risks seem to emanate from both developed and emerging market countries. The possibility of rising U.S. interest rates, the ongoing political and religious strife in the Middle East, weak growth in Europe and the potential for China’s growth rate to fall short of expectations are all potential risks. However, our base case return scenarios for EM debt over the coming year remain positive. Our view derives from a disciplined investment process in which we review the ability and willingness of borrowers to repay their debts. We also assess whether current prices of bonds reflect adequate compensation for risk within the current macroeconomic environment. Based on this process, we continue to believe that EM debt will generate the highest returns in the fixed income universe.

Other general risks of the Fund relate to our use of leverage and also to the longer-term prospects for a rise in global interest rates. Stone Harbor attempts to mitigate the risk of loss of principal due to the possibility of a general rise in global interest rates through our investment processes that determine sector and country allocations, as well as security selection. We seek to reduce interest rate sensitivity during periods of rising interest rates. Notwithstanding these efforts, rising interest rates would increase the Fund’s cost of leverage and could also decrease the value of its portfolio securities, adversely affecting Fund performance.

We continue to believe that investing in EDF may offer an attractive means of capitalizing on further improvements in credit quality in EM. We thank you for your confidence in our ability to invest in these volatile markets and look forward to reporting on EDF in six months.

Sincerely,

 

 

 

Thomas K. Flanagan

Chairman of the Board of Trustees

 

(1)

Performance on a market value basis, or at market price, will differ from its results at NAV. Although market price returns typically reflect investment results overtime, during shorter periods, returns at market price can also be influenced by factors such as changing views about the Fund, market conditions, supply and demand for the Fund’s shares, or changes in Fund dividends.

(2)

J.P. Morgan emerging markets debt benchmarks are used throughout as being representative of market returns. The J.P. Morgan EMBI Global Index (EMBIG) tracks total returns for U.S. dollar-denominated debt instruments issued by emerging markets sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. The changes in the benchmark more accurately reflect the investment strategy. The J.P. Morgan EMBI Global Diversified (EMBI Global Diversified) limits the weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts outstanding. The countries covered in the EMBI Global Diversified are identical to those covered by the EMBI Global. The J.P. Morgan GBI-EM Global Diversified consists of regularly traded, liquid fixed-rate, domestic currency government bonds to which international investors can gain exposure. The weightings among the countries are more evenly distributed within this index. Return from FX is the difference between the J.P. Morgan GBI EM Global Diversified index total return Bloomberg ticker JGENVUUG) and the GBI EM Global Diversified index in local currency terms (Bloomberg ticker JGENVLLG). Return from Rates equals the total return of the GBI EM Global Diversified index in local currency terms (Bloomberg ticker JGENVLLG). The J.P. Morgan CEMBI Broad Diversified tracks total returns of U.S. dollar-denominated debt instruments issued by corporate entities in emerging market countries and consists of an investable universe of corporate bonds. The minimum amount outstanding required is $350 mm for the CEMBI Broad Diversified. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in a broad-based securities index. The CEMBI Broad Diversified limits the weights of those index countries with larger corporate debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.

 

Semi-Annual Report  |  May 31, 2014		3

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Stone Harbor Emerging Markets Income Fund		Summary of Portfolio Holdings
		May 31, 2014 (Unaudited)

 

 

4		www.shiplpcef.com

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Stone Harbor Emerging Markets Income Fund		Growth of $10,000 Investment
		May 31, 2014 (Unaudited)

 

Comparison of Change in Value of $10,000 Investment in Stone Harbor Emerging Markets Income Fund and the J.P. Morgan Emerging Markets Bond Indices: EMBI Global Diversified, CEMBI Broad Diversified, and GBI-EM Global Diversified (Please refer to page 37 for detailed benchmark descriptions).

 

Total Returns as of May 31, 2014 (inception December 22, 2010)

 

		6 Month				One Year				Since Inception (Annualized)
Stone Harbor Emerging Markets Income Fund – NAV		12.48%				1.96%				5.64%
Stone Harbor Emerging Markets Income Fund – Market Price		16.96%				2.45%				3.76%
J.P. Morgan CEMBI Broad Diversified		5.84%				4.78%				6.42%
J.P. Morgan EMBI Global Diversified		8.83%				5.77%				7.86%
J.P. Morgan GBI- EM Global Diversified		4.37%				-1.37%				3.22%

Past performance is no guarantee of future results. Current performance may be lower or higher than the performance shown. Total return is calculated by determining the percentage change in NAV or market price (as applicable) in the specified period. The calculation assumes that all income dividends, capital gain and return of capital distributions, if any, have been reinvested and includes all fee waivers and expense reimbursements. Total return does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or broker commissions or sales charges in connection with the purchase or sale of Fund shares. Investment return and principal value will vary, and shares, when sold, may be worth more or less than their original cost. Total returns for a period of less than one year are not annualized. Index returns do not include the effects of sales charges or management fees. It is not possible to invest directly in an index.

Performance at market price will differ from its results at NAV. Although market price returns typically reflect investment results over time, during shorter periods returns at market price can also be influenced by factors such as changing views about the Fund, market conditions, supply and demand for the Fund’s shares, or changes in Fund dividends.

An investment in the Fund involves risk, including the loss of principal. Total return, market price, market price yield and NAV will fluctuate with changes in market conditions. This data is provided for information purposes only and is not intended for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. There is a onetime public offering and once issued, shares of closed-end funds are traded in the open market through a stock exchange. NAV is equal to total assets attributable to common shareholders less total liabilities divided by the number of common shares outstanding. Holdings are subject to change daily.

 

Semi-Annual Report  |  May 31, 2014		5

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Stone Harbor Emerging Markets Income Fund		Statement of Investments
		May 31, 2014 (Unaudited)

 

		Currency		Rate				Maturity Date				Principal Amount*				Market Value (Expressed in U.S. $)
SOVEREIGN DEBT OBLIGATIONS - 80.95%
Argentina - 10.88%
City of Buenos Aires Argentina		USD			9.950	%			03/01/2017				1,249,000			$	1,286,470	(1)
Republic of Argentina:
		USD			7.000	%			10/03/2015				16,480,000				15,790,129	(2)
		USD			7.000	%			04/17/2017				17,853,572				16,324,612	(2)
		USD			8.750	%			06/02/2017				2,500,000				2,316,312	(2)
																	35,717,523
Brazil - 15.10%
Nota Do Tesouro Nacional:
		BRL			10.000	%			01/01/2017				29,120,000				12,537,061
		BRL			10.000	%			01/01/2021				44,260,000				18,136,014
		BRL			10.000	%			01/01/2023				47,030,000				18,901,405
																	49,574,480
Costa Rica - 0.14%
Republic of Costa Rica		USD			7.000	%			04/04/2044				431,000				452,550	(1)
Croatia - 0.49%
Croatian Government		USD			6.000	%			01/26/2024				1,497,000				1,611,146	(1)(2)
Dominican Republic - 5.04%
Dominican Republic:
		USD			7.500	%			05/06/2021				7,379,000				8,522,745	(2)(3)
		USD			5.875	%			04/18/2024				7,695,000				8,041,275	(1)(2)
																	16,564,020
El Salvador - 3.80%
Republic of El Salvador:
		USD			7.750	%			01/24/2023				829,000				945,060	(3)
		USD			5.875	%			01/30/2025				45,000				44,775	(3)
		USD			8.250	%			04/10/2032				5,000,000				5,700,000	(2)(3)
		USD			7.650	%			06/15/2035				3,000,000				3,195,000	(2)(3)
		USD			7.625	%			02/01/2041				2,450,000				2,597,000	(2)(3)
																	12,481,835
Ghana - 0.39%
Republic of Ghana		USD			7.875	%			08/07/2023				1,295,000				1,265,215	(2)(3)
Honduras - 0.10%
Honduras Government		USD			7.500	%			03/15/2024				335,000				343,375	(3)
Indonesia - 2.98%
Inter-American Development Bank		IDR			0.000	%			08/20/2015				62,090,000,000				4,922,527	(4)
Republic of Indonesia:
		USD			6.625	%			02/17/2037				2,000,000				2,295,000	(2)(3)
		USD			7.750	%			01/17/2038				2,000,000				2,567,500	(2)(3)
																	9,785,027
Iraq - 2.73%
Republic of Iraq		USD			5.800	%			01/15/2028				9,416,000				8,968,740	(2)(3)
Ivory Coast - 4.37%
Ivory Coast Government		USD			5.750	%			12/31/2032				14,604,000				14,333,826	(2)(3)(5)

 

See Notes to Financial Statements.
6		www.shiplpcef.com

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Stone Harbor Emerging Markets Income Fund		Statement of Investments
		May 31, 2014 (Unaudited)

 

		Currency		Rate				Maturity Date		Principal Amount*				Market Value (Expressed in U.S. $)
Mexico - 10.20%
Mexican Bonos:
		MXN			9.500	%		12/18/2014			9,731,000			$	781,181
		MXN			6.250	%		06/16/2016			3,209,000				261,249
		MXN			8.000	%		06/11/2020			81,030,000				7,207,266
		MXN			6.500	%		06/10/2021			271,070,000				22,433,299
		MXN			10.000	%		12/05/2024			21,200,000				2,189,890
		MXN			7.500	%		06/03/2027			3,537,000				309,761
		MXN			8.500	%		05/31/2029			3,366,000				317,690
															33,500,336
Mozambique - 2.51%
Republic of Mozambique		USD			6.305	%		09/11/2020			8,150,000				8,231,500	(2)(3)
Nigeria - 2.14%
Nigerian Government Bond		NGN			15.100	%		04/27/2017			613,000,000				4,030,040
Republic of Nigeria:
		USD			6.375	%		07/12/2023			882,000				959,175	(3)
		USD			6.375	%		07/12/2023			1,859,000				2,021,663	(1)
															7,010,878
Panama - 0.17%
Republic of Panama		USD			8.125	%		04/28/2034			424,000				572,400
South Africa - 8.88%
Republic of South Africa:
		ZAR			13.500	%		09/15/2015			26,070,000				2,665,782
		ZAR			8.000	%		12/21/2018			83,340,000				8,012,047
		ZAR			7.250	%		01/15/2020			192,550,000				17,755,391
		ZAR			6.750	%		03/31/2021			7,380,000				653,416
		ZAR			7.000	%		02/28/2031			920,000				72,759
															29,159,395
Turkey - 6.31%
Republic of Turkey:
		TRY			6.500	%		01/07/2015			2,560,000				1,205,912
		TRY			8.300	%		06/20/2018			6,410,000				3,032,019
		TRY			10.500	%		01/15/2020			15,700,000				8,091,780
		TRY			7.100	%		03/08/2023			19,770,000				8,389,101
															20,718,812
Ukraine - 1.25%
Ukraine Government:
		USD			6.875	%		09/23/2015			2,000,000				1,922,500	(1)(2)
		USD			9.250	%		07/24/2017			2,205,000				2,180,194	(2)(3)
															4,102,694
Venezuela - 3.47%
Republic of Venezuela:
		USD			5.750	%		02/26/2016			2,780,500				2,613,670	(2)(3)
		USD			13.625	%		08/15/2018			518,000				538,720	(3)
		USD			12.750	%		08/23/2022			4,312,000				4,268,880	(2)(3)
		USD			9.000	%		05/07/2023			4,042,300				3,304,580	(3)

 

See Notes to Financial Statements.
Semi-Annual Report  |  May 31, 2014		7

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Stone Harbor Emerging Markets Income Fund		Statement of Investments
		May 31, 2014 (Unaudited)

 

		Currency		Rate				Maturity Date		Principal Amount*				Market Value (Expressed in U.S. $)
Venezuela (continued)
Republic of Venezuela: (continued)
		USD			7.650	%		04/21/2025			924,000			$	679,140
															11,404,990
TOTAL SOVEREIGN DEBT OBLIGATIONS															265,798,742
(Cost $279,164,976)
BANK LOANS - 0.31%(6)
Indonesia - 0.31%
PT Bakrie & Brothers TBK		USD			6.151	%		11/25/2014			2,515,676				1,006,270
TOTAL BANK LOANS															1,006,270
(Cost $1,006,270)
CORPORATE BONDS - 46.65%
Argentina - 0.63%
YPF SA		USD			8.750	%		04/04/2024			2,000,000				2,080,000	(1)
Brazil - 2.95%
Centrais Eletricas Brasileiras SA		USD			5.750	%		10/27/2021			2,000,000				2,025,600	(3)
ESAL GmbH		USD			6.250	%		02/05/2023			3,001,000				2,978,492	(1)(2)
GTL Trade Finance Inc.		USD			7.250	%		04/16/2044			1,000,000				1,058,500	(1)
Minerva Luxembourg SA		USD			7.750	%		01/31/2023			505,000				536,563	(1)
Odebrecht Offshore Drilling Finance Ltd.		USD			6.750	%		10/01/2022			1,891,318				2,033,166	(1)
Votorantim Cimentos SA		USD			7.250	%		04/05/2041			1,000,000				1,067,500	(1)
															9,699,821
Chile - 1.15%
GeoPark Latin America Ltd. Agencia en Chile		USD			7.500	%		02/11/2020			950,000				1,009,375	(1)
VTR Finance BV		USD			6.875	%		01/15/2024			2,600,000				2,748,733	(1)
															3,758,108
China - 1.53%
Country Garden Holdings Co. Ltd.:
		USD			11.125	%		02/23/2018			750,000				819,375	(1)
		USD			11.125	%		02/23/2018			1,250,000				1,365,625	(3)
Kaisa Group Holdings Ltd.:
		USD			8.875	%		03/19/2018			1,200,000				1,221,000	(1)
		USD			10.250	%		01/08/2020			1,545,000				1,602,938	(3)
															5,008,938
Colombia - 1.53%
Emgesa SA ESP		COP			8.750	%		01/25/2021			911,000,000				524,507	(1)
Empresas Publicas de Medellin ESP:
		COP			8.375	%		02/01/2021			500,000,000				279,142	(3)
		COP			8.375	%		02/01/2021			1,030,000,000				575,032	(1)
Millicom International Cellular SA		USD			6.625	%		10/15/2021			1,458,000				1,552,770	(1)
Pacific Rubiales Energy Corp.		USD			5.125	%		03/28/2023			2,127,000				2,103,071	(1)
															5,034,522
Guatemala - 0.65%
Comcel Trust		USD			6.875	%		02/06/2024			2,000,000				2,136,300	(1)

 

See Notes to Financial Statements.
8		www.shiplpcef.com

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Stone Harbor Emerging Markets Income Fund		Statement of Investments
		May 31, 2014 (Unaudited)

 

		Currency		Rate				Maturity Date		Principal Amount*				Market Value (Expressed in U.S. $)
India - 1.84%
Bharti Airtel International Netherlands BV		USD			5.125	%		03/11/2023			1,300,000			$	1,351,688	(1)
ICICI Bank Ltd.		USD			6.375	%		04/30/2022			1,500,000				1,548,750	(3)(7)
Vedanta Resources PLC:
		USD			6.000	%		01/31/2019			1,000,000				1,048,750	(1)
		USD			8.250	%		06/07/2021			1,400,000				1,576,400	(1)
		USD			7.125	%		05/31/2023			500,000				527,500	(1)
															6,053,088
Indonesia - 1.83%
Indo Energy Finance II BV		USD			6.375	%		01/24/2023			1,344,000				1,102,080	(1)
Listrindo Capital BV		USD			6.950	%		02/21/2019			1,000,000				1,085,000	(1)
Pertamina Persero PT		USD			4.300	%		05/20/2023			1,857,000				1,780,399	(1)(2)
PT Adaro Indonesia		USD			7.625	%		10/22/2019			1,935,000				2,048,681	(3)
															6,016,160
Israel - 0.83%
B Communications Ltd.		USD			7.375	%		02/15/2021			2,539,000				2,716,730	(1)
Jamaica - 0.10%
Digicel Group Ltd.		USD			8.250	%		09/30/2020			312,000				339,269	(1)
Kazakhstan - 1.36%
KazMunayGas National Co. JSC		USD			5.750	%		04/30/2043			584,000				575,240	(1)
Zhaikmunai LP		USD			7.125	%		11/13/2019			3,700,000				3,889,625	(1)(2)
															4,464,865
Luxembourg - 1.08%
Puma International Financing SA		USD			6.750	%		02/01/2021			3,393,000				3,540,053	(1)
Macau - 0.31%
MCE Finance Ltd.		USD			5.000	%		02/15/2021			1,000,000				1,002,500	(1)
Mexico - 2.50%
Cemex Finance LLC		USD			9.375	%		10/12/2022			2,000,000				2,352,960	(1)
Cemex SAB de CV:
		USD			9.000	%		01/11/2018			146,000				158,045	(3)
		USD			9.000	%		01/11/2018			224,000				242,480	(1)
		USD			9.500	%		06/15/2018			2,000,000				2,310,000	(1)
Metalsa SAB de CV		USD			4.900	%		04/24/2023			768,000				741,120	(1)
Mexichem SAB de CV		USD			6.750	%		09/19/2042			2,250,000				2,418,750	(1)
															8,223,355
Nigeria - 0.89%
Afren PLC		USD			10.250	%		04/08/2019			2,559,000				2,930,055	(1)
Peru - 2.55%
Cia Minera Ares SAC		USD			7.750	%		01/23/2021			2,000,000				2,122,500	(1)
Inkia Energy Ltd.		USD			8.375	%		04/04/2021			3,000,000				3,356,400	(1)(2)
Southern Copper Corp.		USD			6.750	%		04/16/2040			2,500,000				2,722,650
Volcan Cia Minera SAA		USD			5.375	%		02/02/2022			157,000				154,645	(1)
															8,356,195

 

See Notes to Financial Statements.
Semi-Annual Report  |  May 31, 2014		9

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Stone Harbor Emerging Markets Income Fund		Statement of Investments
		May 31, 2014 (Unaudited)

 

				Currency		Rate				Maturity Date				Principal Amount*				Market Value (Expressed in U.S. $)
Russia - 3.71%
Alfa Bank OJSC Via Alfa Bond Issuance PLC				USD			7.500	%			09/26/2019				2,750,000			$	2,853,125	(1)(2)
Evraz Group SA				USD			6.750	%			04/27/2018				2,000,000				1,962,500	(1)
Far East Capital Ltd. SA				USD			8.000	%			05/02/2018				2,878,000				2,410,325	(1)
Severstal OAO Via Steel Capital SA				USD			5.900	%			10/17/2022				1,955,000				1,920,787	(1)
Vimpel Communications Holdings BV				USD			5.200	%			02/13/2019				900,000				885,375	(1)
Vimpel Communications Via VIP Finance Ireland Ltd. OJSC				USD			7.748	%			02/02/2021				2,000,000				2,147,500	(3)
																			12,179,612
Trinidad - 0.74%
Columbus International Inc.				USD			7.375	%			03/30/2021				2,300,000				2,443,750	(1)
Ukraine - 0.93%
National JSC Naftogaz of Ukraine				USD			9.500	%			09/30/2014				3,170,000				3,036,860
United Arab Emirates - 1.02%
Dubai Holding Commercial Operations MTN Ltd.				GBP			6.000	%			02/01/2017				1,900,000				3,347,986
Venezuela - 18.52%
Petroleos de Venezuela SA:
				USD			8.500	%			11/02/2017				40,173,000				36,959,160	(2)(3)
				USD			6.000	%			11/15/2026				28,388,789				17,090,051	(2)(3)
				USD			5.375	%			04/12/2027				636,100				369,733
				USD			9.750	%			05/17/2035				8,383,584				6,408,244	(3)
																			60,827,188
TOTAL CORPORATE BONDS																			153,195,355
(Cost $146,830,375)
CREDIT LINKED NOTES - 11.07%
Colombia - 4.80%
Titulos de Tesoreria - Series B		J.P. Morgan Chase & Co.		COP			7.000	%			05/06/2022				28,600,000,000				15,774,790
Indonesia - 3.17%
Republic of Indonesia:
		Deutsche Bank AG London		IDR			7.000	%			05/17/2022				86,600,000,000				6,997,280
		Deutsche Bank AG London		IDR			5.625	%			05/17/2023				46,600,000,000				3,397,110
																			10,394,390
Iraq - 3.10%
Republic of Iraq		Bank of America - Merrill Lynch		JPY			2.770	%			01/01/2028				1,382,319,761				10,184,085	(7)
TOTAL CREDIT LINKED NOTES																			36,353,265
(Cost $40,671,948)

 

See Notes to Financial Statements.
10		www.shiplpcef.com

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Stone Harbor Emerging Markets Income Fund		Statement of Investments
		May 31, 2014 (Unaudited)

 

		Currency		Rate				Maturity Date		Principal Amount*				Market Value (Expressed in U.S. $)
Iraq (continued)
Republic of Iraq											1,382,319,761				10,184,085	(7)
SHORT TERM INVESTMENTS - 2.95%
Money Market Mutual Funds - 2.95%
Dreyfus Treasury Prime Cash Advantage Fund - Institutional Advantage Shares (7-Day Yield)		USD			0.00003	%		N/A			9,692,542			$	9,692,542
TOTAL SHORT TERM INVESTMENTS															9,692,542
(Cost $9,692,542)
Total Investments - 141.93%															466,046,174
(Cost $477,366,111)
Liabilities in Excess of Other Assets - (41.93)%															(137,678,711	)
Net Assets - 100.00%														$	328,367,463

 

*	The principal amount/shares of each security is stated in the currency in which the security is denominated.

Currency Abbreviations:

BRL		-		Brazilian Real
COP		-		Colombian Peso
GBP		-		Great Britain Pound
IDR		-		Indonesian Rupiah
JPY		-		Japanese Yen
MXN		-		Mexican Peso
NGN		-		Nigerian Naira
TRY		-		New Turkish Lira
USD		-		United States Dollar
ZAR		-		South African Rand

 

(1)

Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may normally be sold to qualified institutional buyers in transactions exempt from registration. Total market value of Rule 144A securities amounts to $87,419,994, which represents approximately 26.62% of net assets as of May 31, 2014.

(2)	On May 31, 2014, securities valued at $171,884,674 were pledged as collateral for reverse repurchase agreements.

(3)

Securities were originally issued pursuant to Regulation S under the Securities Act of 1933, which exempts securities offered and sold outside of the United States from registration. Such securities cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. As of May 31, 2014, the aggregate market value of those securities was $144,508,691, which represents approximately 44.01% of net assets.

(4)	Issued with a zero coupon. Income is recognized through the accretion of discount.

(5)	Step bond. Coupon increases periodically based upon a predetermined schedule. Interest rate disclosed is that which is in effect as of May 31, 2014.

(6)

Bank loans generally pay interest at rates which are periodically determined by reference to a base lending rate plus a premium. All loans carry a variable rate of interest. These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at May 31, 2014. Bank loans, while exempt from registration, under the Securities Act of 1933, contain certain restrictions on resale and cannot be sold publicly. Floating rate bank loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.

(7)	Floating or variable rate security. Interest rate disclosed is that which is in effect as of May 31, 2014.

 

See Notes to Financial Statements.
Semi-Annual Report  |  May 31, 2014		11

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Stone Harbor Emerging Markets Income Fund		Statement of Investments
		May 31, 2014 (Unaudited)

 

Common Abbreviations:

BV		-		Besloten Vennootschap is the Dutch term for private limited liability company.
ESP		-		Empresa de Servicios Publicos is the Colombian term for Public Service Company.
GmbH		-		Gesellschaft mit beschrankter Haftung is the German term for a company with limited liability.
JSC		-		Joint Stock Company.
LLC		-		Limited Liability Company.
LP		-		Limited Partnership.
Ltd.		-		Limited.
MTN		-		Medium Term Note.
OAO		-		Otkrytoe Aktsionernoe Obschestvo is the Russian term for Open Joint Stock Company.
OJSC		-		Open Joint Stock Company.
PLC		-		Public Limited Company.
PT		-		Perseroan terbuka is an Indonesian term for limited liability company.
SA		-		Generally designates corporations in various countries, mostly those employing the civil law.
SAA		-		Sociedad Anonima Abierta is the Peruvian term used for companies with 20 or more shareholders.
SAB de CV		-		A variable capital company.
SAC		-		Sociedad Anonima Abierta is the Peruvian term used for a publicly traded corporation.
Tbk		-		Terbuka is the Indonesian term for limited liability company.

 

See Notes to Financial Statements.
12		www.shiplpcef.com

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Stone Harbor Emerging Markets Income Fund		Statement of Investments
		May 31, 2014 (Unaudited)

 

OUTSTANDING FORWARD FOREIGN CURRENCY CONTRACTS

 

Counterparty		Foreign Currency		Contracted Amount**		Purchase/Sale Contract		Settlement Date		Current Value				Unrealized Appreciation/ (Depreciation)
Citigroup Global Markets		BRL		115,300,000		Sale		07/02/2014		$	50,982,564			$	161,864
J.P. Morgan Chase & Co.		GBP		2,020,100		Sale		06/30/2014			3,385,257				13,915
J.P. Morgan Chase & Co.		JPY		1,023,875,000		Sale		06/30/2014			10,059,746				38,836
														$	214,615
Citigroup Global Markets		BRL		112,000,000		Sale		06/03/2014		$	49,934,715			$	(213,288)
Citigroup Global Markets		BRL		112,000,000		Purchase		06/03/2014			49,934,716				(143,531)
														$	(356,819)

** The contracted amount is stated in the currency in which the contract is denominated.

REVERSE REPURCHASE AGREEMENTS

 

Counterparty		Interest Rate		Acquisition Date				Value
Credit Suisse First Boston		0.750%			05/16/2013			$	8,871,370
Credit Suisse First Boston		0.750%			06/06/2013				3,644,843
Credit Suisse First Boston		0.750%			07/18/2013				3,985,500
Credit Suisse First Boston		0.250%			01/08/2014				1,734,800
Credit Suisse First Boston		0.450%			01/16/2014				6,740,050
Credit Suisse First Boston		0.750%			01/22/2014				6,853,052
Credit Suisse First Boston		0.500%			02/10/2014				1,912,600
Credit Suisse First Boston		0.350%			02/10/2014				1,776,800
Credit Suisse First Boston		0.750%			02/19/2014				1,680,725
Credit Suisse First Boston		0.500%			03/25/2014				1,972,000
Credit Suisse First Boston		(0.350)%			05/09/2014				983,088
Credit Suisse First Boston		(3.500)%			05/29/2014				12,201,546
Credit Suisse First Boston		(0.250)%			05/30/2014				10,204,400
J.P. Morgan Chase & Co.		0.750%			10/30/2013				1,959,909
J.P. Morgan Chase & Co.		0.750%			11/18/2013				9,330,201
J.P. Morgan Chase & Co.		0.750%			12/23/2013				2,343,781
J.P. Morgan Chase & Co.		0.400%			12/23/2013				3,264,800
J.P. Morgan Chase & Co.		0.650%			12/23/2013				2,468,125
J.P. Morgan Chase & Co.		0.350%			01/16/2014				2,556,758
J.P. Morgan Chase & Co.		0.750%			01/22/2014				17,704,521
J.P. Morgan Chase & Co.		0.250%			02/25/2014				712,687
J.P. Morgan Chase & Co.		0.500%			05/01/2014				2,072,523
J.P. Morgan Chase & Co.		0.100%			05/14/2014				1,391,212
J.P. Morgan Chase & Co.		0.850%			05/22/2014				11,395,200
J.P. Morgan Chase & Co.		0.250%			05/27/2014				5,976,692
J.P. Morgan Chase & Co.		0.150%			05/28/2014				1,100,440
J.P. Morgan Chase & Co.		0.650%			05/28/2014				1,452,229
Nomura Securities		0.650%			01/02/2014				8,360,550
								$	134,650,402

All agreements can be terminated by either party on demand at value plus accrued interest.

 

See Notes to Financial Statements.
Semi-Annual Report  |  May 31, 2014		13

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Stone Harbor Emerging Markets Income Fund		Statement of Assets & Liabilities
		May 31, 2014 (Unaudited)

 

 

ASSETS:
Investments, at value(1)		$	466,046,174
Cash			226,326
Unrealized appreciation on forward foreign currency contracts			214,615
Receivable for investments sold			43,872,014
Deposits with brokers for forward foreign currency contracts collateral			290,000
Dividends and interest receivable			9,074,655
Prepaid and other assets			27,422
Total Assets			519,751,206
LIABILITIES:
Payable for reverse repurchase agreements			134,650,402
Interest due on reverse repurchase agreements			298,604
Payable due to brokers for reverse repurchase agreements collateral			4,992,000
Payable for investments purchased			50,468,653
Unrealized depreciation on forward foreign currency contracts			356,819
Payable to adviser			383,462
Payable to administrator			60,162
Other payables			173,641
Total Liabilities			191,383,743
Net Assets		$	328,367,463
NET ASSETS CONSIST OF:
Paid-in capital		$	375,749,610
Distribution in excess of net investment income			(131,033	)
Accumulated net realized loss on investments, credit default swap contracts, forward foreign currency contracts and foreign currency transactions			(35,886,898	)
Net unrealized depreciation on investments, forward foreign currency contracts and translation of assets and liabilities denominated in foreign currencies			(11,364,216	)
Net Assets		$	328,367,463
PRICING OF SHARES:
Net Assets		$	328,367,463
Shares of beneficial interest outstanding (unlimited number of shares, par value of $0.001 per share authorized)			15,781,701
Net assets value, offering and redemption price per share		$	20.81
(1)Cost of Investments		$	477,366,111

 

See Notes to Financial Statements.
14		www.shiplpcef.com

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Stone Harbor Emerging Markets Income Fund		Statement of Operations
		For the Six Months Ended May 31, 2014 (Unaudited)

 

INVESTMENT INCOME:
Interest		$	19,077,035
Dividends			67,395
Total Investment Income			19,144,430
EXPENSES:
Investment advisory fees			2,164,694
Administration fees			330,594
Interest on reverse repurchase agreements			335,411
Custodian fees			93,899
Audit fees			43,563
Printing fees			39,825
Legal fees			29,836
Trustee fees			16,620
Transfer agent fees			9,998
Insurance fees			9,937
Other			21,156
Total Expenses			3,095,533
Net Investment Income			16,048,897
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on:
Investments			(9,088,033	)
Credit default swap contracts			(872,645	)
Forward foreign currency contracts			(4,819,470	)
Foreign currency transactions			(303,576	)
Net realized loss			(15,083,724	)
Net change in unrealized appreciation/(depreciation) on:
Investments			33,073,141
Credit default swap contracts			2,218,830
Forward foreign currency contracts			(333,566	)
Translation of assets and liabilities denominated in foreign currencies			213,589
Net change in unrealized appreciation			35,171,994
Net Realized and Unrealized Gain on Investments			20,088,270
Net Increase in Net Assets Resulting from Operations		$	36,137,167

 

See Notes to Financial Statements.
Semi-Annual Report  |  May 31, 2014		15

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Stone Harbor Emerging Markets Income Fund		Statements of Changes in Net Assets

 

 

		For the Six Months Ended May 31, 2014 (Unaudited)				For the Year Ended November 30, 2013
OPERATIONS:
Net investment income		$	16,048,897			$	26,266,623
Net realized loss on investments, credit default swap contracts, forward foreign currency contracts, and foreign currency transactions			(15,083,724	)			(17,105,639	)
Net change in unrealized appreciation/(depreciation) on investments, credit default swap contracts and translation of assets and liabilities denominated in foreign currencies			35,171,994				(38,503,627	)
Net increase/(decrease) in net assets resulting from operations			36,137,167				(29,342,643	)
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income			(17,044,237	)			(29,960,507	)
From net realized gains			–				(4,061,325	)
Net decrease in net assets from distributions to shareholders			(17,044,237	)			(34,021,832	)
CAPITAL SHARE TRANSACTIONS:
Net asset value of common shares issued to stockholders from reinvestment of dividends			–				1,778,364
Net increase in net assets from capital share transactions			–				1,778,364
Net Increase/(Decrease) in Net Assets			19,092,930				(61,586,111	)
NET ASSETS:
Beginning of period			309,274,533				370,860,644
End of period (including undistributed/(overdistributed) net investment income of $(131,033) and $864,307)		$	328,367,463			$	309,274,533
OTHER INFORMATION:
Share Transactions:
Beginning shares			15,781,701				15,704,477
Shares issued as reinvestment of dividends			–				77,224
Shares outstanding - end of period			15,781,701				15,781,701

 

See Notes to Financial Statements.
16		www.shiplpcef.com

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Stone Harbor Emerging Markets Income Fund		Statement of Cash Flows
		For the Six Months Ended May 31, 2014 (Unaudited)

 

CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets from operations		$	36,137,167
Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities:
Purchase of investment securities			(193,600,213	)
Proceeds from disposition of investment securities			191,462,920
Net purchase of short-term investment securities			(9,692,542	)
Net payments on credit default swap contracts			(2,272,810	)
Net amortization of discounts and accretion of premiums			(930,332	)
Inflation Income			(61	)
Net realized loss on:
Investments			9,088,033
Credit default swaps contracts			872,645
Net change in unrealized (appreciation)/depreciation on:
Investments			(33,073,141	)
Credit default swap contracts			(2,218,830	)
Forward foreign currency contracts			333,566
Translation of assets and liabilities denominated in foreign currencies			(213,589	)
Decrease in deposits with brokers credit default swap contracts, reverse repurchase agreements, and forward foreign currency contracts			8,746,000
Decrease in dividends and interest receivable			775,612
Decrease in interest receivable on swap contracts			190,000
Increase in prepaid and other assets			(24,539	)
Decrease in payable to bank overdraft			(7,925,783	)
Increase in payable due to brokers for credit default swap contracts, reverse repurchase agreements, and forward foreign currency contracts			4,742,000
Increase in payable to adviser			22,596
Increase in payable to administrator			2,089
Decrease in other payables			(1,321	)
Increase in interest due on reverse repurchase agreements			73,613
Net cash provided by operating activities			2,493,080
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash provided by reverse repurchase agreements			14,563,894
Cash distributions paid			(17,044,237	)
Net cash used in financing activities			(2,480,343	)
Effect of exchange rates on Cash			213,589
Net increase in cash and foreign rates on cash and foreign currency			226,326
Cash and foreign currency, beginning balance			–
Cash and foreign currency, ending balance		$	226,326
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest on reverse repurchase agreements:		$	261,798

 

See Notes to Financial Statements.
Semi-Annual Report  |  May 31, 2014		17

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Stone Harbor Emerging Markets Income Fund		Financial Highlights
		For a share outstanding throughout the periods presented.

 

		For the Six Months Ended May 31, 2014 (Unaudited)				For the Year Ended November 30, 2013				For the Year Ended November 30, 2012				For the Period December 22, 2010 (Inception) to November 30, 2011
Net asset value - beginning of period		$	19.60			$	23.61			$	22.03			$	23.88
Income/(loss) from investment operations:
Net investment income(1)			1.02				1.67				2.20				1.99
Net realized and unrealized gain/(loss) on investments			1.27				(3.52	)			1.54				(1.99	)
Total income/(loss) from investment operations			2.29				(1.85	)			3.74				–
Less distributions to common shareholders:
From net investment income			(1.08	)			(1.90	)			(2.16	)			(1.80	)
From net realized gains			–				(0.26	)			–				–
Total distributions			(1.08	)			(2.16	)			(2.16	)			(1.80	)
Capital share transactions:
Common share offering costs charged to paid-in capital			–				–				–				(0.05	)
Total capital share transactions			–				–				–				(0.05	)
Net Increase/(Decrease) in Net Asset Value			1.21				(4.01	)			1.58				(1.85	)
Net asset value - end of period		$	20.81			$	19.60			$	23.61			$	22.03
Market price - end of period		$	20.48			$	18.55			$	24.70			$	22.38
Total Return - Net Asset Value(2)(3)			12.48%				(8.37%	)			17.71%				(0.47%	)
Total Return - Market Price(2)(3)			16.96%				(17.10%	)			21.22%				(3.41%	)
Ratios/Supplemental Data:
Net assets, end of period (in thousands)		$	328,367			$	309,275			$	370,861			$	342,668
Ratio of expenses to average net assets			2.02%	(4)			1.88%				1.83%				1.76%	(4)
Ratio of net investment income to average net assets			10.49%	(4)			7.43%				9.59%				8.90%	(4)
Ratio of expenses to average managed assets(5)			1.43%	(4)			1.42%				1.40%				1.45%	(4)
Portfolio turnover rate			52%				157%				122%				157%
Borrowings at End of Period
Aggregate Amount Outstanding (in thousands)		$	134,650			$	120,087			$	133,973			$	93,089
Asset Coverage Per $1,000 (in thousands)		$	3,439			$	3,575			$	3,768			$	4,681

 

(1)	Calculated using average shares throughout the period.

(2)

Total investment return is calculated assuming a purchase of common share at the opening on the first day and a sale at closing on the last day of each period reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total investment returns do not reflect brokerage commissions, if any, and are not annualized.

(3)	Total returns for periods of less than one year are not annualized.

(4)	Annualized.

(5)	Average managed assets represent net assets applicable to common shares plus average amount of borrowings during the period.

 

See Notes to Financial Statements.
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Stone Harbor Emerging Markets Income Fund		Notes to Financial Statements
		May 31, 2014 (Unaudited)

 

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Stone Harbor Emerging Markets Income Fund (the “Fund”) is a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund is organized as a Massachusetts business trust pursuant to an Agreement and Declaration of Trust governed by the laws of The Commonwealth of Massachusetts (the “Declaration of Trust”). The Fund commenced operations on December 22, 2010. Prior to that, the Fund had no operations other than matters relating to its organization and the sale and issuance of 4,188 shares of beneficial interest (“Common Shares”) in the Fund to the Stone Harbor Investment Partners LP (the “Adviser” or “Stone Harbor”) at a price of $23.88 per share. The Fund’s common shares are listed on the New York Stock Exchange (the “Exchange”) and trade under the ticker symbol “EDF.”

The Fund’s investment objective is to maximize total return, which consists of income on its investments and capital appreciation. The Fund will normally invest at least 80% of its net assets (plus any borrowings made for investment purposes) in emerging markets securities. Emerging markets securities include fixed income securities and other instruments (including derivatives) that are economically tied to emerging market countries, that are denominated in the predominant currency of the local market of an emerging market country or whose performance is linked to those countries’ markets, currencies, economies or ability to repay loans. A security or instrument is economically tied to an emerging market country if it is principally traded on the country’s securities markets or if the issuer is organized or principally operates in the country, derives a majority of its income from its operations within the country or has a majority of its assets within the country.

The Fund is classified as “non-diversified” under the 1940 Act. As a result, it can invest a greater portion of its assets in obligations of a single issuer than a “diversified” fund. The Fund may therefore be more susceptible than a diversified fund to being adversely affected by any single corporate, economic, political or regulatory occurrence.

The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Investment Valuation: Debt securities, including bank loans and linked notes, are generally valued at the mean between the bid and asked prices provided by independent pricing services or brokers that are based on transactions in debt obligations, quotations from dealers, market transactions in comparable securities and various other relationships between securities. Credit default swaps are priced by an independent pricing service based off of the underlying terms of the swap. Equity securities for which market quotations are available are generally valued at the last sale price or official closing price on the primary market or exchange on which they trade. Publicly traded foreign government debt securities are typically traded internationally in the over-the-counter market and are valued at the mean between the bid and asked prices as of the close of business of that market. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund may value these investments at fair value as determined in accordance with the procedures approved by the Fund’s Board of Trustees (the “Board”). Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates market value. Money market mutual funds are valued at their net asset value. Foreign currency positions including forward currency contracts are priced at the mean between the closing bid and asked prices at 4:00 p.m. Eastern time.

A three-tier hierarchy has been established to measure fair value based on the extent of use of “observable inputs” as compared to “unobservable inputs” for disclosure purposes and requires additional disclosures about these valuations measurements. Inputs refer broadly to the assumptions that market participants would use in pricing a security. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the security developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the security developed based on the best information available in the circumstances.

The three-tier hierarchy is summarized as follows:

 

Level 1		Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access.
Level 2		Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.

 

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Stone Harbor Emerging Markets Income Fund		Notes to Financial Statements
		May 31, 2014 (Unaudited)

 

Level 3		Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability and would be based on the best information available.

The following is a summary of the Fund’s investment and financial instruments based on the three-tier hierarchy as of May 31, 2014:

 

Investments in Securities at Value*		Level 1 - Quoted and Unadjusted Prices				Level 2 - Other Significant Observable Inputs				Level 3 - Significant Unobservable Inputs				Total
Sovereign Debt Obligations		$	–			$	265,798,742			$	–			$	265,798,742
Bank Loans			–				–				1,006,270				1,006,270
Corporate Bonds			–				153,195,355				–				153,195,355
Credit Linked Notes
Iraq			–				–				10,184,085				10,184,085
Other			–				26,169,180				–				26,169,180
Short Term Investments			9,692,542				–				–				9,692,542
Total		$	9,692,542			$	445,163,277			$	11,190,355			$	466,046,174
Other Financial Instruments**
Assets
Forward Foreign Currency Contracts		$	–			$	214,615			$	–			$	214,615
Liabilities
Forward Foreign Currency Contracts			–				(356,819)				–				(356,819)
Total		$	–			$	(142,204)			$	–			$	(142,204)

* For detailed Country descriptions see accompanying Statement of Investments.

** Other financial instruments are derivative instruments not reflected in the Statement of Investments. The derivatives shown in this table are reported at their unrealized appreciation/(depreciation) at measurement date, which represents the change in the contract’s value from trade date.

There were no transfers in or out of Levels 1 and 2 during the six months ended May 31, 2014. It is the Fund’s policy to recognize transfers into and out of all levels at the end of the reporting period.

The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:

 

Investments in Securities		Balance as of November 30, 2013				Accrued discount/ premium				Realized Gain/(Loss)*				Change in Unrealized Appreciation*				Purchases				Sales Proceeds				Balance as of May 31, 2014				Net change in unrealized appreciation/(depreciation) included in the Statements of Operations attributable to Level 3 investments held at May 31, 2014
Bank Loans		$	1,672,087			$	–			$	(1,411,886)			$	2,508,120			$	1,006,270			$	(2,768,321)			$	1,006,270			$	–
Credit Linked Notes			8,133,311				74,598				25,360				2,466,070				–				(515,254)				10,184,085				2,466,070
Total		$	9,805,398			$	74,598			$	(1,386,526)			$	4,974,190			$	1,006,270			$	(3,283,575)			$	11,190,355			$	2,466,070

 

*	Realized gain/(loss) and change in unrealized appreciation are included in the related amounts on the investment in the Statement of Operations.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

In the event a Board approved independent pricing service is unable to provide an evaluated price for a security or the Adviser believes the price provided is not reliable, securities of the Fund may be valued at fair value as described above. In these instances the Adviser may seek to find an alternative independent source, such as a broker/dealer to provide a price quote, or by using evaluated pricing models similar to the techniques and models used by the independent pricing service. These fair value measurement techniques may utilize unobservable inputs (Level 3).

On at least a quarterly basis, the Adviser presents the factors considered in determining the fair value measurements and presents that information to the Board which meets at least quarterly.

 

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Stone Harbor Emerging Markets Income Fund		Notes to Financial Statements
		May 31, 2014 (Unaudited)

 

The table below provides additional information about the Level 3 Fair Value Measurements as of May 31, 2014:

 

Investments in Securities		Fair Value at May 31, 2014				Valuation Methodology		Unobservable Inputs
Stone Harbor Emerging Markets Income Fund
Bank Loans		$	1,006,270			Broker Quote		Broker Quote
Credit Linked Notes			10,184,085			Broker Quote		Broker Quote
Total		$	11,190,355

Security Transactions and Investment Income: Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. If applicable, any foreign capital gains taxes are accrued, net of unrealized gains, and are payable upon the sale of such investments. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Fund’s policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.

Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars. Investment valuations and other assets and liabilities initially expressed in foreign currencies are converted each business day into U.S. dollars based upon current exchange rates. Prevailing foreign exchange rates may generally be obtained at the close of the NYSE (normally, 4:00 p.m. Eastern time).

The portion of realized and unrealized gains or losses on investments due to fluctuations in foreign currency exchange rates is not separately disclosed and is included in realized and unrealized gains or losses on investments, when applicable.

Foreign Securities: The Fund may directly purchase securities of foreign issuers. Investing in securities of foreign issuers involves special risks not typically associated with investing in securities of U.S. issuers. The risks include possible revaluation of currencies, the ability to repatriate funds, less complete financial information about companies and possible future adverse political and economic developments. Moreover, securities of many foreign issuers and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. issuers.

Credit Linked Notes: The Fund may invest in credit linked notes to obtain economic exposure to high yield, emerging markets or other securities. Investments in a credit linked note typically provide the holder with a return based on the return of an underlying reference instrument, such as an emerging market bond. Like an investment in a bond, investments in credit linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. In addition to the risks associated with the underlying reference instrument, an investment in a credit linked note is also subject to the risk that the counterparty will be unwilling or unable to meet its obligations under the note.

Segregation and Collateralization: In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (“SEC”) require that the Fund either delivers collateral or segregate assets in connection with certain investments (e.g., foreign currency exchange contracts, securities with extended settlement periods, and swaps) or certain borrowings (e.g., reverse repurchase agreements), the Fund will segregate collateral or designate on its books and records cash or other liquid securities having a value at least equal to the amount that is required to be physically segregated for the benefit of the counterparty. Furthermore, based on requirements and agreements with certain exchanges and third party broker-dealers, each party has requirements to deliver/deposit cash or securities as collateral for certain investments. Cash collateral that has been pledged to cover obligations of the Fund is reported separately on the Statement of Assets and Liabilities as “Deposits with brokers.” Securities collateral pledged for the same purpose is noted on the Statement of Investments.

Leverage: The Fund may borrow from banks and other financial institutions and may also borrow additional funds by entering into reverse repurchase agreements or the issuance of debt securities (collectively, “Borrowings”) in an amount that does not exceed 33 1/3% of the Fund’s Total Assets (defined in Note 4) immediately after such transactions. It is possible that following such Borrowings, the assets of the Fund will decline due to market conditions such that this 33 1/3% limit will be exceeded. In that case, the leverage risk to Common Shareholders will increase.

In a reverse repurchase agreement, the Fund sells to a financial institution a security that it holds with an agreement to repurchase the same security at an agreed-upon price and date. A reverse repurchase agreement involves the risk that the market value of the security sold by the Fund may decline below the repurchase price of the security. The Fund will segregate assets determined to be liquid by the Adviser or otherwise cover its obligations under reverse repurchase agreements. Due to the short term nature of the reverse repurchase agreements, face value approximates fair value at May 31, 2014. This fair value is based on Level 2 inputs under the three-tier fair valuation hierarchy described above. For the six months ended May 31, 2014, the average amount of reverse repurchase agreements outstanding was $127,434,161, at a weighted average interest rate of 0.51%.

 

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Stone Harbor Emerging Markets Income Fund		Notes to Financial Statements
		May 31, 2014 (Unaudited)

 

Loan Participations and Assignments: The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, or any rights of set-off against the borrower, and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.

The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower.

Leverage Risk: Leverage creates risks for Common Shareholders, including the likelihood of greater volatility of NAV per share and market price of, and dividends paid on, the Common Shares. There is a risk that fluctuations in the interest rates on any Borrowings held by the Fund may adversely affect the return to the Common Shareholders. If the income from the securities purchased with the proceeds of leverage is not sufficient to cover the cost of leverage, the return on the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to the Common Shareholders as dividends and other distributions will be reduced.

The Fund may choose not to use leverage at all times. The amount and composition of leverage used may vary depending upon a number of factors, including economic and market conditions in the relevant emerging market countries, the availability of relatively attractive investment opportunities not requiring leverage and the costs and risks that the Fund would incur as a result of leverage.

Credit and Market Risk: The Fund invests in high yield and emerging market instruments that are subject to certain credit and market risks. The yields of high yield and emerging market debt obligations reflect, among other things, perceived credit and market risks. The Fund’s investment in securities rated below investment grade typically involves risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Fund’s investment in non-dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations. Investments in derivatives are also subject to credit and market risks.

Distributions to Shareholders: The Fund intends to make a level dividend distribution each month to Common Shareholders. The level dividend rate may be modified by the Board of Trustees from time to time. Any net capital gains earned by the Fund are distributed at least annually. Income and long-term capital gain distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. Distributions to shareholders are recorded by the Fund on the ex-dividend date.

Federal and Other Taxes: No provision for income taxes is included in the accompanying financial statements, as the Fund intends to distribute to shareholders all taxable investment income and realized gains and otherwise comply with Subchapter M of the Code applicable to regulated investment companies.

The Fund evaluates tax positions taken (or expected to be taken) in the course of preparing the Fund’s tax returns to determine whether these positions meet a “more-likely-than-not” standard that, based on the technical merits, have more than a 50 percent likelihood of being sustained by a taxing authority upon examination. A tax position that meets the “more-likely-than-not” recognition threshold is measured to determine the amount of benefit to recognize in the financial statements.

As of and during the six months ended May 31, 2014, the Fund did not have a liability for any unrecognized tax benefits. The Fund files U.S. federal, state, and local tax returns as required. The Fund’s tax returns are subject to examination by the relevant tax authorities until expiration of the applicable statute of limitations which is generally three years after the filing of the tax return for federal purposes and four years for most state returns. Tax returns for open years have incorporated no uncertain tax positions that require a provision for income taxes.

 

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Stone Harbor Emerging Markets Income Fund		Notes to Financial Statements
		May 31, 2014 (Unaudited)

 

2. DERIVATIVE INSTRUMENTS

 

Risk Exposure and the Use of Derivative Instruments: The Fund’s investment objectives not only permit the Fund to purchase investment securities, they also allow the Fund to enter in various types of derivatives contracts. In doing so, the Fund will employ strategies in differing combinations to permit it to increase, decrease or change the level or types of exposure to market factors. Central to those strategies are features inherent to derivatives that may make them more attractive for this purpose than equity or debt securities: they require little or no initial cash investment; they can focus exposure on only certain selected risk factors; and they may not require the ultimate receipt or delivery of the underlying security (or securities) to the contract. This may allow the Fund to pursue its objectives more quickly and efficiently than if the Fund were to make direct purchases or sales of securities capable of effecting a similar response to market factors.

Market Risk Factors: In pursuit of its investment objectives, the Fund may seek to use derivatives to increase or decrease its exposure to the following market risk factors, among others:

Interest Rate Risk. Interest rate risk refers to the fluctuations in value of fixed-income securities resulting from the inverse relationship between price and yield. For example, an increase in general interest rates will tend to reduce the value of already issued fixed-income investments, and a decline in general interest rates will tend to increase their value. In addition, debt securities with longer maturities that tend to have higher yields are subject to potentially greater fluctuations in value from changes in interest rates than obligations with shorter maturities.

Credit Risk. Credit risk relates to the ability of the issuer to meet interest and principal payments, or both, as they come due. In general, lower-grade, higher-yield bonds are subject to credit risk to a greater extent than lower-yield, higher-grade bonds.

Foreign Exchange Rate Risk. Foreign exchange rate risk relates to the change in the U.S. dollar value of a security held that is denominated in a foreign currency. The U.S. dollar value of a foreign currency denominated security will decrease as the dollar appreciates against the currency, while the U.S. dollar value will increase as the dollar depreciates against the currency.

Equity Risk. Equity risk relates to the change in value of equity securities as they relate to increases or decreases in the general market.

The Fund’s use of derivatives can result in losses due to unanticipated changes in these risk factors and the overall market. In instances where the Fund is using derivatives to decrease, or hedge, exposures to market risk factors for securities held by the Fund, there are also risks that those derivatives may not perform as expected resulting in losses for the combined or hedged positions.

Derivatives may have little or no initial cash investment relative to their market value exposure and therefore can produce significant gains or losses in excess of their cost. This use of embedded leverage allows the Fund to increase its market value exposure relative to its net assets and can substantially increase the volatility of the Fund’s performance.

Additional associated risks from investing in derivatives also exist and potentially could have significant effects on the valuation of the derivative and the Fund. Typically, the associated risks are not the risks that the Fund is attempting to increase or decrease exposure to, per its investment objectives, but are the additional risks from investing in derivatives.

Examples of these associated risks are liquidity risk, which is the risk that the Fund will not be able to sell or close out the derivative in a timely manner, and counterparty credit risk, which is the risk that the counterparty will not fulfill its obligation to the Fund. Associated risks can be different for each type of derivative and are discussed by each derivative type below and in the notes that follow.

Forward Foreign Currency Contracts: The Fund may engage in currency transactions with counterparties to hedge the value of portfolio securities denominated in particular currencies against fluctuations in relative value, to gain or reduce exposure to certain currencies or to generate income or gains. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The contract is marked-to-market daily, and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is extinguished, through either delivery or offset by entering into another forward foreign currency contract, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was extinguished.

Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected in the Statement of Assets & Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.

 

Semi-Annual Report  |  May 31, 2014		23

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Stone Harbor Emerging Markets Income Fund		Notes to Financial Statements
		May 31, 2014 (Unaudited)

 

Credit Default Swap Contracts: The Fund may enter into credit default swap contracts for hedging purposes to gain market exposure or to add leverage to its portfolio. When used for hedging purposes, the Fund would be the buyer of a credit default swap contract. In that case, the Fund would be entitled to receive the par (or other agreed upon) value of a referenced debt obligation, index or other investment from the counterparty to the contract in the event of a default by a third party, such as a U.S. or foreign issuer, on the referenced debt obligation. In return, the Fund would pay to the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no event of default occurs, the Fund would have spent the stream of payments and received no benefit from the contract. When the Fund is the seller of a credit default swap contract, it receives the stream of payments but is obligated to pay upon default of the referenced debt obligation. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total assets, the Fund would be subject to investment exposure on the notional amount of the swap.

The periodic swap payments received or made by the Fund are recorded in the Statements of Operations as realized gains or losses, respectively. Any upfront fees paid are recorded as assets and any upfront fees received are recorded as liabilities. Swaps are marked-to-market daily and changes in value, including the accrual of periodic amounts of interest, are recorded as unrealized appreciation (depreciation) and shown on the Fund’s Statement of Operations. When the swap is terminated, the Fund will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund’s basis in the contract, if any. Generally, the basis of the contracts is the unamortized premium received or paid.

In addition to the risks applicable to derivatives generally, credit default swaps involve special risks because they may be difficult to value, are highly susceptible to liquidity and credit risk and generally pay a return to the counterparty only in the event of an actual default by the issuer of the underlying obligation, as opposed to a credit downgrade or other indication of financial difficulty.

The tables below are a summary of the fair valuations of derivative instruments categorized by risk exposure.

Fair Values of derivative instruments on the Statement of Assets & Liabilities as of May 31, 2014:

 

Risk Exposure		Statement of Assets and Liabilities Location		Fair Value				Statement of Assets and Liabilities Location		Fair Value
Foreign Exchange Rate Risk		Unrealized appreciation on forward foreign currency contracts		$	214,615			Unrealized depreciation on forward foreign currency contracts		$	(356,819)
Total				$	214,615					$	(356,819)

The number of forward foreign currency contracts held at May 31, 2014 is representative of activity during the six months ended May 31, 2014.

For the six months ended May 31, 2014 the effect of derivative instruments on the Statement of Operations were as follows:

 

Risk Exposure		Statement of Operations Location		Realized Loss on Derivatives				Change in Unrealized Appreciation/(Depreciation) on Derivatives Recognized in Income
Credit Risk		Net realized loss on credit default swap contracts/Net change in unrealized appreciation on credit default swap contracts		$	(872,645)				$                    2,218,830
Forward Exchange Rate Risk		Net realized loss on forward foreign currency contracts/Change in unrealized depreciation on forward foreign currency contracts			(4,819,470)				(333,566)
Total				$	(5,692,115)				$                    1,885,264

Offsetting Arrangements: Certain derivative contracts and reverse repurchase agreements are executed under standardized netting agreements. A derivative netting arrangement creates an enforceable right of set-off that becomes effective, and affects the realization of settlement on individual assets, liabilities and collateral amounts, only following a specified event of default or early termination. Default events may include the failure to make payments or deliver securities timely, material adverse changes in financial condition or insolvency, the breach of minimum regulatory capital requirements, or loss of license, charter or other legal authorization necessary to perform under the contract. These agreements mitigate counterparty credit risk by providing for a single net settlement with a counterparty of all financial transactions covered by the agreement in an event of default as defined under such agreement.

 

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Stone Harbor Emerging Markets Income Fund		Notes to Financial Statements
		May 31, 2014 (Unaudited)

 

The following table presents derivative financial instruments and reverse repurchase arrangements that are subject to enforceable netting arrangements, collateral arrangements or other similar agreements as of May 31, 2014.

 

Offsetting of Derivatives Assets
May 31, 2014
														Gross Amounts Not Offset in the Statements of Assets and Liabilities
Description		Gross Amounts of Recognized Assets				Gross Amounts Offset in the Statements of Assets and Liabilities				Net Amounts Presented in the Statements of Assets and Liabilities				Financial Instruments Available for Offset (a)				Cash Collateral Received (a)				Net Amount     Receivable
Forward foreign currency contracts		$	214,615			$	–			$	214,615			$	(214,615	)		$	–			$	–
Total		$	214,615			$	–			$	214,615			$	(214,615	)		$	–			$	–

 

Offsetting of Derivatives Liabilities
May 31, 2014
														Gross Amounts Not Offset in the Statements of Assets and Liabilities
Description		Gross Amounts of Recognized Liabilities				Gross Amounts Offset in the Statements of Assets and Liabilities				Net Amounts Presented in the Statements of Assets and Liabilities				Financial Instruments Available for Offset (a)				Cash Collateral Pledged(a)				Net Amount     Payable
Forward foreign currency contracts		$	356,819			$	–			$	356,819			$	(214,615	)		$	(142,204	)		$	–
Reverse repurchase agreements			134,650,402				–				134,650,402				(134,650,402	)			–				–
Total		$	135,007,221			$	–			$	135,007,221			$	(134,865,017	)		$	(142,204	)		$	–

 

(a)	These amounts are limited to the derivatives asset/liability balance and, accordingly, do not include excess collateral received/pledged.

 

3. TAX BASIS INFORMATION

Tax Basis of Distributions to Shareholders: Net investment income (loss) and net realized gain (loss) may differ for financial statement and tax purposes. The character of distributions made during the year from net investment income or net realized gains may differ from its ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the fiscal year in which the income or realized gain was recorded by the Fund.

The amounts and characteristics of tax basis distributions and composition of distributable earnings/(accumulated losses) are finalized at fiscal year end; accordingly, tax basis balances have not been determined as of May 31, 2014.

 

Semi-Annual Report  |  May 31, 2014		25

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Stone Harbor Emerging Markets Income Fund		Notes to Financial Statements
		May 31, 2014 (Unaudited)

 

The tax character of the distributions paid by the Fund during the fiscal year ended November 30, 2013 was as follows:

 

		For the Year Ended
		November 30,
		2013
Ordinary Income		$	34,021,832
Total		$	34,021,832

Components of Distributable Earnings on a Tax Basis: As of November 30, 2013, the components of distributable earnings on a tax basis were as follows:

 

Undistributed Ordinary Income		$	1,431,522
Accumulated Capital Loss			(20,620,253)
Unrealized Depreciation			(46,719,131)
Cumulative Effect of Other Timing Difference*			(567,215)
Total		$	(66,475,077)

 

*	Other temporary differences primarily due to timing consist of mark-to-market on forward foreign currency contracts and amortization of credit default swap expenses

The tax components of distributable earnings are determined in accordance with income tax regulations which may differ from the composition of net assets reported under GAAP. Accordingly, for the period ended November 30, 2013, certain differences were reclassified. These differences were primarily due to the differing tax treatment of certain investments and the amounts reclassified did not affect net assets.

The reclassifications were as follows:

 

Accumulated Net

Accumulated Net Realized

Fund

Paid-in Capital

Investment Income/(Loss)

Gain/(Loss) on Investments

Stone Harbor Emerging Markets Income Fund

$

–

$

3,697,445

$

(3,697,445)

Unrealized Appreciation and Depreciation on Investments: At May 31, 2014, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:

 

Gross appreciation on investments (excess of value over tax cost)		$	12,334,457
Gross depreciation on investments (excess of tax cost over value)			(23,692,305)
Net appreciation (excess of value over tax cost) of foreign currency and derivatives			–
Net unrealized depreciation		$	(11,357,848)
Cost of investments for income tax purposes		$	477,404,022

Capital losses deferred to next tax year were as follows:

 

Stone Harbor Emerging Market Income Fund		Short-Term				Long-Term
Capital Losses Deferred to next year			$    5,466,085			$    11,643,284

Stone Harbor Emerging Markets Income have elected to defer to the period ending November 30, 2014 capital losses recognized during the period November 1, 2013 to November 30, 2013 in the amount of $3,510,884.

 

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Stone Harbor Emerging Markets Income Fund		Notes to Financial Statements
		May 31, 2014 (Unaudited)

 

4. ADVISORY FEES, TRUSTEE FEES, ADMINISTRATION FEES, CUSTODY FEES AND TRANSFER AGENT FEES

 

The Adviser receives a monthly fee at the annual rate of 1.00% of the average daily value of the Fund’s total assets (including any assets attributable to any leverage used) minus the Fund’s accrued liabilities (other than Fund liabilities incurred for any leverage) (“Total Assets”).

ALPS Fund Services, Inc. (“ALPS”) serves as administrator to the Fund. Under the administration agreement, ALPS is responsible for calculating the net asset value of the common shares and generally managing the administrative affairs of the Fund. ALPS receives a monthly fee at an annual rate of 0.15% of the average daily value of the Fund’s Total Assets.

The Bank of New York Mellon serves as the Fund’s custodian. Computershare, Inc. serves as the Fund’s transfer agent.

During the reporting period, the Fund paid each Trustee who is not a director, officer, employee or affiliate of Stone Harbor or ALPS, a fee of $2,500 per quarter and $250 for each additional meeting of the Board of Trustees in which that Trustee participated. The Fund will also reimburse independent Trustees for travel and out-of-pocket expenses incurred in connection with such meetings.

5. SECURITIES TRANSACTIONS

 

The cost of purchases and proceeds from sales of securities (excluding short-term securities) during the year ended May 31, 2014, were as follows:

 

Purchases		Sales
$      241,162,097		$      222,290,220

6. APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-08, Financial Services-Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The FASB standard identifies characteristics a company must assess to determine whether it is considered an investment company for financial reporting purposes. This ASU is effective for fiscal years beginning after December 15, 2013. The Fund believes the adoption of this ASU will not have a material impact on its financial statements.

7. INDEMNIFICATIONS

 

Under the Trust’s organizational documents, its officers and Trustees are indemnified against certain liability arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts with service providers that may contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred.

 

Semi-Annual Report  |  May 31, 2014		27

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Stone Harbor Emerging Markets Income Fund		Summary of Dividend Reinvestment Plan
		May 31, 2014 (Unaudited)

 

Unless the registered owner of Common Shares elects to receive cash by contacting Computershare (the “Plan Administrator”), all dividends declared on Common Shares will be automatically reinvested by the Plan Administrator for shareholders in the Fund’s Automatic Dividend Reinvestment Plan (the “Plan”), in additional Common Shares. Common Shareholders who elect not to participate in the Plan will receive all dividends and other distributions in cash paid by check mailed directly to the shareholder of record (or, if the Common Shares are held in street or other nominee name, then to such nominee) by the Plan Administrator as dividend disbursing agent. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Plan Administrator prior to the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution. Such notice will be effective with respect to a particular dividend or other distribution (together, a “Dividend”). Some brokers may automatically elect to receive cash on behalf of Common Shareholders and may re-invest that cash in additional Common Shares.

The Plan Administrator will open an account for each Common Shareholder under the Plan in the same name in which such Common Shareholder’s Common Shares are registered. Whenever the Fund declares a Dividend payable in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in Common Shares. The Common Shares will be acquired by the Plan Administrator for the participants’ accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized Common Shares from the Fund (“Newly Issued Common Shares”) or (ii) by purchase of outstanding Common Shares on the open market (“Open-Market Purchases”) on the NYSE or elsewhere. If, on the payment date for any Dividend, the closing market price plus estimated brokerage commissions per Common Share is equal to or greater than the NAV per Common Share, the Plan Administrator will invest the Dividend amount in Newly Issued Common Shares on behalf of the participants. The number of Newly Issued Common Shares to be credited to each participant’s account will be determined by dividing the dollar amount of the Dividend by the NAV per Common Share on the payment date; provided that, if the NAV is less than or equal to 95% of the closing market value on the payment date, the dollar amount of the Dividend will be divided by 95% of the closing market price per Common Share on the payment date. If, on the payment date for any Dividend, the NAV per Common Share is greater than the closing market value plus estimated brokerage commissions, the Plan Administrator will invest the Dividend amount in Common Shares acquired on behalf of the participants in Open-Market Purchases.

In the event of a market discount on the payment date for any Dividend, the Plan Administrator will have until the last business day before the next date on which the Common Shares trade on an “ex-dividend” basis or 30 days after the payment date for such Dividend, whichever is sooner (the “Last Purchase Date”), to invest the Dividend amount in Common Shares acquired in Open-Market Purchases. It is contemplated that the Fund will pay monthly income Dividends. If, before the Plan Administrator has completed its Open-Market Purchases, the market price per Common Share exceeds the NAV per Common Share, the average per Common Share purchase price paid by the Plan Administrator may exceed the NAV of the Common Shares, resulting in the acquisition of fewer Common Shares than if the Dividend had been paid in Newly Issued Common Shares on the Dividend payment date. Because of the foregoing difficulty with respect to Open-Market Purchases, the Plan provides that if the Plan Administrator is unable to invest the full Dividend amount in Open-Market Purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Administrator may cease making Open-Market Purchases and may invest the uninvested portion of the Dividend amount in Newly Issued Common Shares at the NAV per Common Share at the close of business on the Last Purchase Date provided that, if the NAV is less than or equal to 95% of the then current market price per Common Share, the dollar amount of the Dividend will be divided by 95% of the market price on the payment date for purposes of determining the number of shares issuable under the Plan.

The Plan Administrator maintains all shareholders’ accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for tax records. Common Shares in the account of each Plan participant will be held by the Plan Administrator on behalf of the Plan participant, and each shareholder proxy will include those shares purchased or received pursuant to the Plan. The Plan Administrator will forward all proxy solicitation materials to participants and vote proxies for shares held under the Plan in accordance with the instructions of the participants.

In the case of Common Shareholders such as banks, brokers or nominees which hold shares for others who are the beneficial owners, the Plan Administrator will administer the Plan on the basis of the number of Common Shares certified from time to time by the record shareholder’s name and held for the account of beneficial owners who participate in the Plan.

There will be no brokerage charges with respect to Common Shares issued directly by the Fund. However, each participant will pay a pro rata share of brokerage commissions incurred in connection with Open-Market Purchases. The automatic reinvestment of Dividends will not relieve participants of any federal, state or local income tax that may be payable (or required to be withheld) on such Dividends. Participants that request a sale of Common Shares through the Plan Administrator are subject to brokerage commissions.

The Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants with regard to purchases in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants.

All correspondence or questions concerning the Plan should be directed to the Plan Administrator at 1-866-390-3910.

 

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Stone Harbor Emerging Markets Income Fund		Additional Information
		May 31, 2014 (Unaudited)

 

FUND PORTFOLIO HOLDINGS

 

The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (the “SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available (1) on the Fund’s website located at http://www.shiplpcef.com, (2) on the SEC’s website at http://www.sec.gov, or (3) they may be reviewed and copied at the SEC’s Public Reference Room in Washington DC (call 1-800-732-0330 for information on the operation of the Public Reference Room).

PROXY VOTING

 

The policies and procedures used to determine how to vote proxies relating to securities held by the Fund are available (1) without charge, upon request, by calling 1-877-206-0791, (2) on the Fund’s website located at http://www.shiplpcef.com, or (3) on the SEC’s website at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year (1) without charge, upon request, by calling 1-877-206-0791, (2) on the Fund’s website located at http://www.shiplpcef.com, or (3) on the SEC’s website at http://www.sec.gov.

SENIOR OFFICER CODE OF ETHICS

 

The Fund files a copy of its code of ethics that applies to the Fund’s principal executive officer, principal financial officer or controller, or persons performing similar functions, with the SEC as an exhibit to its annual report on Form N-CSR. This will be available on the SEC’s website at http://www.sec.gov.

SHAREHOLDER MEETING

 

On March 6, 2014, the Fund held its annual meeting of Shareholders for the purpose of voting on a proposal to re-elect Trustees of the Fund. The results of the proposal were as follows:

Proposal: To re-elect the following trustee to the Stone Harbor Emerging Markets Income Fund Board.

 

		Patrick Sheehan
For			13,342,802
Withheld			795,170

PRIVACY POLICY

 

Stone Harbor Emerging Markets Income Fund (the “Fund”) has adopted the following privacy policies in order to safeguard the personal information of the Fund’s customers and consumers in accordance with Regulation S-P as promulgated by the U.S. Securities and Exchange Commission.

Fund officers are responsible for ensuring that the following policies and procedures are implemented:

 

1.

The Fund is committed to protecting the confidentiality and security of the information they collect and will handle personal customer and consumer information only in accordance with Regulation S-P and any other applicable laws, rules and regulations(1). The Fund will ensure: (a) the security and confidentiality of customer records and information; (b) that customer records and information are protected from any anticipated threats and hazards; and (c) that customer records and information are protected from unauthorized access or use.

 

2.

The Fund conducts its business affairs through its trustees, officers and third parties that provide services pursuant to agreements with the Fund. The Fund does not have any employees. It is anticipated that the trustees and officers of the Fund who are not employees of service providers will not have access to customer records and information in the performance of their normal responsibilities for the Fund.

 

3.

The Fund may share customer information with its affiliates, subject to the customers’ right to prohibit such sharing.

 

4.

The Fund may share customer information with unaffiliated third parties only in accordance with the requirements of Regulation S-P. Pursuant to this policy, the Fund will not share customer information with unaffiliated third parties other than as permitted by law, unless authorized to do so by the customer.

 

Semi-Annual Report  |  May 31, 2014		29

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Stone Harbor Emerging Markets Income Fund		Additional Information
		May 31, 2014 (Unaudited)

 

Consistent with these policies, the Fund adopts the following procedures:

 

1.

The Fund will determine that the policies and procedures of its affiliates and Service Providers are reasonably designed to safeguard customer information and only permit appropriate and authorized access to and use of customer information through the application of appropriate administrative, technical and physical protections.

 

2.

The Fund will direct each of its Service Providers to adhere to the privacy policy of the Fund and to their respective privacy policies with respect to the Fund’s customer information and to take all action reasonably necessary so that the Fund is in compliance with the provisions of Regulation S-P, including, as applicable, the development and delivery of privacy notices and the maintenance of appropriate and adequate records.

 

3.

Each Service Provider is required to promptly report to the officers of the Fund any material changes to its privacy policy before, or promptly after, the adoption of such changes.

 

(1)	Generally, the Fund has institutional clients which are not considered “customers” for purposes of Regulation S-P.

This report, including the financial information herein, is transmitted to the shareholders of Stone Harbor Emerging Markets Income Fund for their information. It is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.

Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase its common shares in the open market.

Information on the Fund is available at www.shiplpcef.com or by calling the Fund’s shareholder servicing agent at 1-866-390-3910.

 

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Stone Harbor Emerging Markets Income Fund		Board Approval of Investment Advisory Agreement
		May 31, 2014 (Unaudited)

 

The investment advisory agreement (the “Agreement”) for Stone Harbor Emerging Markets Income Fund (the “Fund”) is subject to annual approval by (i) the vote of a majority of the entire Board of Trustees, or of a majority of the outstanding voting securities (as defined in the Investment Company Act of 1940, as amended (the “1940 Act”)), of the Fund, and (ii) the vote of a majority of the Trustees who are not interested persons of the Fund (the “Independent Trustees”). The Agreement is terminable with respect to the Fund by the Adviser, a majority of the Trustees, or a vote of a majority of the outstanding voting securities of the Fund, without penalty, by not less than 60 days’ prior written notice. The Agreement will terminate automatically in the event of its assignment (as defined for purposes of the 1940 Act).

The Board of Trustees, including the Independent Trustees, meets over the course of the year with representatives of Stone Harbor Investment Partners LP, the Fund’s investment adviser (the “Adviser”), including the Fund’s portfolio managers, and regularly reviews detailed information regarding the investment program and performance of the Fund. The Board of Trustees also receives periodic updates between meetings. The Trustees, including the Independent Trustees, met on April 16, 2014 to review the Agreement for the Fund and to determine whether to approve the continuation of the Agreement for an additional one-year period. The Trustees considered all information they deemed reasonably necessary to evaluate the terms thereof. In connection with this meeting, the Trustees received materials to assist them with their review. These materials included, among other things, (i) information on the Fund’s investment performance and the performance of a group of similar funds (some of which was prepared by a third party); (ii) information on the Fund’s advisory fee and other expenses, including information about the fees charged to institutional accounts managed by the Adviser and comparisons of the Fund’s fees to the fees of a group of similar funds prepared by a third party; and (iii) information about the profitability of the Agreement to the Adviser. In considering whether to approve the continuation of the Agreement, the Board of Trustees, including the Independent Trustees, did not identify any single factor as determinative. Individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. Matters considered by the Trustees, including the Independent Trustees, in connection with their approval of the Agreement included, but were not limited to, the following:

The nature, extent and quality of the services provided to the Fund under the Agreement.

The Trustees considered the nature, extent and quality of the services provided by the Adviser to the Fund. In this regard, the Trustees took into account the experience of the Fund’s portfolio management team and of the Adviser’s senior management, and the time and attention they devote to the Fund.

After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the Agreement, that the nature, extent and quality of the services provided by the Adviser supported the renewal of the Agreement.

Investment performance of the Fund and the Adviser.

The Trustees reviewed performance information, including information prepared by a third party, for the Fund for various time periods since the Fund’s inception. The review included a comparison of the Fund’s performance to the performance of a group of comparable funds selected by a third party and the Fund’s benchmark. The Trustees also considered the Adviser’s performance and reputation generally and its investment techniques, risk management controls and decision-making processes.

After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the Agreement, that these factors supported the renewal of the Agreement.

The costs of the services to be provided and profits to be realized by the Adviser from its relationship with the Fund.

The Trustees considered the fee charged to the Fund for advisory services as well as the total expense level of the Fund. The Adviser furnished information to the Trustees compiled by a third party showing a comparison of the Fund’s advisory fee and total expense levels compared to a group of comparable funds selected by the third party. The Trustees noted that the Fund’s advisory fee and total expenses align competitively with comparable groups of funds. The Adviser also provided information about the costs to it of providing services to the Fund and information about its profitability with respect to its management of the Fund, as well as information about the advisory fees it charges to other funds and institutional separate accounts with similar strategies and information about differences in such fees, as well as information about the differences between those funds and accounts and the Fund. The Trustees also considered the demands and complexity of the investment management of the Fund as compared to the complexity of managing other funds and separate accounts, in particular representations from management about the complexities associated with managing the Fund’s strategy allocations and its leverage. The Trustees also considered the complexity and obligations associated with managing an NYSE-traded fund such as the Fund. The Trustees also considered the conflicts of interest associated with the Fund’s use of leverage, as well as the effect of leverage on the Fund’s yield and total return.

After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the Agreement, that the advisory fee for the Fund was fair and reasonable, and that the costs of these services generally and the related profitability of the Adviser in respect of its relationship with the Fund supported the renewal of the Agreement.

 

Semi-Annual Report  |  May 31, 2014		31

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Stone Harbor Emerging Markets Income Fund		Board Approval of Investment Advisory Agreement
		May 31, 2014 (Unaudited)

 

Economies of Scale.

The Trustees considered to what extent economies of scale would likely be realized as the Fund grows and whether those economies would be shared with the Fund through breakpoints in its investment advisory fee or other means. The Trustees noted that because the Fund is a closed-end fund and does not have any plans to offer more shares to the public, it is unlikely to grow significantly.

After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the Agreement, that the extent to which economies of scale would be shared with the Fund supported the approval of the Agreement.

The Trustees also considered other factors, which included but were not limited to the following:

 

•

Whether the Fund has operated in accordance with its investment objective and the Fund’s record of compliance with its investment restrictions and the compliance programs of the Fund and the Adviser. They also considered the compliance-related resources the Adviser provided to the Fund, including resources designed to ensure compliance with the investment objectives, policies and restrictions of the Fund.

 

•

So-called “fallout benefits” to the Adviser, such as the benefits from being associated with an NYSE-traded investment company.

Based on their evaluation of all factors they deemed to be material, including those factors described above, the Trustees, including the Independent Trustees, concluded that the existing investment advisory agreement for Stone Harbor Emerging Markets Income Fund should be continued through June 20, 2015.

 

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Stone Harbor Emerging Markets Income Fund		Trustees & Officers
		May 31, 2014 (Unaudited)

 

The business and affairs of the Fund are managed under the direction of its Board of Trustees. The Board of Trustees approves all significant agreements between the Fund and the persons or companies that furnish services to the Fund, including agreements with its distributor, investment adviser, administrator, custodian and transfer agent. The day to day operations of the Fund are delegated to the Fund’s Adviser and administrator.

The name, age and principal occupations for the past five years of the Trustees and officers of the Fund are listed below, along with the number of portfolios in the Fund complex overseen by and the other directorships held by each Trustee. The Fund’s Statement of Additional Information includes additional information about the Trustees and is available without a charge, upon request, by calling 1-866-699-8158.

INDEPENDENT TRUSTEES

 

 

Name and Year of Birth(1)

Position(s) Held with the Fund

Term of Office And Length of Time Served

Principal Occupation(s) During Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee(2)

Other Directorships Held by Trustee

Experience, Qualifications, Attributes, Skills for Board Membership

Alan Brott 1942 Class I

Chairman of the Audit Committee; Trustee

Trustee: Since 2010   Term Expires: 2015

Columbia University - Associate Professor, 2000-Present; Consultant, 1991-Present.

8

Stone Harbor Investment Funds, Stone Harbor Emerging Markets Total Income Fund, Grosvenor Registered Multi- Strategy Fund, Excelsior Multi- Strategy Hedge Fund of Funds, and Excelsior Private Markets Fund II.

Significant experience on Board of Trustees of Stone Harbor Investment Funds, Stone Harbor Emerging Markets Total Income Fund and/or other business organizations; academic experience; significant public accounting experience, including significant experience as a partner at a public accounting firm.

Heath B. McLendon 1933 Class II

Trustee

Trustee: Since 2010   Term Expires: 2016

Retired: formerly Citigroup — Chairman of Equity Research Oversight Committee (retired December 31, 2006).

8

Stone Harbor Investment Funds, Stone Harbor Emerging Markets Total Income Fund.

Significant experience on Board of Trustees Stone Harbor Investment Funds, Stone Harbor Emerging Markets Total Income Fund and/or other business organizations; executive experience in the mutual fund industry.

 

Semi-Annual Report  |  May 31, 2014		33

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Stone Harbor Emerging Markets Income Fund		Trustees & Officers
		May 31, 2014 (Unaudited)

 

INDEPENDENT TRUSTEES (CONTINUED)

 

 

Name and Year of Birth(1)

Position(s) Held with the Fund

Term of Office And Length of Time Served

Principal Occupation(s) During Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee(2)

Other Directorships Held by Trustee

Experience, Qualifications, Attributes, Skills for Board Membership

Patrick Sheehan 1947 Class III

Trustee/Nominee

Trustee: Since 2010   Term Expires: 2017

Retired; formerly, Citigroup Asset Management-Managing Director and Fixed Income Portfolio Manager, 1991-2002.

8

Stone Harbor Investment Funds, Stone Harbor Emerging Markets Total Income Fund.

Significant experience on Board of Trustees of Stone Harbor Investment Funds, Stone Harbor Emerging Markets Total Income Fund and/or other business organizations; experience in the financial industry, including executive and portfolio management experience.

INTERESTED TRUSTEE

 

 

Name and Year of Birth(1)

Position(s) Held with the Fund

Term of Office And Length of Time Served(1)

Principal Occupation(s) During Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee(2)

Other Directorships Held by Trustee

Experience, Qualifications, Attributes, Skills for Board Membership

Thomas K. Flanagan(3) 1953 Class I

Chairman and Trustee

Trustee: Since 2012   Term Expires: 2015

Since April 2006, Portfolio Manager of Stone Harbor; prior to April 2006, Managing Director and Senior Portfolio Manager for emerging markets debt portfolios at Salomon Brothers Asset Management Inc.; joined Salomon Brothers Asset Management Inc. in 1991.

8

Stone Harbor Investment Funds, Stone Harbor Emerging Market Total Income Fund.

Significant experience in the financial industry, including as a portfolio manager and member of an Investment Policy Committee; other financial and academic experience.

 

(1)	The business address of each Trustee and Officer of the Fund is c/o Stone Harbor Investment Partners LP, 31 West 52nd Street, 16th Floor, New York, NY 10019.

(2)

The term “Fund Complex” as used herein includes the Fund and the following registered investment companies: Stone Harbor Emerging Markets Debt Fund, Stone Harbor High Yield Bond Fund, Stone Harbor Local Markets Fund, Stone Harbor Emerging Markets Corporate Debt Fund, Stone Harbor Emerging Markets Total Income Fund, Stone Harbor Investment Grade Fund and Stone Harbor Strategic Income Fund.

(3)	Mr. Flanagan is an interested person of the Fund (as defined in the 1940 Act) (an “Interested Trustee”) because of his position with Stone Harbor.

 

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Stone Harbor Emerging Markets Income Fund		Trustees & Officers
		May 31, 2014 (Unaudited)

 

OFFICERS

 

 

Name and Year of Birth(1)		Position(s) Held with the Fund		Term of Office And Length of Time Served(2)		Principal Occupation(s) During Past 5 Years
Peter J. Wilby 1958		President and Chief Executive Officer		Since 2010		Co-portfolio manager of the Fund; since April 2006, Chief Investment Officer of Stone Harbor; prior to April 2006, Chief Investment Officer — North American Fixed Income at Citigroup Asset Management; joined Citigroup or its predecessor firms in 1989.
Pablo Cisilino 1967		Executive Vice President		Since 2010		Co-portfolio manager of the Fund; since July 2006, Portfolio Manager of Stone Harbor; from June 2004 to July 2006, Executive Director for Sales and Trading in Emerging Markets at Morgan Stanley Inc.; prior to June 2004, Vice President for local markets and FX sales and trading, Goldman Sachs; joined Goldman Sachs in 1994.
James E. Craige 1967		Executive Vice President		Since 2010		Co-portfolio manager of the Fund; since April 2006, Portfolio Manager of Stone Harbor; prior to April 2006, Managing Director and Senior Portfolio Manager for emerging markets debt portfolios at Salomon Brothers Asset Management Inc.; joined Salomon Brothers Asset Management Inc. in 1992.
David Griffiths 1964		Executive Vice President		Since 2010		Co-portfolio manager of the Fund; since April 2006, Portfolio Manager of Stone Harbor; prior to April 2006, Senior Portfolio Manager and economist responsible for market opportunity analysis, hedging and alternative asset allocation strategies; joined Salomon Brothers Asset Management Limited in 1993.
Angus Halkett 1977		Executive Vice President		Since 2012		Co-portfolio manager of the Fund; since June 2011, Portfolio Manager of Stone Harbor; prior to joining Stone Harbor, Director at Deutsche Bank responsible for Central Europe rates trading and EMEA Local Markets Strategy; Assistant Fund Manager and Quantitative Analyst in Emerging Markets Fixed Income at F&C Asset Management.
David A. Oliver 1959		Executive Vice President		Since 2010		Co-portfolio manager of the Fund; since June 2008, Portfolio Manager of Stone Harbor; from 1986 to June 2008, Managing Director in Emerging Market sales and trading at Citigroup.
William Perry 1962		Executive Vice President		Since 2012		Co-portfolio manager of the Fund; since September 2012, Portfolio Manager of Stone Harbor; from August 2010 to August 2012, Emerging Markets Corporate Portfolio Manager at Morgan Stanley Investment Management; prior to 2010, Managing Director/Portfolio Manager in the Global Special Opportunities Group for Latin American Special Situations at J.P. Morgan/Chase.
David Scott 1961		Executive Vice President		Since 2010		Co-portfolio manager of the Fund; since April 2006, Portfolio Manager of Stone Harbor; prior to April 2006, Managing Director and Head of Traditional Investment Group responsible for the global bond portfolios at Salomon Brothers Asset Management Limited; joined Salomon Brothers Asset Management Limited in 1983.

 

Semi-Annual Report  |  May 31, 2014		35

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Stone Harbor Emerging Markets Income Fund		Trustees & Officers
		May 31, 2014 (Unaudited)

 

OFFICERS (CONTINUED)

Name and Year of Birth		Position(s) Held with the Fund		Term of Office And Length of Time Served(1)		Principal Occupation(s) During Past 5 Years
Thomas Reynolds 1960		Principal Financial and Accounting Officer		Since April 16, 2014		Since April 2008, Controller of Stone Harbor; from February 2006 to February 2008, Vice President of Portfolio Administration for Goldman Sachs Asset Management; from 1991 to 2006, Citigroup Asset Management.
Amanda Suss 1969		Treasurer		Since April 16, 2014		Since July 2011, Senior Finance Associate of Stone Harbor; from May 2000 to July 2006, Director of Business Operations at Citigroup Asset Management; from April 1994 to April 2000, Mutual Fund Accounting Manager at Smith Barney Asset Management.
Adam J. Shapiro 1963		Chief Legal Officer and Secretary		Since 2010		Since April 2006, General Counsel of Stone Harbor; from April 2004 to March 2006, General Counsel, North American Fixed Income, Salomon Brothers Asset Management Inc.; from August 1999 to March 2004, Director of Product and Business Development, Citigroup Asset Management.
Jeffrey S. Scott 1959		Chief Compliance Officer and Assistant Secretary		Since 2010		Since April 2006, Chief Compliance Officer of Stone Harbor; from October 2005 to March 2006, Director of Compliance, New York Life Investment Management LLC; from July 1998 to September 2005, Chief Compliance Officer, Salomon Brothers Asset Management Inc.
JoEllen Legg 1961		Assistant Secretary		Since 2010		Vice President, Assistant General Counsel of ALPS Fund Services, Inc., ALPS Advisors Inc., ALPS Distributors Inc. and ALPS Portfolio Solutions Distributor, Inc.; Secretary of ALPS Series Trust; Assistant Secretary of the Stone Harbor Investment Funds, Stone Harbor Emerging Markets Income Fund, Stone Harbor Emerging Markets Total Income Fund, James Advantage Funds and WesMark Funds.
Gina Meyer 1980		Assistant Treasurer		Since July 17, 2013		Since August 2013, Assistant Treasurer, RiverNorth Funds; since November 2012, Fund Controller for ALPS Fund Services, Inc.; from January 2011 to October 2012, Manager of Fund Accounting for Jackson National Asset Management; from August 2008 to January 2011, Supervisor of Fund Accounting for Jackson National Asset Management.

 

(1)	The business address of each Trustee and Officer of the Fund is c/o Stone Harbor Investment Partners LP, 31 West 52nd Street, 16th Floor, New York, NY 10019.

(2)	Officers are typically elected every year, unless an officer earlier retires, resigns or is removed from office.

 

36		www.shiplpcef.com

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Stone Harbor Emerging Markets Income Fund		Benchmark Descriptions
		May 31, 2014 (Unaudited)

 

Index		Description
J.P. Morgan EMBI Global Diversified		The J.P. Morgan EMBI Global Diversified (EMBI Global Diversified) tracks total returns for U.S. dollar- denominated debt instruments issued by emerging markets sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. The index limits the weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts outstanding. The countries covered in the EMBI Global Diversified are identical to those covered by the EMBI Global.
J.P. Morgan CEMBI Broad Diversified		The J.P. Morgan CEMBI Broad Diversified tracks total returns of U.S. dollar-denominated debt instruments issued by corporate entities in emerging market countries and consists of an investable universe of corporate bonds. The CEMBI Broad Diversified limits the weights of those index countries with larger corporate debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.
J.P. Morgan GBI-EM Global Diversified		The J.P. Morgan GBI-EM Global Diversified consists of regularly traded, liquid fixed-rate, domestic currency government bonds to which international investors can gain exposure. The weightings among the countries are more evenly distributed within this index.

 

Semi-Annual Report  |  May 31, 2014		37

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INVESTMENT ADVISER

Stone Harbor Investment Partners LP

31 W. 52nd Street 16th Floor

New York, New York 10019

ADMINISTRATOR & FUND ACCOUNTANT

ALPS Fund Services, Inc.

1290 Broadway, Suite 1100

Denver, Colorado 80203

TRANSFER AGENT

Computershare, Inc.

480 Washington Blvd.

Jersey City, NJ 07310

CUSTODIAN

The Bank of New York Mellon

One Wall Street

New York, New York 10286

LEGAL COUNSEL

Ropes & Gray LLP

1211 Avenue of the Americas

New York, New York 10036

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP

555 17th Street, Suite 3600

Denver, Colorado 80202

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Item 2.

Code of Ethics.

Not applicable to this Report.

 

Item 3.

Audit Committee Financial Expert.

Not applicable to this Report.

 

Item 4.

Principal Accountant Fees and Services.

Not applicable to this Report.

 

Item 5.

Audit Committee of Listed Registrants.

Not applicable to this Report.

 

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 Stockholders filed under Item 1 of this Form N-CSR.

 

(b)

Not applicable.

 

Item 7.

Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable to this Report.

 

Item 8.

Portfolio Managers of Closed-End Management Investment Companies.

Not applicable to this Report.

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Item 9.

Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable to this Report.

 

Item 10.

Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which 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) of Regulation S-K, or this Item.

 

Item 11.

Controls and Procedures.

 

(a)

The Registrant’s principal executive officer and principal financial officer 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) are effective as of a date within 90 days of the filing date of this Report.

 

(b)

There was no change in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) that occurred during the 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)		Not applicable to this Report.
(a)(2)		The certifications required by Rule 30a-2(a) of the Investment Company Act of 1940, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibit 99.Cert.
(a)(3)		None.
(b)		The certifications by the Registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(b) of the Investment Company Act of 1940, as amended, and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibit 99.906Cert.

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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.

Stone Harbor Emerging Markets Income Fund

 

By:		/s/ Peter J. Wilby
		Peter J. Wilby
		President/Principal Executive Officer
Date:		August 8, 2014

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.

Stone Harbor Emerging Markets Income Fund

 

By:		/s/ Peter J. Wilby
		Peter J. Wilby
		President/Principal Executive Officer
Date:		August 8, 2014
By:		/s/ Thomas M. Reynolds
		Thomas M. Reynolds
		Principal Financial Officer/Principal Accounting Officer
		Date: August 8, 2014