Voya MidCap Opportunities Strategy Quarterly Commentary - 2Q22

Voya MidCap Opportunities Strategy Quarterly Commentary - 2Q22

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Actively managed mid-cap growth strategy that relies on fundamental research and analysis to identify companies with strong and accelerating business momentum, increasing market acceptance and attractive valuations.

Seeking a More Favorable Risk/Return Trade-off

Key Takeaways

  • For the quarter, the Strategy outperformed its benchmark, the Russell Midcap Growth index (the “index”), primarily due to allocation effects.
  • An allocation to cash, although within the typical range, along with stock selection in the industrials sector contributed the most to performance.
  • Stock selection within the consumer discretionary and health care sectors proved to be the greatest headwind.
  • Russia’s war on Ukraine continued to warp market dynamics, pushing a surge of inflation.

Current Strategy and Outlook

Russia’s war on Ukraine continued to warp market dynamics, pushing a surge of inflation. In response, the Federal Reserve pivoted to raising interest rates aggressively. The Fed policy response prompted worries that rate hikes would overshoot the need to curb inflation and cause a recession. Economic data began to show signs of slowdown in manufacturing and job growth, though prices continued to climb. On average, the number of S&P 500 companies issuing negative earnings per share (EPS) guidance for calendar year 2022 increased, though that number was about the middle of the range for the last ten years. Investors responded to these signals with accelerated stock selling, which pressured prices lower.

At some point, declining financial markets, higher interest rates and a stronger U.S. dollar ought to tighten financial conditions enough to curb inflation and give the Fed room to moderate its policy stance. Hopefully, this would allow the economy to stabilize without slipping into recession. Also, S&P 500 EPS guidance varies by sector: the highest numbers of companies issuing negative guidance occur within the health care, industrial and utility sectors; on the other hand, the highest numbers issuing positive guidance occur within the information technology, health care and industrial sectors. These variations suggest there may be room for equity markets to stabilize as inflation and monetary policy moderate.

Portfolio Review

For the quarter, the Strategy outperformed its benchmark, the Russell Midcap Growth index (the “index”) primarily due to allocation effects. An allocation to cash, although within the typical range, along with stock selection in the industrials sector contributed the most to performance. Stock selection within the consumer discretionary and health care sectors proved to be the greatest headwind.

Stocks that contributed the most to the quarter’s performance were United Therapeutics Corporation, Quanta Services, Inc. and Seagen, Inc.

An overweight position in United Therapeutics Corporation (UTHR) contributed to performance. UTHR posted a blowout 1Q22 with revenue and earnings coming in well ahead of expectations. The growth was solid across the board, driven by key drivers: Tyvaso, Remodulin and Orenitram for pulmonary arterial hypertension (PAH) as new patients start vastly improved post Covid-19. Additionally, during the quarter, the company announced that the Centers for Medicare and Medicaid Services (CMS) granted coverage for Tyvaso for PAH associated with interstitial lung disease (ILD) — a larger market opportunity with limited treatment options. The medicare reimbursement coupled with Food and Drug Administration (FDA) approval for a new dry powder inhaler device (DPI) in May are two important catalysts that could further accelerate the Tyvaso launch.

An overweight position in Quanta Services, Inc. (PWR) contributed to performance. The company had a strong 1Q22, beating on earnings and revenue, and made a slight raise to guidance for FY22. PWR also posted a material topline beat in its largest segment, electric power. Despite supply chain disruptions and regulatory challenges, PWR has been resilient thus far, and while 2Q22 saw the broad market enter bear market territory, its stock price continued to climb. President Biden also enacted an executive order in June allowing solar imports from countries in the Department of Commerce (DOC) free of certain duties for 24 months — a favorable policy for PWR.

An overweight position in Seagen, Inc. (SGEN) contributed to performance. Following the resignation of the CEO in mid-May, takeout speculation began to heat up, driving the stock price higher. Later in the quarter, more credible reports that Merck may be pushing ahead with a potential deal to acquire the company ahead of 2Q22 earnings lent further credence to these rumors. Additionally, the company announced encouraging new data for several of its oncology assets at the annual American Society for Clinical Oncology (ASCO) meeting in June, including Tivdak in first-line cervical cancer and Tukysa in colorectal cancer, making it an appealing oncology target for a large pharmaceutical company.

Key detractors for the quarter were Bill.com Holdings, Inc., Expedia Group, Inc. and DexCom, Inc.

An overweight position in Bill.com Holdings, Inc. (BILL) detracted from performance. Shares traded off due to investor concerns regarding the potential recession impact on its small to medium-sized business client base and transaction activity. In addition, higher rates negatively impacted its relative multiple versus the overall technology sector.

An overweight position in Expedia Group, Inc. (EXPE) detracted from performance. EXPE’s stock has been hit hard of late, dropping approximately 50% during the second quarter. Investor uncertainty around travel expectations due to Covid-19 and inflationary pressures has generated negative sentiment.

An overweight position in DexCom, Inc. (DXCM) detracted from performance. The company reported a modest revenue beat and reiterated guidance for the year, despite an incremental foreign exchange (FX) headwind, but investors likely expected more for a high multiple growth stock. DXCM’s primary competitor, Abbott, presented better-than-expected headline clinical data for their Libre 3 product at the Advanced Technologies and Treatments of Diabetes (ATTD) medical conference in late-April, creating an overhang for the stock. DXCM was also impacted by growing speculation that it might acquire Insulet Corporation (PODD), which offers a patch-pump insulin delivery system for diabetics. Investors reacted negatively to a potential combination, which would have been quite dilutive initially. Libre 3 has since gained FDA approval and DXCM announced they are not in active discussions with PODD regarding a merger at this time

Holdings Detail

Companies mentioned in this report – percentage of portfolio investments, as of 06/30/22: United Therapeutics Corporation 1.67%, Quanta Services, Inc. %, Seagen, Inc. 2.27%, Bill.com Holdings, Inc. 0%, Expedia Group, Inc. 1.61% and DexCom, Inc. 2.44%; 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.

IM2299759

The Russell MidCap Growth Index is an unmanaged index that measures the performance of those companies included in the Russell MidCap Index with relatively higher price-to-book ratios and higher forecasted growth values. The Index does not reflect fees, brokerage commissions, taxes or other expenses of investing. Investors cannot invest directly in an index.

Principal Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. Foreign Investing poses special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. Investing in stocks of Mid-Sized Companies may entail greater volatility and less liquidity than larger companies. The Portfolio may use Derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses and have a potentially large impact on Portfolio performance. Other risks of the Portfolio include but are not limited to: Growth Investing Risks, Market Trends Risks, Other Investment Companies’ Risks, Price Volatility Risks, Liquidity Risks, Securities Lending Risks and Portfolio Turnover Risks. Investors should consult the Portfolio’s Prospectus and Statement of Additional Information for a more detailed discussion of the Portfolio’s risks. An investment in the Portfolio is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
The strategy employs a quantitative model to execute the strategy. Data imprecision, software or other technology malfunctions, programming inaccuracies and similar circumstances may impair the performance of these systems, which may negatively affect performance. Furthermore, there can be no assurance that the quantitative models used in managing the strategy will perform as anticipated or enable the strategy to achieve its objective.

The strategy is available as a mutual fund or variable portfolio. The mutual fund may be available to you as part of your employer sponsored retirement plan. There may be additional plan level fees resulting in personal performance that varies from stated performance. Please call your benefits office for more information.

Variable annuities and group annuities are long-term investments designed for retirement purposes. If withdrawals are taken prior to age 59½, an IRS 10% premature distribution penalty tax may apply. Money taken from the annuity will be taxed as ordinary income in the year the money is distributed. An annuity does not provide any additional tax deferral benefit, as tax deferral is provided by the plan. Annuities may be subject to additional fees and expenses to which other tax-qualified funding vehicles may not be subject. However, an annuity does provide other features and benefits, such as lifetime income payments and death benefits, which may be valuable to you.

Variable investments, of any kind, are not guaranteed and are subject to investment risk including the possible loss of principal. The investment return and principal value of the security will fluctuate so that when redeemed, it may be worth more or less than the original investment. In addition, there is no guarantee that any variable investment option will meet its stated objective. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies.

Insurance products, annuities and funding agreements issued by Voya Retirement Insurance and Annuity Company (“VRIAC”), One Orange Way, Windsor, CT 06095, which is solely responsible for meeting its obligations. Plan administrative services provided by VRIAC or Voya Institutional Plan Services, LLC (“VIPS”). Securities distributed by or offered through Voya Financial Partners, LLC (“VFP”) (member SIPC)or other broker-dealers with which it has a selling agreement. Only Voya Retirement Insurance and Annuity Company is admitted and can issue products in the state of New York. All companies are members of Voya Financial.

This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer  to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. Past performance is no guarantee of future results. 

The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Portfolio holdings are fluid and are subject to daily change based on market conditions and other factors.
 

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