A rules-based strategy designed to exploit market inefficiencies in a disciplined systematic manner.
For the quarter ended March 31, 2023, the Voya Corporate Leaders 100 Fund underperformed its benchmark, the S&P 500 Index (the Index) on net asset value (NAV) basis.
- During the quarter, the Fund continued to follow its strict rules-based investment approach.
- At the beginning of the quarter, the Fund held equal-weighted positions in the stocks of the S&P 100 Index (implying that each holding represented about 1% of the portfolio).
- Over the course of the quarter, if the value of a security increased by more than 50%,* the position size was reduced to 1%, and if the value of a security decreased by more than 30%,* the position was eliminated.
Current strategy and outlook
The financial markets were positive in the first quarter, but volatile as concerns with inflation and interest rates tugged asset prices up and down. At its first 2023 policy meeting, the US Federal Reserve raised interest rates by 25 basis points (bp), driving market rates higher while pulling down bond prices and crimping the values of rate-sensitive technology stocks. Market focus shifted dramatically in March as the sudden failure of several US regional banks and the collapse of Credit Suisse shook the banking sector. Markets regrouped after the government intervened to protect depositors. The Fed, seeking to avoid further “accidents” tied to higher rates, took a restrained step and increased the Fed funds rate by just another 25 bp at its March policy meeting.
The 10-year US Treasury yield fell from nearly 3.9% in early January to less than 3.5% by quarter-end. Falling rates helped both stocks and bonds. The S&P 500 Index gained 7.50% and the Bloomberg US Aggregate Bond Index gained 2.96%. Easing rates also gave growth stocks an advantage over value stocks ― across the capitalization spectrum, growth styles posted gains significantly greater than those of value styles.
Strains in parts of the financial system have prompted the Fed to trim its tightening plans. We believe quick action by regulators has largely addressed concerns of systemic risk in the banking system. In our view, bank balance sheets are healthy, and the lack of fundamental consumer and corporate imbalances should limit the severity of any sort of economic downturn that may materialize.
The long game still needs to play out: a higher cost of capital for banks will raise borrowing costs for companies and consumers, increasing the potential for a longer but still shallow recession. Since the challenges to the banking system are likely to be disinflationary, further Fed rate hikes may not be necessary. The focus now shifts to when the Fed might begin lowering rates. For that to happen, we believe labor markets and economic growth would need to weaken substantially — and that is not happening yet. Employment data remain vibrant despite an uptick in the unemployment rate, and the economy has remained remarkably resilient, supported by strong consumer spending.
Over the reporting period, the underweight in the energy sector and stock selection in the materials sector contributed the most to performance. At the individual stock level, overweight positions in Advanced Micro Devices, Inc., Salesforce, Inc. and FedEx Corp. were among the key contributors.
By contrast, the underweight in the information technology sector detracted. The overweight and stock selection in financials sector was the second largest detractor. Among the largest individual detractors for the period were the underweight in Apple Inc., Microsoft Corp. and the overweight to American International Group, Inc.
As of the end of the reporting period, the Fund’s largest sector overweight was to the financials sector, while the largest sector underweight was information technology. Sector exposures are purely a function of the Strategy’s rules-based investment discipline and are not actively managed.
Companies mentioned in this report – percentage of Fund investments, as of 03/31/23: Advanced Micro Devices, Inc. 0.93%, Salesforce, Inc. 1.47%, FedEx Corp. 1.27%, Apple Inc.1.24%, Microsoft Corp. 1.17%, American International Group, Inc. 0.77%; 0% indicates that the security is no longer in the Fund. Portfolio holdings are subject to daily change.
*If a security is underperforming the S&P 500® Index and the S&P 500® Index is positive on an intra-quarter basis, the security will typically be sold when it declines by 30% or more, irrespective of the percentage difference versus the S&P 500® Index. If a security is underperforming the S&P 500® Index and the S&P 500® Index is negative on an intra-quarter basis, the security will typically be sold when it underperforms the S&P 500® Index by 30 percentage points or more. This change went into effect on 5/18/20.