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Voya Credit Income Fund Quarterly Commentary - 3Q24

Key Takeaways

The third quarter of 2024 was characterized by a gradual moderation in the labor market, further easing in inflation, and a proactive shift in monetary policy by the U.S. Federal Reserve. These factors, coupled with a solid growth environment, resulted in strong returns across both equity and fixed income markets.

Class I shares of the Fund underperformed the benchmark on a net asset value (NAV) basis, the 50% Bloomberg High Yield Bond—2% Issuer Constrained Composite Index/ 50% Morningstar LSTA US Leveraged Loan Index (benchmark).

The macro outlook remains supportive overall, with growth remaining near trend and the Fed having started its cutting cycle in September.

Actively managed, ultra-short duration floating-rate income strategy that invests primarily in privately syndicated, below investment-grade senior secured corporate loans.

Portfolio Review

The third quarter of 2024 was characterized by a gradual moderation in the labor market, further easing in inflation and a proactive shift in monetary policy by the Fed. These factors, coupled with a solid growth environment, resulted in strong returns across both equity and fixed income markets. The labor market’s path towards normalization was evidenced by cooling non-farm payrolls reports, a decline in the number of job openings and the quits rate reverting to pre-pandemic levels. While the unemployment rate ticked up modestly, the labor market remains near historically tight levels, which allowed consumer spending to continue to advance at a decent rate. Inflation continued its downward trend, with core Consumer Price Index approaching 3%, despite the shelter component remaining stubbornly elevated. Core goods prices remained in deflation, while core services inflation decelerated significantly, partially attributable to moderating wage gains. This disinflationary environment provided the Fed with the flexibility to shift its focus from inflation concerns to labor market conditions and ultimately deliver a 50 basis points cut at its September meeting. As such, yields rallied across the curve, with front-end rates falling more significantly than long-end rates.

This backdrop was positive for higher-beta sectors within fixed income, as spreads continued to move tighter across both senior loans and high yield (HY) bonds. In terms of relative performance, the HY market outperformed meaningfully for the quarter due to the sharp rally in rates. The Morningstar® LSTA ® US Leveraged Loan Index advanced by 2.04%, while the Bloomberg U.S. High Yield 2% Issuer Constrained Index gained a robust 5.28%. On a quality basis, dispersion in total returns was relatively limited within the loan market, as BB, B and CCC rated loans returned 1.90%, 2.20% and 2.07%, respectively. Unlike the loan market, high yield bond returns were disproportionately in favor of lower-rated segments in 3Q24. Specifically, the story of the quarter was the lower-rated “tail” of the market, where bonds of a subset of distressed issuers in sectors such as media and telecom that had been under pressure in prior months rallied sharply. This impact is evident in returns across credit ratings, with CCC rated bonds returning 10.20% for the quarter, versus 4.53% for B rated bonds and 4.25% for BB rated bonds. On the issuance side, gross new-issue supply remained active across the leveraged finance space due to ongoing refinancing activity despite still subdued merger and acquisition deal volume. Meanwhile, investor flows into leveraged credit remained broadly positive, as persistent collateralized loan obligations (CLO) issuance buoyed loan demand, while HY retail funds saw sizable inflows during the quarter.

Despite producing a return of 3.12%, class I shares of the Fund failed to keep pace with the benchmark on a NAV basis in the quarter. The shortfall reflected the Fund’s overweight to loans versus HY going into the quarter (though asset allocation rotated toward HY as the quarter progressed) and its underweight in the distressed names in the cable and satellite space. The latter segment of the market underperformed in recent months but rallied sharply in the quarter due to a combination of positive idiosyncratic risks and general market appetite for risk (names such as Dish, Commscope, Lumen and Unity). On the other hand, positive contributions included select holdings within food and beverage, automotive, as well as chemicals that outperformed.

Current Strategy and Outlook

The macro outlook remains supportive overall, with growth remaining near trend and the Fed having started its cutting cycle in September. Fundamental factors in the leveraged credit market remain generally healthy, barring a few pockets of stress in the more secularly challenged sectors. That said, we are closely monitoring key risks that could heighten volatility and widen spreads over the coming quarters, such as a more meaningful slowdown in growth and the possibility of margin compression, as pricing power diminishes against the backdrop of disinflation. The prevailing supply and demand imbalance should persist, with net issuance remaining muted, while steady fund inflows and coupon reinvestment support demand. Although spreads do not appear particularly cheap, solid credit fundamental factors should limit spread widening and the carry from high all-in yields should cushion returns.

From an asset allocation standpoint, we have moved modestly overweight to HY bonds relative to loans compared to last quarter given the start of the cutting cycle. Additionally, we have become slightly more defensive of late given tight valuations, with a continued focus on name-specific risk given our expectation of increased return dispersion and downside risk. In terms of sector positioning, we are still positive on the healthcare space given higher utilization rates and easing labor costs, as well as the food and beverage sector given its defensive nature and attractive free cash flow generation. On the other hand, we continue to maintain a more cautious and selective stance in industries that face secular challenges, such as media and cable. From a ratings perspective, we maintain a single-B rated issuer average credit profile, with a continued focus on single-name risk.

Holdings Detail

Companies mentioned in this report – percentage of Fund investments, as of 9/30/24: Dish 0%, Commscope 0%, Lumen 0% and Unity 0%. 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.

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The Morningstar® LSTA ® US Leveraged Loan index is an unmanaged total return index that captures accrued interest, repayments, and market value changes. The index does not reflect fees, brokerage commissions, taxes or other expenses of investing. Investors cannot invest directly in an Index.
Bloomberg U.S. High Yield 2% Issuer Constrained Index is an unmanaged index that covers U.S. corporate, fixed-rate, non-investment grade debt with at least one year to maturity and at least $150 million in par outstanding. Index weights for each issuer are capped at 2%.
Principal Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. Investment Risks: The Fund invests primarily in below investment grade, floating rate senior loans (also known as “high yield” or “junk” instruments), which are subject to greater levels of liquidity, credit, and other risks than are investment grade instruments. There is a limited secondary market for floating rate loans, which may limit the Fund’s ability to sell a loan in a timely fashion or at a favorable price. If a loan is illiquid, the value of the loan may be negatively impacted and the manager may not be able to sell the loan in order to meet redemption needs or other portfolio cash requirements. The value of loans in the Fund could be negatively impacted by adverse economic or market conditions and by the failure of borrowers to repay principal or interest. A decrease in demand for loans may adversely affect the value of the Fund’s investments, causing the Fund’s net asset value to fall. Because of the limited market for floating rate senior loans, it may be difficult to value loans in the Fund on a daily basis. The actual price the Fund receives upon the sale of a loan could differ significantly from the value assigned to it in the Fund. The Fund may invest in foreign instruments, which may present increased market, liquidity, currency, interest rate, political, information, and other risks. These risks may be greater in the case of emerging market loans. Although interest rates for floating rate senior loans typically reset periodically, changes in market interest rates may impact the valuation of loans in the portfolio. In the case of early prepayment of loans in the Fund, the Fund may realize proceeds from the repayment that are less than the valuation assigned to the loan by the Fund. In the case of extensions of payment periods by borrowers on loans in the Fund, the valuation of the loans may be reduced. The Fund may also invest in other investment companies and will pay a proportional share of the expenses of the other investment company. Derivative Instruments: Derivative instruments are subject to a number of risks, including the risk of changes in the market price of the underlying securities, credit risk with respect to the counterparty, risk of loss due to changes in interest rates and liquidity risk. The use of certain derivatives may also have a leveraging effect which may increase the volatility of the Fund and reduce its returns. Other investment risks of the Fund include, but are not limited to: Equity Securities, Foreign Investments, High-Yield Securities, Leverage, Liquidity, Prepayment and Extension. Investors should consult the Fund’s prospectus and statement of additional information for a more detailed discussion of the Fund’s risks. An investment in the Fund is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
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.
The Fund discussed may be available to you as part of your employer sponsored retirement plan. There may be additional plan level fees resulting in personal performance to vary from stated performance. Please call your benefits office for more information.
Performance Attribution: During the period from January 1, 2017 to July 31, 2020, an unaffiliated data provider, which is used by the Funds to identify individual senior loans and groups of senior loans that detracted from or contributed to portfolio performance on an absolute or relative basis (commonly known as “attribution analysis”), provided the Funds with inaccurate data. As a result, the attribution analysis used to explain and analyze a portfolio’s performance against a particular benchmark was inaccurate in some instances during the period. Importantly, the Funds’ actual performance information and performance comparison to their respective benchmark which appeared in various Fund commentaries during this period were correct and were not impacted by the inaccurate data. The data provider has identified and corrected the issue that caused the transmission of inaccurate information, and correct information is reflected in attribution analysis used in commentaries prepared after September 30, 2020.performance. Please call your benefits office for more information.
The Standard & Poor’s rating scale is as follows, from excellent (high grade) to poor (including default): AAA to D, with intermediate ratings offered at each level between AA and CCC. Anything lower than a BBB- rating is considered a non-investment grade or junk bond. Any security that is not rated by Standard & Poor’s is placed in the NR (Not Rated) category.