An Attractive Income Option for a Strategic Allocation

Voya Floating Rate Fund Quarterly Commentary - 3Q24

Key Takeaways

For the quarter, the Morningstar® LSTA ® US Leveraged Loan Index (the Index) returned 2.04%, up from 1.90% last quarter.

On a NAV basis, Class I shares of the Fund underperformed the Index.

Looking ahead, loans remain resilient given attractive yields and a favorable fundamental backdrop.

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 continued stable earnings backdrop, a gradual moderation in the labor market, further easing of inflation, and a proactive shift in monetary policy by the U.S. Federal Reserve. This moderation in the labor market did not significantly hinder consumer spending, which continued to advance at a decent rate. As a result, the macro backdrop remained supportive, leading to strong returns across most risk assets.

For the quarter, the Index returned 2.04%, up from 1.90% last quarter. The average bid price increased by 12 basis points (bp), closing out the period at 96.71. Looking at ratings, single-B rated loans outperformed this quarter, posting gains of 2.20%, while CCC and Double-B rated loans returned 2.07% and 1.90%, respectively. On a year to date basis lower-rated categories have outperformed given the stable macro backdrop.

Despite the seasonal market slowdown in August, leveraged buyouts (LBOs) and merger and acquisition supply surged in September. For the first time since January 2022, volume was mainly driven by acquisition-related deals. For context, acquisition-related deals increased from U.S. $27 billion to $45 billion in 3Q24. Overall, total institutional volume, excluding repricings and amendments, was about $110 billion in 3Q24. Turning to opportunistic deals, repricings fell to their lowest level since June 2023 to $1.2 billion in August. However, repricings are on a record pace in 2024, reaching a total of $479 billion YTD. Refinancings volume fell to $29.8 billion from $94.8 billion last quarter, but YTD total issuance is at a record high at $207 billion. Turing to the investor demand, collateralized loan obligations (CLO) issuance slightly decreased in 3Q24 to $40.6 billion from $52.6 billion last quarter. YTD CLO volume is now tracking $142 billion, up from last year’s volume of $84 billion for the comparable period. On the other hand, retail loan funds experienced a net outflow of $4.7 billion during the quarter (first negative quarter in 2024).

On a NAV basis, Class I shares of the Fund underperformed the Index. By industry, the Fund benefited from selection in the software space. At an issuer level, the avoidance of underperforming loans helped the Fund, most notably Mcafee Enterprise. In contrast, the top industry detractor was the underweight allocation to diversified telecommunication services, where several stressed names jumped in price on some idiosyncratic positive news which buoyed the entire sector. By ratings, selection in single-B rated loans was the main drag this quarter. Away from loan-level performance, the Fund’s exposure to high yield (HY) bonds boosted performance, as the HY bond market outperformed loans in 3Q24 (5.29% return for the Bloomberg U.S. Corporate High Yield Index).

Portfolio and positioning changes were both mostly minimal during the period. The number of individual names in the portfolio decreased from 362 to 343.

Current strategy and outlook

Looking ahead, loans remain resilient given attractive yields and a favorable fundamental backdrop. The overall carry should continue to boost performance on both a total return and excess return basis. Easing Fed policy should lower financing costs for loan borrowers and provide a buffer in the event of a more pronounced slowdown in economic activity. We expect leveraged borrowers will continue to grow earnings and manage their debt opportunistically given the accommodative capital markets and strong market technical factors. Although default activity remains muted, distressed exchanges and liability management exercises (LME) will continue to be very topical across a handful of acute credit situations. Downgrade activities should continue to pose a challenge, especially for issuers in the lower rating spectrum, as key downgrade themes include earnings, margin pressure, elevated leverage levels, increased borrowing costs and developing sectoral themes. Market technical factors are expected to remain supportive, driven by strong investor demand. Tighter CLO liability spreads remain a catalyst behind the material uptick in CLO issuance alongside attractive CLO equity economics and strong demand for CLO AAA rated tranches from banks and other institutional investors.

From a positioning standpoint, we continue to maintain primarily a high, single-B rated credit profile, with an ongoing underweight in the right tail of the market. Credit selection remains key, as the market continues to be bifurcated between the “haves” and “have-nots.” Specifically, we are paying close attention to segments in consumer services for further evidence of continued deceleration given the guidance revisions we are seeing in some sectors: airlines, hotels, autos, manufacturers. We remained cautious on cyclical sectors and those reliant on discretionary consumer spending.

Holdings detail

Companies mentioned in this report-percentage of Fund investments, as of 9/30/2024: Mcafee 0.42%. 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subjected to change on a daily basis.

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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.

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.