An Attractive Income Option for a Strategic Allocation

Voya Floating Rate Fund Quarterly Commentary - 1Q25

Key Takeaways

Risk assets were volatile during the first quarter, as macro and policy-related uncertainties soured investor sentiment.

The Fund underperformed the Index on a net asset value (NAV) basis in 1Q25 due to some expenses related to the proposed merger into Voya Short Duration High Income Fund, which is pursuant to a Shareholder vote occurring in May 2025.

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

Portfolio review

Risk assets were volatile during the first quarter, as macro and policy-related uncertainties soured investor sentiment. Equities experienced declines and credit spreads moved wider, with the bulk of move occurring in March as tariff rhetoric intensified against the backdrop of weaker consumer and business survey data. Although the loan market still registered a positive return of 0.48% for the quarter, it was one of the worst first quarters in the last 25 years. The average Index bid price lost 102 basis points (bp), closing out the period at 96.31. Looking at ratings, double-B rated loans outperformed this quarter, posting gains of 0.93%, followed by single-B rated loans with a positive return of 0.35%. On the other hand, CCC rated loans were in the negative territory at –0.57%.

In the primary market, mergers and acquisitions and refinancing transactions were the main drivers of supply this quarter, while repricings have understandably slowed given the recent decline in secondary trading levels. Total repricing volume was about $186 billion in 1Q25, down from $295 billion in 4Q24, but surpassing the $159 billion recorded during the comparable period in 2024. The share of loans priced at par or higher decreased to 10.3% from 63% in 4Q24. The Index’s nominal spread compressed by 10 bp over that time timeframe to S+331 bp. Excluding repricings, institutional volume was $144.3 billion, higher than 1Q and 4Q of 2024. Total refinancings were about $65.4 billion, up from $48.5 billion last quarter, and acquisition-related deals grew to $52 billion from $28 billion in 4Q24. On the investor side, both institutional and retail demand decreased this quarter as compared to 4Q24.

For the quarter, there were 97 collateralized loan obligation (CLO) deals that priced during that period, totaling $48.6 billion, in line with 1Q 2024 volume of $48.8 billion. On the retail side, total year to date net inflow stands at $1.7 billion. Of this total, approximately 26% of the flows came from exchange-traded funds (ETF), while mutual funds accounted for the remaining 73%.

There were three defaults in the Index during the quarter. The trailing 12-month default rate by principal amount decreased to 0.82% from 0.91% in December. Including liability management exercises, the loan default rate closed out the quarter at 4.31%, down from 4.70% in 4Q24.

The Fund underperformed the Index on a NAV basis in 1Q25 due to some expenses related to the proposed merger into Voya Short Duration High Income Fund, which is pursuant to a Shareholder vote occurring in May 2025. Given our up-in-quality positioning with an underweight in the right tail of the market, the portfolio was well positioned against market volatility and market weakness. Across ratings, the main contributor to this quarter’s performance was selection in the B and BB rated category and underweight positioning in CCC rated loans. By industry, the underweight in diversified telecommunication services, selection in specialty retail and the overweight to building products detracted from performance. In contrast, selection in chemicals, commercial services and supplies and food products added to performance. At an issuer level, the overweight allocation to Petco Animal Supplies, Inc. and Leslies Poolmart, Inc. had a modest negative impact on performance. On the other hand, the portfolio benefited from the avoidance of underperforming loans, most notably the avoidance of Ascend Performance Materials Llc and Cdk Global.

Current strategy and outlook

As headline noise remains elevated with limited visibility on the full potential impacts on the economy due to the various moving pieces, we expect the loan market to be correlated with broader financial markets in the near term until more clarity forms. Key questions need to be addressed related to the duration of the announced tariffs and whether they can be negotiated down, the reaction of trade partners, reactionary fiscal and monetary effects, impact on global trade and economic growth. The Fed has expressed concern over recent policy and signaled that it will continue to closely monitor incoming economic data for any signs of weakness in growth and the labor market before making any decisions on interest rate cuts. We believe the likelihood of more material slowdown in growth has increased assuming the announced tariffs remain in place for an extended period of time with no benefits from potential bilateral trade negotiations.

Despite the increased uncertainty, fundamental factors continue to remain in good shape and are starting from a place of strength, particularly among stronger-rated borrowers. The issuers that are most exposed to tariff impacts and lower-quality issuers in stressed sectors remain the most susceptible to downgrade risk, while a slowdown in growth may trigger a pickup in distress exchanges and defaults, especially from companies already under pressure. While technical factors in the loan market have understandably softened as of late, we expect the backdrop to firm once the macro-related noise subsides. We expect the demand and supply imbalance to persist, driven by steady CLO issuance and still muted new-issue activity.

Across credit quality, we continue to maintain our high single-B rated profile and remain vigilant on our portfolio’s exposure to increased costs, supply chain disruption, geographical exposures and any additional negative second-order effects.

Holdings detail

Companies mentioned in this report-percentage of Fund investments, as of 3/31/2024: Ascend Performance Materials Llc 0%, Cdk Global 0%, Petco Animal Supplies, Inc. 0.39%, and Leslies Poolmart, Inc. 0.27% indicates that the security is no longer in the portfolio. Portfolio holdings are subjected to change on a daily basis.

Download the Commentary

Tags:

Portfolio Manager Commentary

IM4431776

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.