Voya Large Cap Value Strategy Quarterly Commentary - 2Q23

June 30, 2023
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Actively managed portfolio aiming to achieve a dividend yield that exceeds the average dividend yield of the companies included in the Russell 1000® Value index.

Key Takeaways

After much speculation over when the seemingly inevitable recession would hit, markets have continued to defy the narrative with yet another strong quarter. Unemployment remains at historic lows and the economy has thus far shown itself to be much more resilient than expected.
For the quarter ended June 30, 2023, the Strategy underperformed the Russell 1000 Value Index (the Index) on net asset value (NAV) basis, due to unfavorable stock selection and allocation effects. The selection in the health care, financial, and industrials sectors contributed the most to performance. Conversely, selection in the communication services, and to a much lesser degree, information technology and energy sectors detracted from performance.
With inflation easing, it appears that the U.S. Federal Reserve is nearing the end of the rate-hike cycle. We are cautiously optimistic that we can achieve the soft landing scenario.

Portfolio Review

U.S. equity markets performed well during the second quarter, with most of the gains made in June. Stocks were buoyed by relief over Congress’s passage of the bill to raise the debt ceiling. The S&P 500 Index notched its best monthly performance of 2023 during the final month of the period, gaining 6.61% in June and 8.74% for the quarter. Information technology stocks delivered strong performance during the quarter, driven by artificial intelligence and chip manufacturers. Growth stocks outperformed value stocks during the period. After poor performance in April and May, small caps rebounded in June and outperformed larger stocks.

Volatility in the U.S. bond market continued during the quarter. The Bloomberg U.S. Aggregate Bond Index lost –0.84%, while the 10-year U.S. Treasury yield rose from 3.43% at the beginning of the quarter to 3.81% by quarter-end. The Fed raised rates by 25 basis points twice during the period, bringing the Fed funds rate to a range of 5.00–5.25%, but did not implement a hike at its June meeting. Still, Fed officials maintained a hawkish stance through the end of the quarter; although core inflation has decreased significantly from 2022, it has persisted well above the 2% target. The Fed’s “dot plot,” which serves as a predictor of rate movements, indicates two additional hikes this year.

For the quarter ended June 30, 2023, the Strategy outperformed the Index due to stock selection and allocation effects. The selection in the health care, financial and industrials sectors contributed the most to performance.

Owning a non-benchmark position in Apollo Global Management Inc. and overweight positions in Arthur J. Gallagher & Co. and Howmet Aerospace Inc. added the most to performance.

Owning a non-benchmark position in Apollo Global Management Inc. (APO) contributed to performance. The company reported a solid quarter and raised forward guidance. High interest rates are boosting organic growth in the retail channel, flow reinsurance is ramping, and pension risk transfer activity is picking up as well.

An overweight position in Arthur J. Gallagher & Co. (AJG) contributed to performance. The company reported a strong quarter behind stronger organic growth. Management has yet to detect any recessionary pressure from its middle-market client base.

An overweight position in Howmet Aerospace Inc. (HWM) contributed to performance. The company reported a strong quarter behind higher sales and margins. HWM also raised guidance.

Conversely, selection in the communication services, and to a much lesser degree, information technology and energy sectors detracted from performance.

Overweight positions in AT&T Inc. and Kraft Heinz Co. and not owning Meta Platforms Inc. were the biggest individual detractors.

An overweight position in AT&T Inc.(T) detracted from performance. The company reported a mixed quarter with less free-cash-flow (FCF) than anticipated.

An underweight position in Meta Platforms Inc. (META) detracted from performance. The company reported a strong quarter, beating street estimates across the board. Management has also continued to trim 2023 operating expenses and raised revenue guidance.

An overweight position in Kraft Heinz Co. (KHC) detracted from performance. The company reported a solid quarter during the period, but trimmed estimates, resulting from visibility on consumer challenges from elevated Supplemental Nutrition Assistance Program (SNAP) payments ending, student loan payments resuming, inflationary pressure and falling levels of elevated savings from stimulus.

Current Strategy and Outlook

The U.S. economy has remained resilient as have corporate earnings, fueling the debate of a hard versus soft landing. We still believe there may be greater volatility to come given uncertainty over Fed rate policy in the second half of the year; mixed business sentiment and slowing economic growth; and whether a recession will actually happen, and if so, the duration and depth. The real story has been the resilience of corporate earnings and rise in equity valuations as interest rates begin to normalize. Using price-to-earnings (P/E) ratio as a proxy, valuations for the S&P 500 Index ended 2022 well below 2019 levels. However, despite elevated rates and tightening financial conditions in the first half of the year, valuations have expanded modestly. P/E ratios are still below 2019 levels, and we believe earnings expectations are reasonable, but this could change as we enter 2024 depending on the state of the U.S. economy.

Holdings Detail

Companies mentioned in this report – percentage of Strategy investments, as of 06/30/23: Apollo Global Management Inc. 2.24%, Arthur J. Gallagher & Co. 2.70%, Howmet Aerospace Inc. 2.28%, AT&T Inc. 4.12% and Kraft Heinz Co. 2.08% and Meta Platforms Inc. 0%; 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.

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The Russell 1000 Value index is an unmanaged index that measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecast growth values. The index does not reflect fees, brokerage commissions, taxes or other expenses of investing. Investors cannot directly invest in an index.

Investment Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. An investment in securities of larger companies carries with it the risk that the company (and its earnings) may grow more slowly than the economy as a whole or not at all. Value investing securities that appear to be undervalued may never appreciate to the extent expected and are generally more sensitive to changing economic conditions. Foreign investing poses special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. The risks of emerging markets securities may be intensified. Because the Fund may invest in other investment companies, you may pay a proportionate share of the expenses of that other investment company, in addition to the expenses of the Fund. Other risks of the Fund include but are not limited to: company, convertible securities; dividend risks; interest rate, investment model, market trends; inability to sell securities; real estate companies and real estate investment trusts (“REITs”) and securities lending risks. Investors should consult the Fund’s Prospectus and Statement of Additional Information for a more detailed discussion of the Fund’s risks.

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.

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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 does not guarantee future results.

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