Seeking the Potential of High-Dividend Yield and Dividend Growth

Voya Large Cap Value Strategy Quarterly Commentary - 3Q24

Key Takeaways

In 3Q 2024, equity markets had varied performance with broadening returns. Small and mid-cap stocks led, and emerging markets rebounded strongly, especially in China. Falling interest rates boosted bond returns, and value stocks outperformed growth stocks, driven by defensives, cyclicals and banks. Technology saw a slight uptick in September but was muted compared to the first half of the year. AI remained a significant driver, rewarding companies involved in its development and integration.

Looking ahead, the equity market outlook for the remainder of 2024 is cautiously optimistic despite expected volatility. Uncertainties around U.S. Federal Reserve policies, upcoming elections, and rising geopolitical tensions may cause fluctuations. However, potential buying opportunities in large-cap stocks and positive reactions to recent rate cuts, along with a strong labor market, could support equities.

For the quarter ended September 30, 2024, the Strategy underperformed the Russell 1000 Value Index on a net asset value (NAV) basis due to unfavorable stock selection. Stock selection in consumer staples and, to a lesser extent, information technology contributed most to performance, while industrials and health care detracted.

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.

Portfolio Review

U.S. stocks advanced during the third quarter following the Fed implementing a larger-than-expected 50 basis points interest rate cut. The S&P 500 Index rose by 5.89% and the Nasdaq Composite grew by 2.57% during the quarter. The utilities and real estate sectors led, while information technology and communications services lagged. Small cap stocks outperformed large caps and value significantly beat growth.

U.S. bonds logged their first positive quarterly performance of 2024 in the past three months. The Bloomberg U.S. Aggregate Bond Index rose by 5.20%. The 10-year U.S. Treasury yield fell from 4.48% at the beginning of July to 3.81% by quarter end (declines in the 10-year yield generally signal investor pessimism).

For the quarter ended September 30, 2024, the Strategy underperformed the Index on a NAV basis due to unfavorable stock selection. Stock selection within the consumer staples sector, and to a lesser degree the information technology sector, contributed the most to performance. Conversely, the selection in industrials and health care sectors detracted from performance.

At the individual stock level, overweight positions in Philip Morris International Inc., Kenvue, Inc. and Lazard Inc. added the most to performance. Our overweight position in Philip Morris International, Inc. (PM) contributed favorably to performance during the quarter. The stock price rose in response to a strong earnings report driven by the continued success of its smokeless tobacco products and significant profit growth. The company also raised its full-year outlook. An overweight position in Kenvue, Inc. (KVUE) contributed to performance. KVUE outperformed due to better-than-expected organic growth and margin performance, with results ahead of inventory replenishment and successful sales initiatives, along with significant gross margin improvement, contributed to the strong performance. An overweight position in Lazard, Inc. (LAZ) contributed to performance. LAZ outperformed due to strong advisory revenue growth outlook on the merger and acquisition (M&A) environment and improving non-M&A advisory revenues also contributed to the stock's strong performance.

An overweight position in Dollar General Corp., owning a non-benchmark position in BP p.l.c. and an overweight position in Raymond James Financial, Inc. were the biggest individual detractors. Our overweight position in Dollar General Corp. (DG) detracted from performance this quarter. The stock declined following an earnings announcement that adjusted annual sales forecasts downward, exacerbated by increasing competition in the budget retail sector. Our non-benchmark position in BP Plc (BP) detracted from performance this quarter. Profits were impacted by lower oil and gas prices. Additionally, increased investor caution regarding its balance sheet and capital allocation have contributed to the underperformance. Our overweight position in Raymond James Financial, Inc. (RJF) negatively impacted our performance this quarter. Early in the period, shares were pressured by concerns over potential cash sweep repricing in the brokerage industry.

Current Strategy and Outlook

The stickiness of the “last mile” of inflation suggests the United States may be facing structural inflation pressures, driven by supply chain constraints and a tight labor market (despite disappointing job growth numbers, layoffs have not increased and unemployment remains at only 4.2%). Inflation that persists above 2% may prevent the Fed from cutting rates as aggressively as the market hopes. The anticipated rate cuts resemble past recession scenarios, but today’s economic landscape differs significantly—the current economy does not seem to be on the brink of collapse. In fact, in Fed Chair Powell’s words, “the U.S. economy is basically fine.” The temporary boost to the workforce from immigration and shift in consumer spending back to services have also helped dampen inflation, but these trends may not be sustainable.

This disconnect could lead to increased volatility, especially in the bond market, if the Fed’s actual moves fall short of expectations. Investors should be prepared for potential sharp adjustments in pricing as the market navigates its perceptions this rate-cutting cycle.

Holdings Detail

Companies mentioned in this report—percentage of Strategy investments, as of 09/30/24: Philip Morris Internationa Inc. 2.14%, Kenvue, Inc. 2.40%, Lazard Inc. 1.57%, Dollar General Corporation 0.00%, BP p.l.c. 0.00%, Raymond James Financial, Inc. 0.00%, 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.

The strategy is available as a mutual fund or variable portfolio. The mutual fund may be available to you as part of your employer sponsored retirement plan. There may be additional plan level fees resulting in personal performance that varies from stated performance. Please call your benefits office for more information.

Variable annuities and group annuities are long-term investments designed for retirement purposes. If withdrawals are taken prior to age 59½, an IRS 10% premature distribution penalty tax may apply. Money taken from the annuity will be taxed as ordinary income in the year the money is distributed. An annuity does not provide any additional tax deferral benefit, as tax deferral is provided by the plan. Annuities may be subject to additional fees and expenses to which other tax-qualified funding vehicles may not be subject. However, an annuity does provide other features and benefits, such as lifetime income payments and death benefits, which may be valuable to you.

Variable investments, of any kind, are not guaranteed and are subject to investment risk including the possible loss of principal. The investment return and principal value of the security will fluctuate so that when redeemed, it may be worth more or less than the original investment. In addition, there is no guarantee that any variable investment option will meet its stated objective. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies.

Insurance products, annuities and funding agreements issued by Voya Retirement Insurance and Annuity Company (“VRIAC”), One Orange Way, Windsor, CT 06095, which is solely responsible for meeting its obligations. Plan administrative services provided by VRIAC or Voya Institutional Plan Services, LLC (“VIPS”). Securities distributed by or offered through Voya Financial Partners, LLC (“VFP”) (member SIPC)or other broker-dealers with which it has a selling agreement. Only Voya Retirement Insurance and Annuity Company is admitted and can issue products in the state of New York. All companies are members of Voya Financial.

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.

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.