Voya MidCap Opportunities Strategy Quarterly Commentary - 4Q22

Voya MidCap Opportunities Strategy Quarterly Commentary - 4Q22

Seeking a More Favorable Risk/Return Trade-off

Voya MidCap Opportunities Strategy Quarterly Commentary - 4Q22

Actively managed mid-cap growth strategy that relies on fundamental research and analysis to identify companies with strong and accelerating business momentum, increasing market acceptance and attractive valuations.

Key Takeaways

  • Markets finished the year with continued volatility, with stocks rallying in October and November before falling again in December to close out the year. The US Federal Reserve continued hiking rates in an attempt to ease inflationary pressures, and questions remain as to whether or not taming inflation will lead to recession. The Ukraine and Russia conflict also remains a factor for the global economy.
  • For the quarter, the Strategy underperformed its benchmark, the Russell Midcap Growth Index (the Index), on net asset value basis (NAV), due primarily to unfavorable stock selection, particularly within the information technology, and to a much lesser extent, consumer staples sectors.
  • While inflation appears to have peaked and the Fed has shown signs of moderating its aggressive rate hikes, we are entering into a new phase of uncertainty regarding the likelihood of a recession, as well as its potential magnitude. If and when the Fed pivots on rates may determine, if the kind of volatility we have seen will continue into 2023.

Portfolio Review

The major US and non-US stock Indexes overcame negative returns in December to end the fourth quarter with gains. US stock results varied by market capitalization: Midcaps were the strongest performers, followed by large caps, then by small caps. Across market cap segments, value styles outperformed growth styles. Technology stocks continued to suffer from rising interest rates and posted losses for the quarter.

Broad gauges of US and non-US bonds posted gains for the quarter, though non-US bonds gained more than twice as much as US bonds. Results varied at the asset-class level: Long-term US Treasury securities sustained the largest losses, whereas long-term corporate bonds and high yield were among the strongest performers. Shorter-term corporate bonds and government securities saw positive returns.

For the quarter, the Strategy underperformed the Index on NAV basis, primarily due to stock selection. Stock selection within the industrials and energy sectors contributed the most to performance. The information technology and consumer staples sectors were the biggest detractors.

Key contributors to the quarter’s performance were DexCom, Inc., Ross Stores, Inc. and AMETEK, Inc.

An overweight position in DexCom, Inc. (DXCM) contributed to performance. The company reported strong quarterly results and raised the lower end of its full year guidance. DXCM also announced Food and Drug Administration (FDA) approval of its G7 device for diabetes management.

An overweight position in Ross Stores, Inc. (ROST) contributed to performance. The company reported strong earnings and raised its outlook for the year. Management pointed to stronger value delivery to customers fueled by an increase in traffic as a driver of the better-than-expected results.

Owning a non-benchmark position in AMETEK, Inc. (AME) contributed to performance. The company reported strong earnings and raised forward guidance. Its high margin businesses in its Electromechanical Group (EMG) grew faster than expected, benefiting from demand for automation and defense businesses.

Key detractors for the quarter were Paylocity Holding Corp., Palo Alto Networks Inc. and ZoomInfo Technologies Inc.

An overweight position in Paylocity Holding Corp. (PCTY) detracted from performance. The company reported a strong quarter but concerns about pricing pressure have weighed on the stock price.

Owning a non-benchmark position in Palo Alto Networks, Inc. (PANW) detracted from performance. Macro challenges have contributed to slower next generation expansion and some uncertainty around the timing of large deals.

An overweight position in ZoomInfo Technologies, Inc. (ZI) detracted from performance. Despite a relatively strong quarter, a difficult macro environment weighed on the share price. The company missed billings targets as a result of an elongated sales cycle, more flexible deal terms, and general uncertainty of macro-conditions.

Current Strategy and Outlook

Investors can be forgiven for wanting to put 2022 in the rearview mirror. High inflation, rate hikes, market volatility, the war in Ukraine and resurging Covid infections top the list of things we would like to move past. Will 2023 bring more troubles, or do investors have reasons for optimism? The Eurozone appears to be headed for a recession, whereas the United States seems slightly less at risk. The markets are hunting for imbalances, such as whether China’s return to growth will be stymied by its significant debt burden. There is at least one reason for optimism: The end of the global interest-rate hiking cycle may be in sight, letting markets focus more on economic fundamental factors.

Holdings Detail

Companies mentioned in this report – percentage of portfolio investments, as of 12/31/22: DexCom, Inc. 3.44%, Ross Stores, Inc. 2.41%, AMETEK, Inc. 2.31%, Paylocity Holding Corp. 2.17%, Palo Alto Networks Inc. 1.85% and ZoomInfo Technologies 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 MidCap Growth Index is an unmanaged index that measures the performance of those companies included in the Russell MidCap Index with relatively higher price-to-book ratios and higher forecasted growth values. 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. Foreign Investing poses special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. Investing in stocks of Mid-Sized Companies may entail greater volatility and less liquidity than larger companies. The Portfolio may use Derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses and have a potentially large impact on Portfolio performance. Other risks of the Portfolio include but are not limited to: Growth Investing Risks, Market Trends Risks, Other Investment Companies’ Risks, Price Volatility Risks, Liquidity Risks, Securities Lending Risks and Portfolio Turnover Risks. Investors should consult the Portfolio’s Prospectus and Statement of Additional Information for a more detailed discussion of the Portfolio’s risks. An investment in the Portfolio is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
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 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.
 

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