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.
Voya MidCap Opportunities Strategy Quarterly Commentary - 4Q22