Voya Small Cap Growth Strategy Quarterly Commentary - 1Q23

Voya Small Cap Growth Strategy Quarterly Commentary - 1Q23

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Actively managed small cap growth strategy driven by bottom-up fundamental research seeking high-quality companies with strong balance sheets and cash flow characteristics that are beneficiaries of sustainable growth trends.

Key Takeaways

  • First quarter returns for small cap growth stocks, as measured by the Russell 2000 Growth Index (the Index), were positive. The year started with a significant rally across many asset classes and small cap was no exception. On the heels of a flattish February, March closed the quarter with positive performance despite headline news surrounding the collapse of Silicon Valley Bank (SVB) in mid-March that sent shockwaves across the banking industry.
  • Markets continued to be macro focused with all eyes on the Fed and their balancing act between the timing and magnitude of current and future rate hikes versus the inflationary environment and the potential lagging effects of previous hikes.
  • Investors continue to debate whether the Fed can navigate the shallow valley of a “soft landing” or if the economy is on the verge of entering a much deeper valley and a meaningful recession.

Portfolio Review

For the quarter ended March 31, 2023, the Strategy outperformed the Index both on a gross- and net-of-fees basis, due to individual stock selection. The industrials, information technology, healthcare and financials sectors added the most to performance. Sector allocation was a slight detractor along with stock selection in the energy and materials sectors.

Key contributors to performance included Indie Semiconductor, Inc., Axcelis Technologies, Inc. and Focus Financial Partners, Inc.

Indie Semiconductor, Inc. (INDI), a fabless semiconductor company that serves the automotive technology market, was the largest individual contributor to performance for the quarter. Semiconductors were one of the best performing market segments in 1Q23, with the Philadelphia Semi Index (SOXX) rallying above 20%. After a poorly executed convertible debt offering in November 2022, INDI rallied along with semis and posted solid 4Q22 results and 2023 outlook in February. We continue to hold the stock but have recently trimmed the position.

Axcelis Technologies, Inc. (ACLS), a supplier of semiconductor manufacturing equipment and a leader in ion implant equipment, outperformed for the quarter. The company continues to grow through the cycle given their exposure (25% of revenue) to the Silicon Carbide (SiC) power device market, which is growing at a more than 30% CAGR. These high-powered SiC devices are in high demand for the electric vehicle market and investors have realized their SiC exposure will allow them to grow earnings in 2023, while the stock had been priced as if earnings would decline.

Focus Financial Partners, Inc. (FOCS) was a top three contributor for the quarter. FOCS is a holding company and active acquirer of registered investment advisors (RIA’s). FOCS underperformed broadly in 2022 on the combined earnings challenges of down equity and bond markets and rising interest rates. FOCS rallied in 1Q23 on the equity market rebound and slowing forward rate increase expectations. It was then announced on February 27th that FOCS would be acquired by private equity firm Clayton, Dubilier & Rice for $53 in cash. We have liquidated the majority of the position.

Key detractors from performance included Western Alliance Bancorp, Patterson-UTI Energy, Inc. and Matador Resources Co.

Western Alliance Bancorp (WAL) a regional bank, was the largest detractor of performance for the quarter, as many regional banks came under pressure after the collapse of SVB in mid-March. Despite a much lower exposure to the venture capital market (around 11% of loans compared to 50% at Silicon Valley) and significantly smaller HTM (hold to maturity) book of assets, WAL was under the microscope as other regional banks failed over the weekend following the SVB announcement. We initially trimmed WAL by 40% on the day the SVB news broke and then made the decision to exit WAL completely to mitigate risk, as the future regulatory environment is opaque, and the current fundamentals are less predictable.

Patterson-UTI Energy (PTEN), a provider of contract drilling services to oil and natural gas operators, underperformed for the quarter. The company guided to 26% higher 2023 capital expenditure budget driven by eight incremental rig reactivations and one incremental frac fleet reactivation. This was not well received due to a weaker economic outlook and lower energy prices. Investors are concerned that PTEN is not exercising good capital discipline and may unintentionally oversupply the market for drilling and fracking. We are actively monitoring our position.

Matador Resources Co. (MTDR), an independent energy company engaging in exploration and production of oil and natural gas resources in the United States, underperformed due to the swift drop in the price of crude and natural gas during the quarter. Concerns surrounding the company’s higher capital expenditure expectations related to the build out of their midstream assets and a minimally hedged book has led to near term volatility. We continue to hold the position and like the company’s exposure to the Delaware shale basin, lower cost structure and the recent accretive acquisition of Advance Resources.

Current Strategy and Outlook

Valuations of small cap stocks relative to large cap stocks remain near 20-year lows and stocks that were previously outside our valuation overlay bandwidth are plentiful. Most investors are expecting a slowing economy over the next several months and it is our view that the importance of companies that can continue to grow revenue and earnings will be paramount. The small cap growth team continues to be prudent in adding new names to the portfolio, preferring companies that have provided 2023 growth perspectives, in order to avoid negative earnings revisions. The recent regional banking issues will clearly have an impact on small cap companies in need of accessing capital. It is difficult to know the ultimate outcome, but we are certain that added regulatory oversight and a vastly different funding environment is inevitable. For these reasons, in the near term, the small cap growth team will avoid any investments in regional banks and take a “wait-and-see” approach.

Small cap growth portfolios have taken profits in companies where we expect decelerating fundamentals and those with stretched valuations. Conversely, the team is considering investments in companies where sentiment is low and fundamentals are holding up. The Voya Small Cap Growth strategy remains overweight the industrial sector, neutral to technology and slightly overweight healthcare. As stated in prior quarters, our investment philosophy of identifying companies with double digit revenue and earnings growth that are trading at sustainable valuations continues to perform well in this environment on a relative basis.


Effective January 1, 2022, Voya Investment Management acquired the investment advisory business and certain other assets of Tygh Capital Management (TCM). As such, AUM, performance and characteristics prior to 12/31/21 pre-date the acquisition and are reflective of the strategy as managed by TCM.

The Russell 2000 Growth Index is an unmanaged index that measures the performance of securities of smaller U.S. companies with greater-than-average growth orientation. 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. In exchange for higher growth potential, investing in stocks of Smaller Companies may entail greater price volatility and less liquidity than investing in stocks of larger companies. 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, Portfolio Turnover Risks and Securities Lending 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.

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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 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.