Voya Strategic Income Opportunities Fund Quarterly Commentary - 1Q22

Unconstrained Fixed Income

Unconstrained and flexible approach, investing broadly across the global debt markets.

Key Takeaways

  • For the quarter, the Strategy underperformed its benchmark, the ICE Bank of America U.S. Dollar Three-Month Deposit Offered Rate Constant Maturity index (the “index”).
  • Following another record Consumer Price Index (CPI) print and strong jobs report, 1Q22 began with a more hawkish tone from the Federal Reserve (the “Fed”), which drove the ten-year yield to a post-pandemic high.
  • While a move wider was the theme for all spread sectors, the move was far from uniform and lower-duration sectors fared better.
  • Rates and credit spread volatility led to detractions from duration, yield curve and sector allocation decisions; by contrast, security selection decisions contributed to results.

Portfolio Review

Underperformance for the period was driven by duration and yield curve structure. Sector allocation also detracted, while security selection contributed to performance.

Following another record CPI print and strong jobs report, the first quarter of 2022 began with a more hawkish tone from the Fed, which drove rates to rise to a post pandemic high and flattened the yield curve dramatically by quarter-end. While remaining at tight levels, credit spreads also sold off amidst increased concerns that a recession may be needed to break inflation. Volatility was exacerbated by Russia’s invasion of Ukraine, the scale of which few expected. The reaction from western nations was swift and severe; however, the voluntary actions from the private sector were arguably more surprising. The best example of this was when Shell, an oil company, publicly apologized for buying Russian oil. This could mark a new era in corporate stewardship; if so, investors should not ignore this new factor in corporate decision making. Following the invasion, oil prices, already well above pandemic lows, surpassed $100 for the first time since 2014. Given the likely squeeze on consumer budgets, a new case for a recession entered the picture. That said, it is worth noting that energy costs make up a significantly smaller portion of consumer budgets today than in the late 1970s.

While a move wider was the theme for all spread sectors, the move was far from uniform. In corporate credit, investment-grade (IG) widened more than high-yield (HY), due in part to its higher sensitivity to interest rates and HY’s heavier tilt towards energy producers. Early in the quarter, senior loan spreads held in due to strong demand for floating rate assets; however, as the credit selloff intensified, loans followed suit. New deals in the commercial mortgage-backed securities (CMBS) space widened modestly, while further recovery in delinquency rates allowed for continued price recovery in vintage deals, particularly lower-rated tranches. Agency mortgage-backed securities (MBS) also performed poorly amid rising rates and elevated rate volatility. Meanwhile, emerging-market (EM) debt indexes massively underperformed for the quarter due to Russia and overall risk aversion.

Even with a low duration profile, the significantly higher interest rates weighed on performance. With spreads wider, sector allocation also detracted amid risk-off sentiment. Allocations to EM were the largest detractor on the heels of the Russia-Ukraine conflict. Corporate sectors delivered mixed results. HY detracted in part due to rate volatility, while bank loans contributed as a result of their floating rate structure. Investments in securitized sectors spanning CMBS and agency residential mortgage-backed securities (RMBS) detracted, while non-agency RMBS did not impact returns. Security selection, in aggregate, was positive. Selection among securitized sectors was the largest contributor, spanning lower-rated CMBS tranches and a combination of agency RMBS, collateralized mortgage obligations (CMOs) and other mortgage derivatives. Selection across IG and HY corporate bonds also added. By contrast, selection within EM sovereigns and corporates, which included exposure to Russia and Ukraine, offset some of the portfolio’s gains. Changes to the portfolio during the quarter, largely reflected relative value assessments and a decision to increase liquidity. We reduced allocations in bank loans, collateralized loan obligations (CLOs), CMBS and ABS, as those sectors and securities we selected had outperformed. As a result, the strategy had a higher allocation to U.S. Treasuries and cash, leaving it with dry powder to take advantage of opportunities.

Current Strategy and Outlook (1)

Through the remainder of the year, the Fed expects to hike its policy rate to around 2% and begin balance sheet runoff. We believe this will be achievable without causing disruptions to the market, if the Fed does not make any surprise moves and if inflation begins to wane. With supply chains broken and wage inflation persisting, corporations have an elevated incentive to invest. We believe this handoff to a capital expenditure cycle should help to alleviate inflation pressure, increasing the likelihood of a soft landing.

In the near term, investors can take comfort in the fact that both corporations and households remain fundamentally sound. Corporate profits grew at record levels in 2021 as consumers flush with cash allowed price increases to be passed through. And while home prices have risen significantly over the last 18 months, the data show that the rise is not being fueled by increased debt. Nonetheless, while not our base case, the probability of a mild recession has moved definitively higher, and investors would be wise to increase liquidity in their portfolio and reduce exposure to sectors that remain tight. With rate volatility increasing and the Fed moving off the zero-lower bound, duration has re-emerged as an interesting tool to balance credit risk.

IM1991312

The Bank of America Merrill Lynch U.S. Dollar Three- Month LIBOR Constant Maturity Index is designed to track the performance of a synthetic asset paying LIBOR to a stated maturity. The index is based on the assumed purchase at par of a synthetic instrument having exactly its stated maturity and with a coupon equal to that day’s fixing rate. That issue is assumed to be sold the following business day (priced at a yield equal to the current day rate) and rolled into a new instrument. The Index does not reflect fees, brokerage commissions, taxes or other expenses of investing. Investors cannot directly invest in an index. BofA Merrill Lynch® indices used with permission, are provided “AS IS”, without warranties, and with no liability. BofAML does not sponsor, endorse, review, or recommend Voya or its products or services.

Principal Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. High-Yield Securities, or “junk bonds,” are rated lower than investment-grade bonds because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. To the extent that the Fund invests in Mortgage-Related Securities, its exposure to prepayment and extension risks may be greater than investments in other fixed-income securities. The Fund may use Derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses and have a potentially large impact on Fund performance. Foreign Investing poses special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. As Interest Rates rise, bond prices fall, reducing the value of the Fund’s share price. Other risks of the Fund include but are not limited to: Credit Risks, Extension Risks, Investment Models Risks, Municipal Securities Risks, Other Investment Companies’ Risks, Prepayment Risks, Price Volatility Risks, U.S. Government Securities and Obligations Risks, Debt Risks, Liquidity Risks, Portfolio Turnover Risks, and Securities Lending Risks. An investment in the Fund 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 investment process. The process is based on a collection of proprietary computer programs, or models, that calculate expected return rankings based on variables such as earnings growth prospects, valuation, and relative strength. Portfolio construction uses a traditional optimizer that maximizes expected return of the portfolio, while managing tracking error.

Data imprecision, software or other technology malfunctions, programming inaccuracies and similar circumstances may impair the performance of these systems, which may negatively affect Fund performance. Furthermore, there can be no assurance that the quantitative models used in managing the Fund will perform as anticipated or enable the Fund to achieve its objective.

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. The Fund discussed may be available to you as part of your employer sponsored retirement plan. There may be additional plan level fees resulting in personal performance to vary from stated performance. Please call your benefits office for more information.

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CMFC-SIO 123121 • ex123122 • IM1991312 • WLT250005733

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