Voya Floating Rate Fund Quarterly Commentary - 4Q22

An Attractive Income Option for a Strategic Allocation

Voya Floating Rate Fund Quarterly Commentary - 4Q22

Actively managed, ultra-short duration floating-rate income strategy that invests primarily in privately syndicated, below investment grade senior secured corporate loans.

Key takeaways

Key Takeaways

  • Broad market sentiment stabilized in 4Q22, helping buoy performance in the loan market and other risk assets, as the Morningstar® LSTA ® US Leveraged Loan Index (the Index) gained 2.74% during the period.
  • The Class I shares of the Fund underperformed the Index as the Fund was primarily impacted by selection in CCC and single-B rated loans, and hotels, restaurants and leisure, as well as trading companies and distributors at the sector level.
  • Looking ahead, we believe many of the issues that confronted the leveraged credit markets in 2022 will persist into 2023, though we hope to see resolution of certain issues as the credit cycle matures.

Portfolio review

Broad market sentiment stabilized in 4Q22, helping buoy performance in the loan market and other risk assets, as the Index gained 2.74% during the period. The Index bid price increased by 24 basis points (bp) to 92.44, primarily attributable to the firmer trading levels in the first two months of the quarter, as December experienced some modest price declines. On a relative basis, loans trailed equities, investment grade and high yield (HY) bonds in December but notably outperformed for the full-year period given rising rate hedge. In 2022, loans were only down –0.6%, as compared to more than double digit losses experienced in fixed rate bonds (–15.7% and –11.1%, respectively for Morningstar US Corporate Bond Index and Morningstar US High-Yield Bond TR USD Index).

In line with the prior two quarters, a continued flight to quality theme was evident, with returns for BB, single-B, and CCC rated loans coming in at 3.93%, 2.80% and –2.05%, respectively. The dislocation amongst different ratings buckets and liquidity profiles remained intact, with better-rated and liquid areas holding better relative to lower quality and illiquid names. On a full-year basis, double-B, single-B and CCC rated posted returns of 2.99%, –1.07% and –12%, respectively.

New loan supply remained limited, although increased to $35.7 billion (from $22.2 billion in 3Q22). Refencing activity was the main driver of issuance, as higher-rated issuers looked to extend maturities. Total volume for the year amounted to $225 billion, which is below the record $615 billion issued in 2021. On the other hand, investor demand decreased as collateralized loan obligation (CLO) issuance slowed and retail fund flows remained firmly negative. CLO formation decreased to $22 billion given challenging liability backdrop and weaker demand from Japanese banks. Despite the lighter quarter, the full-year tally was the second most on record at $129 billion. Meanwhile, retail loan funds experienced $14 billion redemptions during the quarter, bringing 2022 net outflow activity to $13.5 billion.

On a NAV basis, Class I shares of the Fund underperformed the Index (which reflects no cash allocation or fee expenses). By ratings, the Fund was negatively impacted by selection and overweight to CCC rated loans and selection in B rated loans. From an industry perspective, selection in the following sectors detracted from relative returns: hotels, restaurants and leisure, trading companies and distributors, media and software. When looking at individual issuers, negative outliers included owning a non-benchmark to 24 Hour Fitness Worldwide, Inc. and overweights to Yak Mat, Diamond Sports Group, LLC, and Telesat Canada. 24 Hour Fitness Worldwide, Inc, on no news, moved lower based on a small handful of secondary trades that pushed the quoted level in the name down. Meanwhile, Yak Mat, Diamond Sports Group, LLC. and Telesat Canada remained under pressure given weak earnings and challenging liquidity. In contrast, the Fund was helped by the selection in BB rated loans and the avoidance of a few loans within the D-rated cohort. The primary industry-level benefit stemmed from selection and overweight to specialty retail, followed by selection in chemicals. The top issuer-level contributor was the avoidance of Cineworld. Away from loan-level performance, the Fund’s modest exposure to HY bonds had a positive impact on performance, given the outperformance of the HY bond market in 4Q22 relative to loans (4.17% return for the Bloomberg U.S. Corporate High Yield Index).

Portfolio and positioning changes were both mostly minimal during the period. The portfolio reduced individual names from 391 to 356 in order to meet redemptions, while the average spread level of the Fund decreased modestly to 386 bp (versus 393 bp in the prior quarter). In terms of positioning, we made no fundamental changes during the period. Elsewhere, there were no defaults experienced in the Fund, nor in the Index.

Current strategy and outlook

Looking ahead, we believe many of the issues that confronted the leveraged credit markets in 2022 will persist into 2023, though we hope to see resolution of certain issues as the credit cycle matures. Notable macro themes for 2023 include slower global growth with heightened recession potential, deceleration from peak inflation levels, less aggressive and less synchronous central bank policies, lower rate volatility and continuing geopolitical risks. While macro news will have an impact on technical factors, fundamental factors likely will be a bigger story. A weaker earnings environment raises the prospects of more downgrades and defaults and continued ratings and sector dispersion among weaker credit profiles, particularly among loans. Some of the downside potential already is reflected in current valuations, e.g., loan prices in the low 90s. Considering high starting all-in yields, we believe loans still offer fairly attractive relative value, but given the late-cycle backdrop, acknowledge the need for careful credit selection and monitoring.

Holdings Detail

Companies mentioned in this report – percentage of Fund investments, as of 12/31/22: 24 Hour Fitness Worldwide, Inc. 0.45%, Yak Mat 0.60%, Diamond Sports Group, LLC 0.24%, Telesat Canada 0.45% and Cineworld 0%; 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to change on a daily basis.


The Morningstar® LSTA ® US Leveraged Loan index is an unmanaged total return index that captures accrued interest, repayments, and market value changes. 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. Investment Risks: The Fund invests primarily in below investment grade, floating rate senior loans (also known as “high yield” or “junk” instruments), which are subject to greater levels of liquidity, credit, and other risks than are investment grade instruments. There is a limited secondary market for floating rate loans, which may limit the Fund’s ability to sell a loan in a timely fashion or at a favorable price. If a loan is illiquid, the value of the loan may be negatively impacted and the manager may not be able to sell the loan in order to meet redemption needs or other portfolio cash requirements. The value of loans in the Fund could be negatively impacted by adverse economic or market conditions and by the failure of borrowers to repay principal or interest. A decrease in demand for loans may adversely affect the value of the Fund’s investments, causing the Fund’s net asset value to fall. Because of the limited market for floating rate senior loans, it may be difficult to value loans in the Fund on a daily basis. The actual price the Fund receives upon the sale of a loan could differ significantly from the value assigned to it in the Fund. The Fund may invest in foreign instruments, which may present increased market, liquidity, currency, interest rate, political, information, and other risks. These risks may be greater in the case of emerging market loans. Although interest rates for floating rate senior loans typically reset periodically, changes in market interest rates may impact the valuation of loans in the portfolio. In the case of early prepayment of loans in the Fund, the Fund may realize proceeds from the repayment that are less than the valuation assigned to the loan by the Fund. In the case of extensions of payment periods by borrowers on loans in the Fund, the valuation of the loans may be reduced. The Fund may also invest in other investment companies and will pay a proportional share of the expenses of the other investment company. Derivative Instruments: Derivative instruments are subject to a number of risks, including the risk of changes in the market price of the underlying securities, credit risk with respect to the counterparty, risk of loss due to changes in interest rates and liquidity risk. The use of certain derivatives may also have a leveraging effect which may increase the volatility of the Fund and reduce its returns. Other investment risks of the Fund include, but are not limited to: Equity Securities, Foreign Investments, High-Yield Securities, Leverage, Liquidity, Prepayment and Extension. Investors should consult the Fund’s prospectus and statement of additional information for a more detailed discussion of the Fund’s 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.

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.

Performance Attribution: During the period from January 1, 2017 to July 31, 2020, an unaffiliated data provider, which is used by the Funds to identify individual senior loans and groups of senior loans that detracted from or contributed to portfolio performance on an absolute or relative basis (commonly known as “attribution analysis”), provided the Funds with inaccurate data. As a result, the attribution analysis used to explain and analyze a portfolio’s performance against a particular benchmark was inaccurate in some instances during the period. Importantly, the Funds’ actual performance information and performance comparison to their respective benchmark which appeared in various Fund commentaries during this period were correct and were not impacted by the inaccurate data. The data provider has identified and corrected the issue that caused the transmission of inaccurate information, and correct information is reflected in attribution analysis used in commentaries prepared after September 30, 2020.performance. Please call your benefits office for more information.

The Standard & Poor’s rating scale is as follows, from excellent (high grade) to poor (including default): AAA to D, with intermediate ratings offered at each level between AA and CCC. Anything lower than a BBB- rating is considered a non-investment grade or junk bond. Any security that is not rated by Standard & Poor’s is placed in the NR (Not Rated) category.