Actively managed portfolio aiming to achieve a dividend yield that exceeds the average dividend yield of the companies included in the Russell 1000® Value index.
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 ended December 31, 2022, the Strategy outperformed the Russell 1000 Value Index (the Index) due to stock selection effects. The industrials, consumer staples and communication services sectors contributed the most to performance. Conversely, the health care and energy sectors were key detractors to performance.
- 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 ended December 31, 2022, the Strategy outperformed the Index due to stock selection effects. The industrials, consumer staples and communication services sectors contributed the most to performance.
Overweight positions in Apollo Global Management Inc., JPMorgan Chase & Co. and United Rentals, Inc. added the most to performance.
An overweight position in Apollo Global Management Inc. (APO) contributed to performance. The company reported solid earnings results, mainly driven by high spread related earnings (SRE) from higher rates and robust net flows, as well as higher transaction fees.
An overweight position in JPMorgan Chase & Co. (JPM) contributed to performance. The company reported strong earnings with stronger net interest income (NII) and better than expected fee revenue
An overweight position in United Rentals, Inc. (URI) contributed to performance. The company announced strong earnings results with in-line sales and solid year over year revenue growth. Management noted that despite increasing cross-currents in the economy, consumer sentiment remains encouraging. URI also acquired Ahern Rental at an attractive valuation during the period.
Conversely, the health care and energy sectors were key detractors to performance. An overweight position in PayPal Holdings Inc., not owning Exxon Mobil Corp. and an overweight position in Assurant, Inc. were the biggest individual detractors.
An overweight position in Paypal Holdings, Inc. (PYPL) detracted from performance. Although the company reported solid earnings, they were boosted by reserve releases in the transaction loss allowance, despite losses increasing during the period. In addition, they missed estimates on Total Payment Volume (TPV), and that number is expected to continue to decelerate amidst existing macro concerns.
Not owning a position in Exxon Mobil Corp. (XOM) detracted from performance. XOM reported strong earnings driven by high gas prices, oil volumes, and product segment earnings being partially offset by higher spending. They also reported stronger free cash flow (FCF) than consensus, giving them increased optionality.
An overweight position in Assurant, Inc. (AIZ) detracted from performance. The company preannounced disappointing earnings and a reduced guidance. In addition to challenges from inflation increasing costs and the broader economic slowdown, AIZ saw a decline in mobile devices covered and serviced along with moderation in auto growth
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 Strategy investments, as of 12/31/22: Apollo Global Management Inc. 1.53%, JPMorgan Chase & Co. 4.94%, United Rentals, Inc. 1.56%, PayPal Holdings, Inc. 1.16%, Exxon Mobil Corp. 0%, and Assurant, Inc. 0%. 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.
Voya Large Cap Value Strategy Quarterly Commentary - 4Q22