Voya MidCap Opportunities Strategy Quarterly Commentary - 1Q23

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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 bounced back in March after retreating in February, finishing off a mostly positive quarter. The banking crisis triggered fears of a global banking contagion which caused a flight to safety, with mega cap stocks leading the overall market for the quarter.
  • 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 health care, information technology and industrials sectors.
  • Although the US Federal Reserve hiked another quarter point in March, the market seems to be weighing if that could be the final rate hike of the year. The unprecedented rise in yields over the last year contributed to the recent bank failures, making a soft landing less likely, and increasing the likelihood of a recession.

Portfolio Review

The financial markets were positive in the first quarter, but volatile as concerns with inflation and interest rates tugged asset prices up and down. At its first 2023 policy meeting, the Fed raised interest rates by 25 basis points (bp), driving market rates higher while pulling down bond prices and crimping the values of rate-sensitive technology stocks. Market focus shifted dramatically in March as the sudden failure of several US regional banks and the collapse of Credit Suisse shook the banking sector. Markets regrouped after the government intervened to protect depositors. The Fed, seeking to avoid further “accidents” tied to higher rates, took a restrained step and increased the Fed funds rate by just another 25 bp at its March policy meeting.

The 10-year US Treasury yield fell from nearly 3.9% in early January to less than 3.5% by quarter-end. Falling rates helped both stocks and bonds. The S&P 500 Index gained 7.50% and the Bloomberg US Aggregate Bond Index gained 2.96%. Easing rates also gave growth stocks an advantage over value stocks ― across the capitalization spectrum, growth styles posted gains significantly greater than those of value styles.

For the quarter, the Strategy underperformed the Index on NAV basis, primarily due to stock selection. Stock selection within the financials and energy sectors contributed the most to performance. The health care, information technology and industrials sectors were the biggest detractors.

Key contributors to the quarter’s performance were Palo Alto Networks, Inc., Seagen, Inc. and Cadence Design Systems, Inc.

Owning a non-benchmark position in Palo Alto Networks, Inc. (PANW) contributed to performance. The company reported strong results during the period, balancing top-line growth with strong margin performance. Results were driven by strong execution and the continued expansion of next-generation security in a challenging macro environment.

An overweight position in Seagen, Inc. (SGEN) contributed to performance. Shares have soared nearly 60% year to date as the company reported better-than-expected revenue and earnings for the period. In addition, it was announced that SGEN will be acquired by Pfizer for $43 billion — a value of $229 per share. The deal is expected to close in late 2023 or early 2024.

An overweight position in Cadence Design Systems, Inc. (CDNS) contributed to performance. The company reported strong quarterly results that were above management guidance and consensus expectations. CDNS also noted that they continue to see strong visibility in their hardware business into fiscal year 2023 and are ramping up capacity to meet a robust demand.

Key detractors for the quarter were United Therapeutics Corp., Ross Stores, Inc. and Arista Networks, Inc.

Owning a non-benchmark position in United Therapeutics Corp. (UTHR) detracted from performance. The company reported below consensus numbers on both sales and revenue for the quarter.

An overweight position in Ross Stores, Inc. (ROST) detracted from performance. The company reported a solid quarter but offered below consensus guidance for fiscal year 2023 as a result of inflationary wage and incentive compensation-driven cost challenges.

Not owning a position in Arista Networks, Inc. (ANET) detracted from performance. The company reported strong earnings and revenue growth, as well as favorable guidance for 1Q23. ANET has laid out its belief that calendar year 2023 is an inflection year for infrastructure build to enable artificial intelligence, which is likely to become a major demand driver and key to growth in calendar year 2024 and beyond.

Current Strategy and Outlook

Strains in parts of the financial system have prompted the Fed to trim its tightening plans. We believe quick action by regulators has largely addressed concerns of systemic risk in the banking system. In our view, bank balance sheets are healthy, and the lack of fundamental consumer and corporate imbalances should limit the severity of any sort of economic downturn that may materialize.

The long game still needs to play out: a higher cost of capital for banks will raise borrowing costs for companies and consumers, increasing the potential for a longer but still shallow recession. Since the challenges to the banking system are likely to be disinflationary, further Fed rate hikes may not be necessary. The focus now shifts to when the Fed might begin lowering rates. For that to happen, we believe labor markets and economic growth would need to weaken substantially — and that is not happening yet. Employment data remain vibrant despite an uptick in the unemployment rate, and the economy has remained remarkably resilient, supported by strong consumer spending.

Holdings Detail

Companies mentioned in this report – percentage of portfolio investments, as of 03/31/23: Palo Alto Networks, Inc. 2.48%, Seagen, Inc. 2.14%, Cadence Design Systems, Inc. 3.23%, United Therapeutics Corp. 1.15%, Ross Stores, Inc. 2.07% and Arista Networks, Inc. 0%; 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.


The Russell MidCap Growth Index is an unmanaged index that measures the performance of those companies included in the Russell MidCap Index with relatively higher price-to-book ratios and higher forecasted growth values. 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. Foreign Investing poses special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. Investing in stocks of Mid-Sized Companies may entail greater volatility and less liquidity than larger companies. The Portfolio may use Derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses and have a potentially large impact on Portfolio performance. 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, Securities Lending Risks and Portfolio Turnover 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.
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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.