The Virtus Capital Growth Series offers a concentrated portfolio that focuses on companies with growth rates believed to exceed the general market.
Virtus Capital Growth Series
2Q 2016 COMMENTARY
Financial market volatility continued into the second quarter, primarily driven by the surprising outcome of the U.K. “Brexit” vote to leave the European Union.
The Series slightly underperformed the Russell 1000® Growth Index during the quarter. From a sector perspective, performance was helped by strong stock selection in the information technology and consumer staples sectors.
Looking ahead to the second half of the year, the U.K.’s “Brexit” from the European Union and U.S. presidential elections are likely to be sources of volatility. However, they will not distract us from our focus on investing in high-quality businesses as our firm has done for over 30 years.
Financial market volatility continued during the second quarter, primarily driven by the surprising outcome to the U.K. Brexit vote. The S&P 500® Index gained 2.46% for the quarter and is 3.84% higher year to date. Smaller stocks, as measured by the Russell 2000® Index, managed to break into positive territory for the year to date with a return of 2.22%. The NASDAQ Composite® Index continued to struggle with a decline of 2.66% for the first half of 2016. In response to the potential economic uncertainty created by Brexit, any further U.S. interest rate increases will be very modest at best. Higher yielding stocks continued to perform well in this low rate environment with the S&P utilities and telecom sectors up over 20% year to date. Emerging market stocks were up just 0.81% in the quarter but the MSCI Emerging Markets Index is 6.67% higher year to date.
The Series slightly underperformed the Russell 1000® Growth Index during the quarter. From a sector perspective, performance was helped by strong stock selection in the information technology and consumer staples sectors. Performance was hurt by negative stock selection in the consumer discretionary and health care sectors.
The companies that contributed the most to performance during the quarter were Monster Beverage and Amazon.com.
Monster Beverage delivered double-digit first-quarter sales growth, its best showing since being acquired by Coca-Cola in June 2015 and a trend that should accelerate as the transition into Coke’s distribution system is completed.
After years of investment, Amazon.com is firing on all cylinders with the e-commerce leader delivering multi-year highs in revenue growth, gross and operating margins, and return on invested capital in its most recent quarter.
The companies that detracted the most from performance during the quarter were Apple and Nike.
Shares of Apple are being depressed by a maturing iPhone cycle, peaking profit margins, and a lack of visibility on new breakthrough products. We have been reducing our position as the law of large numbers catches up with the stock.
Nike’s shares were hurt during the quarter by increased competition from Under Armour in its key basketball market as well as better execution from long-time rival Adidas.
PURCHASES AND SALES
We purchased Ctrip.com, Pioneer Natural Resources, and Yandex for the portfolio during the quarter, and we sold our positions in ANSYS and Perrigo.
We believe the domestic economy will grow at a modest rate in the range of 1.5% to 2.5%, and corporate earnings will grow in the mid-single digit range. Our confidence is growing that oil has finally hit bottom because domestic shale producers and major international oil companies have announced dramatic reductions in capital spending on the order of 40% to 70%. These supply reductions, combined with natural depletion rates, will ultimately reduce excess supply. Importantly, stability in the price of oil and the U.S. dollar will help stabilize reported profits for companies in the S&P 500, which have been sliding downward over the last two years due to the impact of weak oil and a strong U.S. dollar. This stability is needed in order for equity markets to generate returns in line with earnings growth.
As we have experienced thus far this year, it is likely to continue to be a volatile year for financial markets. Repercussions from the U.K.’s Brexit vote to leave the European Union and our own presidential elections are likely to cause continued market volatility. However, we will remain steadfast in our high-quality focus as we have always done through good and bad times over the last three decades.
Class A operating expenses are 1.03% and gross operating expenses are 1.20%. Operating expenses reflect a contractual expense reimbursement in effect through 4/30/2017.
Average annual total returns reflect the change in share price and the reinvestment of all dividends and capital gains. Performance data quoted represents past results. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate so your shares, when redeemed, may be worth more or less than their original cost. Please visit Virtus.com for performance data current to the most recent monthend. Index:
The Russell 1000® Growth Index
is a market capitalization-weighted index of growth-oriented stocks of the 1,000 largest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and it is not available for direct investment.
The commentary is the opinion of the subadviser. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
The investments for the Series are managed by the same portfolio manager(s) who manage one or more of the other funds that have similar names, investment objectives and investment styles as the Series. You should be aware that the Series is likely to differ from the other mutual funds in size, cash flow pattern and tax matters. Accordingly, the holdings and performance of the Series can be expected to vary from those of the other mutual funds. Shares of the separate Series of Virtus Variable Insurance Trust are sold only through the currently effective prospectuses and are not available to the general public.
Shares of the VIT Series may be purchased only by life insurance companies to be used with their separate accounts which fund variable annuity and variable life insurance policies or qualified retirement plans. The performance information for the Series does not reflect fees and expenses of the insurance companies. If such fees and expenses were deducted, performance would be lower.
Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk.
Limited Number of Investments: Because the fund has a limited number of securities, it may be more susceptible to factors adversely affecting its securities than a less concentrated fund.
Industry/Sector Concentration: A fund that focuses its investments in a particular industry or sector will be more sensitive to conditions that affect that industry or sector than a non-concentrated fund.
Prospectus: For additional information on risks, please see the fund's prospectus.
Please carefully consider a Series’ investment objectives, risks, charges, and expenses before investing. For this and other information about any Virtus Variable Insurance Trust Series, contact your financial representative, call 1-800-367-5877, or visit Virtus.com for a prospectus or summary prospectus. Read it carefully before investing.
Not insured by FDIC/NCUSIF or any federal government agency. No bank guarantee. Not a deposit. May lose value. Distributed by VP Distributors, LLC, member FINRA and subsidiary of Virtus Investment Partners, Inc.
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