Virtus Contrarian Value Fund
4Q 2016 COMMENTARY
The year 2016 was marked by major political surprises and unexpected market reactions. All major benchmarks surged following the Trump/Republican Party wins, buoyed by optimism over forthcoming favorable regulatory and tax changes and infrastructure spending. Value stocks outperformed growth stocks and investors bid up financial, manufacturing, and commodity-related stocks. Financials was, by far, the best performing fourth quarter sector, across all benchmarks, and resulted in penalizing the Fund’s relative performance, as the portfolio is historically void that sector.
Major restructuring events in a diverse number of our holdings provided strong performance tailwinds. Leading the charge in the quarter were HD Supply, Republic Services, ONEOK, and FMC Corp. For the year, ONEOK was the stellar winner (+133%), joined by FMC (+45%), Devon Energy (+43%) and Allegheny Technologies (+42%). After plummeting at the start of the year, energy stocks recovered nicely, thanks to a late 2016 deal by OPEC to slash oil production, which pushed back prices to a 16-month high. Our one disappointment was Hertz Global which suffered deteriorating fundamentals and the departure of its CEO. We sold our position late in the year and reinvested the proceeds in a new portfolio position.
Our best performing sectors during the quarter were materials and real estate. On the flip side, financials (no exposure), industrials, and consumer discretionary were the major detractors. For the year, our best performing sectors were energy, materials, and real estate whereas industrials, financials (no exposure), and IT (no exposure) were the detractors.
The fourth quarter was marked by a number of corporate restructuring divestitures within our portfolio.
- Alcoa completed its earlier announced separation into two companies: the commodity aluminum company Alcoa, which retained the original stock symbol (AA), and Arconic, which provides materials and engineered products to the aerospace, automotive and industrial markets. We sold our position in Alcoa and increased the portfolio weighting in Arconic as the company continues to restructure to unleash higher earnings.
- Johnson Controls completed the spin of its automotive seating and interior business in October into a new publicly traded company called Adient. Given the concentrated exposure to the auto industry and where we believe we are in the market cycle, we decided to dispose of the small position we received in the transaction.
- ConAgra spun off its Lamb Weston division to shareholders. We retained the shares received from the spin and continued to opportunistically add to the position during the quarter, as we like the new company’s valuation and attractive 20% EBITDA margins and international growth prospects.
Aside from these corporate action events, we were quite active throughout the quarter, trimming positions that reached our price targets and re-investing proceeds in more favorable risk/reward holdings. We trimmed our positions in Devon Energy, FMC, HD Supply, ONEOK, and Republic Services and added to Johnson Controls, Occidental Petroleum, and Sealed Air, as we anticipate ongoing restructuring events will continue to build shareholder value.
We are starting the year with guarded optimism on the economy and the political landscape, carefully assessing the many cross-currents likely to face investors in the months ahead. Changes to the market outlook are likely to be driven by a few key economic and geopolitical considerations, including tax and spending initiatives, trade policy, immigration changes and global geopolitical developments. “Trumponomics” has boosted investors’ confidence and is bullish to the economy. We believe the market is reflecting much of that euphoria and 2017 will prove to be a “show me” year.
We expect a modest (single-digit) return for the U.S. equity markets in 2017. In a more volatile market, we believe earnings will drive stocks higher, yet a gradual increase in interest rates will put a lid on valuation. In such an environment, we expect fundamentally based stockpickers should flourish as investors return to individual company actions that drive earnings and release shareholder value. With an undervalued portfolio and a robust pipeline of research ideas, we are confident we can stock-pick our way through a market that is likely to be volatile and headline driven.
The fund class gross expense ratio is 1.41%.
Average annual total returns reflect the change in share price and the reinvestment of all dividends and capital gains. Net Asset Value (NAV) returns do not reflect the deduction of any sales charges. POP (Public Offering Price) performance reflects the deduction of the maximum sales charge of 5.75%. A contingent deferred sales charge of 1% may be imposed on certain redemptions within 18 months on purchases on which a finder’s fee has been paid.
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 month-end.
Index: The Russell Midcap® Value Index is a market capitalization-weighted index of medium-capitalization, value-oriented stocks of 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.
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.
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.
Please carefully consider a Fund’s investment objectives, risks, charges, and expenses before investing. For this and other information about any Virtus mutual fund, contact your financial representative, call 1-800-243-4361, or visit Virtus.com for a prospectus or summary prospectus. Read it carefully before investing.