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
4Q 2016 COMMENTARY
The Series underperformed the Russell 1000® Growth Index in the fourth quarter. From a sector perspective, performance was hurt by negative stock selection in the information technology and consumer discretionary sectors. Performance was helped by positive stock selection in the health care and financials sectors.
From an individual stock perspective, the companies that contributed the most to performance were Netflix and Bank of America.
- Netflix embarked on two bold growth initiatives in recent years with the build-out of international infrastructure and a massive investment in original content. So far, both look like home runs. The company’s unmatched scale gives it the data and the financial firepower to deliver better content and led to another better than expected earnings report.
- With the prospect for higher interest rates (helping net interest margins) from the new administration, reduced regulation (allowing banks to refocus on growth) and lower corporate taxes, Bank of America is one of many financial institutions that now, for the first time in years, has the opportunity to grow and return capital to shareholders.
The companies that detracted the most from performance were Facebook and Alibaba Group.
- Facebook continues to grow advertising revenue and take share in the online digital marketing space. The company delivers an unprecedented global reach of 20% of the earth’s population to advertisers in a very measureable (ROI) way. Monetization of this audience has barely scratched the surface of its long-term potential. Future growth levers include untapped monetization of Messenger, WhatsApp and video advertising, along with Virtual Reality. Facebook was both a crowded, defensive long as well as a perceived relative loser from the election, and was thus used by investors as a source of funds for purchases of more Trump-sensitive companies in the quarter.
- Alibaba’s marketplaces have huge network effects and Alibaba is fostering the ecosystem with investments in payments and logistics partnerships. Alibaba can leverage its computing architecture for Alicloud, a cloud computing offering that should turn profitable in the next two years. Alibaba was also a crowded long, as well as a perceived relative loser from the election, and was thus used by investors as a source of funds for purchases of more Trump-sensitive names in the quarter.
Changes made to the portfolio during the quarter included the purchase of Bank of America and Union Pacific, and the sale of Amgen, Estee Lauder Companies, Gilead Sciences, Palo Alto Networks, and UFP Technologies.
As we peer into 2017, we believe there is more than a usual amount of economic uncertainty. President-elect Trump has no public office track record for us to assess and judge how effective he will be in getting changes accomplished. It does seem highly likely that some form of corporate and personal tax reform, partial repeal of the Affordable Care Act, increased infrastructure spending, and less regulatory burden for many businesses will occur over the next two years. However, the timing of these changes are unclear. If these events were to occur, we believe the economy should accelerate and grow in the 2.5% to 3.5% range for the next couple of years. We also believe that the S&P 500® earnings-per-share growth should pick up from the low single-digit range to the mid-to-high single-digit growth range as economic growth increases over the next year.
The fund class gross expense ratio is 1.20%. The net expense ratio is 1.03%, which reflects 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 month-end.
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.