Virtus Contrarian Value Fund
3Q 2016 COMMENTARY
MARKETS — Equity markets had a good third quarter, despite volatility at the start and finish. Small-cap companies outperformed large- and mid-cap companies. Value stocks outperformed growth.
PORTFOLIO — The Fund delivered positive returns in the quarter, though lagged the benchmark mainly due to the absence of technology holdings from the portfolio. Energy and materials stocks were strong contributors to the Fund's performance, led by Allegheny Technologies and Devon Energy.
OUTLOOK — Given the proximity of the benchmark index to new highs, coupled with uncertainty over the economic and political landscape, we believe it prudent to maintain the Fund’s balance between “risk-on” and “risk-off” holdings. We remain fully invested and focused on our strategy of investing in companies that are engaged in event-driven restructuring
The market continued its march higher in the third quarter. Investors were still trying to digest the impact of the U.K.’s late June “Brexit” vote as the quarter began, but that quickly fell into the background as the market was generally docile for most of the summer. Volatility picked up again at the end of the quarter as the markets re-assessed the prospects of a rate increase, tepid economic growth, and the uncertainties surrounding the presidential election. Small-cap stocks outperformed both large- and mid-cap stocks. Value-oriented stocks underperformed growth stocks for the quarter, but retained a leadership position for the year.
The Fund, which invests in event-driven restructuring companies, had a solid quarter. Our traditional void in the exceptionally strong technology sector accounted for most of the underperformance relative to the benchmark Russell Midcap® Value Index. The Fund’s energy and materials stocks were strong contributors to performance, with Allegheny Technologies and Devon Energy leading the charge. Relative to the Index, the Fund’s overweights in the consumer and industrial sectors detracted from performance, but this was more than offset by our overweight position in the outperforming materials sector. Our lack of exposure to healthcare and financials had minimal impact since these sectors performed about in line with the Index.
The strength in some of our energy stocks, particularly Devon and ONEOK, carried over from the second quarter through the end of the third. Given that both names had more than doubled off their February lows, we trimmed the positions. We also sold our position in land driller Nabors, which brought our energy weighting in line with the benchmark. In addition, the portfolio got a strong boost from some of our packaging stocks such as Ball Corp., Crown Holdings, and International Paper — all up double digits for the quarter.
The only notable laggards in the quarter were HD Supply, due to an earnings miss; Hertz Global Holdings, which is still struggling with auto rental pricing; and Dominion, our one stock in the underperforming utility sector. All three posted single-digit declines.
Year to date, we are pleased with the Fund’s strong lead over all major market benchmarks. Looking ahead, we expect the market to continue to “muddle through.” Given the benchmark’s proximity to new highs, coupled with uncertainty over the economic and political landscape, we believe it prudent to maintain the portfolio’s balance between “risk-on” and “risk-off” holdings. We remain fully invested and believe our fundamental value approach of focusing on companies undergoing event-driven restructuring will continue to deliver strong performance results in the “stock-pickers” market we foresee.
Class A operating expenses are 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.
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