Virtus Contrarian Value Fund
2Q 2016 COMMENTARY
The Fund outperformed its benchmark index in the second quarter, with ONEOK, Devon Energy, FMC Corp., and Owens Illinois the top contributors.
We trimmed a number of holdings in the portfolio, reinvesting the proceeds into companies with more attractive risk/reward potential, and we initiated two new positions.
Looking ahead to the second half of the year, we expect the market will muddle through the uncertainties of the political and economic environment. Even with the Fund's strong returns year to date, we believe the portfolio is undervalued and poised for further appreciation.
During the second quarter, equity markets once again proved their resiliency, shrugging off the surprise U.K. “Brexit” vote, and with the exception of the NASDAQ, managed to finish the quarter back in the black after a short-lived sell-off. Value outperformed growth stocks, as they did in the first quarter, and small-cap indices outperformed the large-cap benchmarks. Once again, there was substantial dispersion among market sector returns. Energy and materials were the strongest performers within the Russell Midcap® Value Index, while consumer discretionary was the poorest performer, posting a negative return.
The Fund produced a 6.17% return for the quarter (Class A NAV), compared with the 4.77% return of the benchmark Russell Midcap Value Index. Our portfolio of event-driven, transforming companies continued to spring higher, building on the uptrend of the previous quarter. Leading the charge with impressive gains were ONEOK, Devon Energy, FMC Corp., and Owens Illinois, each marching to its own restructuring beat.
On the flip side, Allegheny Technologies and Target were the only two notable laggards. The former retraced much of its first quarter gains as it worked through pension contribution issues, and the latter was hit with weak retailing headwinds. We remain confident that both companies are on track to execute their restructuring plans successfully.
During the quarter we trimmed a number of holdings, based on valuation levels. We recycled the proceeds into more attractive risk/reward holdings and initiated two new positions.
Looking ahead, uncertainties continue to abound on both the political and economic fronts. These include, to name a few, the looming U.S. presidential election, fears of an unraveling European Union, China’s slowdown, and negative interest rates in Japan. We expect the market to continue to muddle through.
Such an environment tends to favor stock pickers like us. Even though the Fund has produced good returns year to date, we believe the portfolio is undervalued and poised for further appreciation. We remain fully invested, with a robust research idea pipeline and look forward to continuing to build on our 34-year record of strong performance.
Class A operating expenses are 1.38%. Excluding the indirect expenses incurred by the underlying funds in which the Fund invests, fund class operating expenses are 1.37%.
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.