Virtus Equity Trend Fund
4Q 2016 COMMENTARY
MARKET — The U.S. stock market had strong performance in the final quarter of 2016, despite a brief risk flare in early November related to the U.S. presidential election. A relative lack of leadership among U.S. equity sectors continued through the quarter.
PORTFOLIO — The Fund made no defensive moves to cash equivalents during the quarter, and the portfolio stayed fully invested at all times. Some portfolio changes occurred, particularly near year-end, and were mainly driven by weakness in leadership among equity market sectors which trickled down to the sub-industry and single stock level.
OUTLOOK — At the end of the fourth quarter, the portfolio was fully invested, representing those U.S. equity sub-industries that had shown the greatest relative strength. In early 2017, it appears that sector leadership is becoming more reliable, although more time is needed to recognize whether this is a true market trend.
During the fourth quarter of 2016, the U.S. stock market had strong performance, gaining 3.81% (as measured by the S&P 500® Index), nearly identical to its performance in the third quarter. The path to this result was quite different, though, as the market experienced a brief risk flare surrounding the U.S. presidential election in early November. The market rally that followed from this hiccup was strong over the rest of the quarter, before finally losing steam in the last few days of December.
What new economic information caused this pause in the rally? The best theory we can come up with is that market participants were mindful of the Dow Jones Industrial Average Index crossing above the 20,000 value level. While that is an arbitrary and somewhat irrational concern, it certainly is in keeping with some of the other irrational behavior we saw over the course of 2016 (and all of recorded human history). Investors, or more accurately traders in this case, occasionally will buy and sell (often using highly liquid, index-based passive products) with “support” and “resistance” pricing levels in mind. This can become self-fulfilling at a large scale, as the mere expectation of what other traders may do around a key level can be enough to influence behavior.
Also continuing in the fourth quarter was the relative lack of sector leadership in the U.S. equity market. While there is evidence in early 2017 that sector leadership is normalizing, the volatility of market leaders was challenging for the Fund in the final months of the year.
Similar to the third quarter, the Fund made no defensive moves to cash equivalents during the fourth quarter, and the portfolio was fully invested at all times. That being said, there was some activity in the portfolio during the quarter, particularly as the year drew to a close. This was primarily driven by the weakness in sector leadership that we had previously observed, which naturally propagated down to the sub-industry and the single stock level. For example, in December, as the portfolio moved to incorporate those sub-industries that had shown recent strength, the number of sub-industry changes was nearly as large as the aggregate changes made during the entire third quarter.
In a related metric, even though the number of stocks in the portfolio at the end of December was similar to the number at the end of November, nearly a quarter of the individual names were different. This level of turnover is not typical of the portfolio, and is a demonstration of how weakness in sector leadership can correspond to weakness in sub-industry leadership, as even the building blocks of economic sectors struggle to assert themselves.
At the end of the fourth quarter, the portfolio was fully invested, represented by those U.S. equity sub-industries that had shown the greatest relative strength. In early 2017, we have observed that sector leadership has recently become more reliable, although more time is needed to recognize this as a true market trend and not a temporary return to normal market functioning.
Associated with this renewed sector leadership, those sectors that are currently driving the market upward are leaning more towards “bull market” sectors – such as consumer discretionary and basic materials. While we do not attempt to draw conclusions about future market directionality from this data, we typically find that momentum-based strategies, such as that employed by the Fund, work better when bull market sectors are driving strong markets.
Effective May 11, 2015, the Fund changed its strategy and name. The portfolio was fully transitioned to the new manager’s strategy on 5/19/15. Performance since the manager change is shown from 5/19/15 in addition to the Fund’s historic record to illustrate the performance of the new manager’s strategy.
The fund class gross expense ratio is 1.61% and reflects the direct and indirect expenses paid by the Fund.
The gross expense ratio minus the indirect expenses incurred by the underlying funds in which the Fund invests is 1.42%.
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 S&P 500® Index is a free-float market capitalization-weighted index of 500 of the 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 is not available for direct investment.
Support and resistance levels: Technical analysis terms related to stock prices. Support is the price level through which a stock seldom falls, while resistance is the price level at which a stock seldom surpasses.
There is no relationship between Dorsey Wright and Virtus other than a license by Dorsey Wright to Virtus of certain Dorsey Wright trademarks and trade names, and the Dorsey Wright technical analysis (“Technical Analysis”). The Technical Analysis has been created and developed by Dorsey Wright without regard to and independently of Virtus, its business, its development of this product, and/or any prospective investor. The licensing of any Technical Analysis to Virtus is not an offer to purchase or sell, or a solicitation or an offer to buy any securities. A determination that any portion of an investor’s portfolio should be devoted to any product developed by Virtus is a determination made solely by the investment advisor serving the investor or the investor himself, not Dorsey Wright or Virtus.
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.
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.
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.
Allocation: The fund's exposure to different asset classes may not be optimal for market conditions at a given time. Asset allocation does not guarantee a profit or protect against a loss in declining markets.
Prospectus: For additional information on risks, please see the fund's prospectus.