Virtus Equity Trend Series
2Q 2016 COMMENTARY
U.S. equities enjoyed a strong second quarter, with the S&P 500® Index hitting record levels. The UK Brexit vote took markets by surprise, triggering a steep fall in late June, but quickly recovered by quarter-end.
The Series maintained an even keel over the quarter, and no defensive allocations to cash equivalents were needed. Allocations were consistent across sectors, with consumer discretionary allotted the largest share. Performance was positive for the quarter.
Market uncertainty is higher than ever and there is good reason to be cautious. Given the benign risk environment, the Series is fully invested in U.S. equities, but prepared to move defensively to cash equivalents should risk levels rise.
During the second quarter of 2016, the U.S. stock market (S&P 500 Index) was up nearly 2.5% — a slightly above-average quarter, historically speaking. The quarter was not without its share of surprises, though. The biggest by far came on June 23 when 52% of UK voters chose to leave the European Union. This news shocked global markets, which had been highly confident of a “remain” vote.
Beyond the global economic, political, and social ramifications of this vote (which have been well-covered by the major media and financial press), the trading reaction was interesting to observe. The news was initially met with a sharp decline in global equity prices, with the S&P 500 falling by over 5% in the two days following the vote, and European indexes experiencing much larger declines. This sort of reaction is not uncommon when unexpected news is delivered. But the rebound that followed the selloff was nearly as severe, with the market appreciating nearly 5% over the following three days. This price action echoed a theme we have seen over the past several quarters: steep declines followed by equally steep, and rapid, rebounds.
Given this environment, it is reasonable to characterize the stock market as lacking conviction. For example, it appears that over the course of a single week, market participants were equally convinced that the Brexit vote was a) a terrible outcome, and b) a non-event. Even the standard gauge of expected market risk, the CBOE Volatility Index (“VIX®”), has become unreliable. While the VIX spent most of the quarter well below its long-term average levels, the one-year standard deviation of the VIX was at its all-time high at the end of June. One way to interpret this data is that the uncertainty regarding market uncertainty is currently higher than it has ever been.
Amidst the uncertainty, the Series was stable during the quarter, with no defensive allocations to cash. Sector allocations remained consistent, with the consumer discretionary sector receiving the largest share. The Brexit episode at the end of June came and went so quickly that it didn’t trigger an elevated risk state — in fact, the S&P 500 Index dipped below the 200-day average level for only one day during the event.
While the Series’ risk-control mechanisms were not triggered, the quarter did appear to signal the end to the underperformance of highly ranked sub-industries relative to their lower-ranked peers witnessed in the first quarter. During the second quarter, normalcy was largely restored to the relationship between sub-industry rankings and relative performance..
Over the quarter, the Series (Class A NAV) was up 2.01%, compared with 2.46% for the S&P 500 Index. The Series underperformed the Index by 0.94% in April, largely due to an overweight in the tires & rubber sub-industry (Goodyear Tire was down 12% for the month) and an underweight in the diversified banks sub-industry (Citigroup was up 11%). The Series underperformed the Index by 0.42% in May, nearly all of which was due to an allocation to Freeport-McMoRan (down 21%). In June, the Series outperformed the Index by 0.92%, as diversified banks gave back most of what was made in April, and the Series remained out of the sub-industry.
For the one-year ended June 30, 2016, the S&P 500 Index was up about 4%. During this period, there were multiple risk flares, steep rebounds, and strong recoveries. Going forward, the environment is likely to remain uncertain. By traditional measures (volatility, the VIX), risk is subdued. By other measures, such as the progression of the all-time market highs seen in July, there is reason to be cautious.
In this benign risk environment, the Series is currently fully invested in U.S. equities. If the market begins to falter, the Series has the ability to move to cash (as much as 100%) as a defensive mechanism. In our view, this ability to adjust the Series’ risk exposure stands to serve investors well over the long term.
Class A operating expenses are 1.73%. Excluding the indirect expenses incurred by the underlying funds in which the Fund invests, fund class operating expenses are 1.70%.
Effective May 11, 2015, this Series changed its strategy and its name. The portfolio was fully transitioned to the new manager’s strategy on 5/19/15. Performance since manager change is shown from 5/19/15 in addition to the Series’ historic record to illustrate the performance of the new manager’s strategy.
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. 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.
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. Standard deviation:
A measure of variability of returns around the average return for an investment. Higher standard deviation suggests greater risk.
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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.
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.