Virtus Growth & Income Series
2Q 2016 COMMENTARY
During the second quarter, the U.S. equity market continued to be tormented by the tug-of-war between the bulls and bears. While the S&P 500® Index has experienced several rapid swoons and sharp recoveries in the last year and a half, the price level of the Index has remained virtually unchanged. The United Kingdom’s surprising “Brexit” vote at the end of June sent the market into a temporary tailspin, only to quickly recover and make new all-time highs in mid-July. With the Federal Reserve and other world central banks continuing the easy money policy, the bears lack a compelling case for a move lower. Furthermore, bearish sentiment is high, which is not normally a precondition for a significant market decline. The overall market tenor during the quarter was affected by a general move back into defensive areas of the market – i.e., consumer staples, utilities, health care, and telecom – and the recovery in the price of crude oil, which served to propel beaten-down energy stocks higher.
During the quarter, the Series underperformed the benchmark S&P 500® Index. The underperformance was largely driven by the Series’ underweight allocations to the materials, consumer staples, utilities, and energy sectors, and stock selection within these sectors. In addition, the Series’ exposure to industrials was detrimental to performance, both in terms of the sector overweight and stock selection. The sectors that detracted the most from performance were industrials, health care, and consumer discretionary, while technology provided a modest benefit. The stocks that detracted the most from performance were Goodyear Tire, Alaska Air, and Target, while the stocks that made the largest positive contributions to returns were agricultural processor Archer-Daniels-Midland, a gold miner ETF, and discount retailer Five Below.
Among the changes made to the portfolio in the quarter was the purchase of Clorox, a manufacturer of household products. The company’s execution of business strategy has been excellent and revenue growth has accelerated, which is hard to find in this market, and its dividend growth has been consistent. We also chose to exit Goodyear Tire, a relatively long-term holding with modest gains, in light of concerns over auto sales leveling off and higher oil prices.
Although the overall environment during the quarter was relatively quiet and range-bound, the Brexit vote caused a violent sell-off in global stocks, only to be followed by a swift recovery that now leaves U.S. stock averages at all-time highs. As we have discussed in previous commentaries, the performance metrics that have aided many stocks in this market run contrary to our “growth at a reasonable approach” stock picking biases. The market’s manic nature is well illustrated by energy stocks and the beating they took last year, in contrast to the violent move upward these stocks have since seen this year with the recovery in oil prices. Also, during the recent period of tepid economic growth, investors have continued to search for growth at any price, not growth at a reasonable price, while simultaneously using the defensive areas of the market as a “bond proxy” in this very low interest rate environment. While it continues to be a very trying time for our stock selection process, we will continue to eliminate stocks that underperform, and buy stocks that we believe offer a combination of momentum and future consistent growth potential.
Class A operating expenses are 0.98% and gross operating expenses are 1.22%. Operating expenses reflect 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 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 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.
Call/Put Spreads: Buying and selling call and put option spreads on the SPX Index risks the loss of the premium when buying, can limit upside participation and increase downside losses.
Portfolio Turnover: The fund's principal investments strategies will result in a consistently high portfolio turnover rate. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account.
Fund of Funds: Because the fund can invest in other funds, it indirectly bears its proportionate share of the operating expenses and management fees of the underlying fund(s).
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.
Not insured by FDIC/NCUSIF or any federal government agency. No bank guarantee. Not a deposit. May lose value.
Distributed by VP Distributors, LLC, member FINRA and subsidiary of Virtus Investment Partners, Inc.
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