Virtus Newfleet Core Plus Bond Fund
Virtus Newfleet Core Plus Bond Fund
Investment Overview
The Fund seeks to generate total return from both current income and capital appreciation by investing primarily in higher-quality intermediate-term debt securities across 14 global bond sectors. A disciplined, time-tested investment process and rigorous risk management approach aim to capitalize on opportunities across undervalued areas of the fixed income markets.
Investment Partner
Newfleet Asset Management
Newfleet Asset Management leverages the knowledge and skill of a team of investment professionals with expertise in every sector of the bond market, including evolving, specialized, and out-of-favor sectors. The team employs active sector rotation and disciplined risk management to portfolio construction.
Newfleet Asset Management is a division of Virtus Fixed Income Advisers, LLC ("VFIA"), an SEC registered investment adviser.
Learn more about Newfleet Asset Management
Investment Professionals
David L. Albrycht, CFA
President and Chief Investment Officer
Industry start date: 1985
Start date as fund Portfolio Manager: 2012
Stephen H. Hooker, CFA
Managing Director and Portfolio Manager
Industry start date: 1993
Start date as fund Portfolio Manager: 2017
Key Features
Broad Fixed Income Exposure
Highly diversified, duration-neutral core plus bond allocation, primarily focused on higher-quality, more liquid securities
Relative Value Focus
Top-down analysis weighs relative attractiveness of 14 global bond sectors, evaluating fundamentals, yields, spreads, and supply/demand dynamics
Extensive Fundamental Research
Security selection driven by bottom-up analysis of individual bond quality, credit risk, valuation, company management, structure, and technical elements
Characteristics4
(as of 06/30/2023)| Effective Duration (years) | 6.07 |
Top Holdings (% Fund)
| Security | |
|---|---|
| United States Treasury Note/Bond, 3.6250% 05/15/2053 | |
| United States Treasury Note/Bond, 4.0000% 11/15/2052 | |
| United States Treasury Note/Bond, 3.0000% 08/15/2048 | |
| Freddie Mac Pool, 5.0000% | |
| United States Treasury Note/Bond, 3.3750% 05/15/2033 | |
| Metropolitan Transportation Authority, 5.0000% 11/15/2045 | |
| United States Treasury Note/Bond, 3.6250% 02/15/2053 | |
| United States Treasury Note/Bond, 4.1250% 11/15/2032 | |
| United States Treasury Note/Bond, 1.5000% 02/15/2030 | |
| Broward County FL Water & Sewer Utility Revenue, 4.0000% 10/01/2047 |
Holdings are subject to change.
Sector Allocation (% Fund)
| Corporate - High Quality | |
| Non-Agency Residential MBS | |
| Treasury | |
| Asset Backed Securities | |
| Bank Loans | |
| Corporate - High Yield | |
| Non-Agency Commercial MBS | |
| Mortgage Backed Securities | |
| Cash | |
| Municipals | |
| Yankee - High Quality | |
| Emerging Market - High Yield | |
| Taxable Municipals |
Growth of $10,000 Investment
From toPerformance
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.
Sales Charge and Expenses
Risk Statistics3
(as of )| Fund | Index | |
|---|---|---|
| R2 | ||
| Beta | ||
| Alpha | ||
| Std Dev |
Risk Considerations
Marketing Materials
| Virtus Newfleet Core Plus Bond Fund Fact Sheet - R6 | |
| Virtus Newfleet Core Plus Bond Fund Fact Sheet - A | |
| Virtus Newfleet Core Plus Bond Fund Fact Sheet - I | |
| Morningstar - Quarterly Ratings | |
| Virtus Core and Core Plus Bond Funds Flyer | |
| Braving the New World of Bonds | |
| Newfleet Fixed Income Fund Capabilities | |
| Is It Time to Start Adding Duration? | |
| A Multi-Sector Approach to Core Plus Fixed Income |
Financial Materials
Holdings
Investors should carefully consider the investment objectives, risks, charges and expenses of any Virtus Mutual Fund before investing. The prospectus and summary prospectus contains this and other information about the fund. Please contact your financial representative, call 1-800-243-4361 to obtain a current prospectus and/or summary prospectus. You should read the prospectus and/or summary prospectus carefully before you invest or send money.
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.
Average annual total return is the annual compound return for the indicated period. It reflects the change in share price and the reinvestment of all dividends and capital gains. NAV returns do not include the effect of any applicable sales charges. POP and w/CDSC returns include the effect of maximum applicable sales charges.
Returns for periods of less than one year are cumulative total returns.
1 Yields/Distributions: 30-day SEC Yield is a standardized yield calculated according to a formula set by the SEC, and is subject to change. 30-day SEC Yield (unsubsidized) is the 30-day SEC Yield without the effect of applicable expense waivers. Distribution Rate is calculated by (a) annualizing the latest income distribution for fixed income funds or funds less than 1 year old, or (b) summing all income distributions over the preceding 12 months for all other funds, and dividing by the NAV on the last business date of the period, unless otherwise indicated. The Distribution Rate may be comprised of ordinary income, net realized capital gains and returns of capital.
2 Distribution History: Distributions are represented on a cash basis and may be reclassified at year end for tax purposes. The Fund will send you a Form 1099-DIV for the calendar year that will tell you how to report these distributions for federal income tax purposes. STCG: Short Term Capital Gain, LTCG: Long Term Capital Gain
3 Risk Statistics: R2 is a statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index. Beta is a quantitative measure of the volatility of a given portfolio to the overall market. Alpha is a risk adjusted measure of an investment's excess return relative to a benchmark. A positive Alpha indicates that the investment produced a return greater than expected for the risk (as measured by Beta) taken. Standard Deviation measures variability of returns around the average return for an investment fund. Higher standard deviation suggests greater risk. Risk Statistics are calculated using 36 monthly returns.
4 Characteristics: For Equity Funds: Avg. Weighted Market Cap (bn): The sum of each security's weight within the fund (or index) multiplied by the security's market capitalization. Trailing P/E Ex-Negative Earnings: Per-share stock price divided by the latest 12-months Earnings per Share; Price/Cash Flow: Per-share stock price divided by the per-share operating cash flow; Price/Book: Per-share stock price divided by the latest 12-month per-share Book Value; 3-Year EPS Growth Rate: Average of earnings per share growth for latest 3-year period. The 3-Year EPS Growth Rate is not a forecast of the fund's performance.
4 Characteristics: For Fixed Income Funds: Effective Duration represents the interest rate sensitivity of a fixed income fund. For example, if a fund's effective duration is five years, a 1% increase in interest rates would result in a 5% decline in the fund's price. Similarly, a 1% decline in interest rates would result in a 5% gain in the fund's price.
Morningstar Disclosures:
The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Ratings do not take into account the effects of sales charges and loads.
© 2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
2Q23
Market Review
The second quarter of 2023 confirmed our expectation that this year’s theme would be one of transition. China’s transition from a strict zero-COVID policy to a broader reopening of its economy brought stronger initial economic data releases that later faded as the quarter progressed, with new calls for stimulus emerging by quarter-end. In the U.S., we saw the Federal Reserve (Fed) in transition as it opted to hold its federal funds rate steady for the first time in more than a year after raising the target rate at every meeting since March of 2022. Economic growth is transitioning towards a slower pace in some parts of the world and proving more resilient in others. Unfortunately, we have yet to witness a transition towards peace in Eastern Europe. Financial markets continue to take most of these transitions in stride and seem to be embracing the view that any pain related to these changes would be shallow and short-lived. Washington was able to put its differences aside temporarily to address the U.S. debt ceiling, and the stresses in the banking system that emerged at the end of the first quarter have largely abated. Though this is certainly welcome news, it warrants monitoring.
While financial markets remained constructive during the quarter, central bankers still face the challenge of returning inflation to target. We have seen significant progress on headline readings as supply chains healed, demand shifted from goods to services, and energy prices rebalanced. Core readings of inflation, however, remain stubbornly above targets, and central bankers are focused on the need for progress on this front. Evidence of this is found in the Fed, which signaled more rate increases in its most recent summary of economic projections, in the European Central Bank and Bank of England, which continue to raise rates, and in the Bank of Canada and Royal Bank of Australia, which surprised markets by resuming tighter policy following a pause earlier in the year. Clearly, there is still work to be done on the inflation front. As the banking stresses faded, risk rallied, and core inflation remained persistent, the U.S. Treasury curve shifted higher during the quarter and the curve inversion deepened. The 2-year Treasury yield increased 87 basis points (bps), the 5-year Treasury yield increased by 58 bps, the 10-year Treasury yield increased by 37 bps, and the 30-year Treasury yield moved 21 bps higher.
We continue to see value being restored across most of the fixed income sectors in which we invest. We expect the Fed will be successful in returning inflation to acceptable levels over time. We continue to watch for economic data to inform our views on the possibility of recession. While our base case is still that any contraction would be mild, recession risks have risen. As the markets digest global developments, we continue to believe active sector and issuer selection is critical to take advantage of market volatility as it arises. We believe our approach to fixed income – the approach we have implemented for over three decades – enables us to scan the bond market for the most attractive investment opportunities and is ideally suited for the current environment.
How the Fund Performed
The Fund (Class I, Accumulating) returned 0.01% in the second quarter, outperforming the U.S. Bloomberg Aggregate Bond Index return of -0.84%.
The Fund’s underweight to U.S. Treasuries was beneficial during the quarter as most spread sectors outperformed U.S. Treasuries. Issue selection within investment grade corporates had a positive impact during the quarter. The investment grade market returned to normalcy in the quarter as financials, front-end bonds, and BBBs, previous underperformers in March, all outperformed. The Fund’s overweight to financials and BBBs drove outperformance during the period. Allocation and issue selection within corporate high yield had a positive impact on performance. A risk-led rally in June helped the high yield market generate a total return of +1.75% despite a substantial move higher in U.S. Treasury yields, with CCCs leading the way. Technicals were supportive as increased issuance early in the quarter was not enough to offset the inflows and a sizable number of rising stars, creating a supply shortfall during the period.
Allocation to bank loans had a positive impact on performance. Loans quickly rebounded early in the quarter after swift actions by the Fed and others helped steady markets after the banking crisis in March. A solid technical driven by limited loan supply, hawkish Fed comments and solid economic numbers are resetting rate expectations higher and pushing out recession expectations further into the future.
Conversely, bank loans issue selection had a negative impact. While allocation to bank loans had a positive impact on performance, the Fund’s higher-quality focus detracted from performance as lower-quality cohorts outperformed during the period. Issue selection within EM high yield also had a negative impact on performance, though EM high yield bonds outperformed EM investment grade during the period. Macro drivers behind performance were centered on the Federal Open Market Committee’s inflation-fighting path, China’s reopening, and global growth.
Current Fund Strategy
Reduced exposure to municipal bonds, corporate high yield, ABS, and investment grade corporates. Increased exposure to U.S. Treasuries, bank loans, agency MBS, and commercial mortgage-backed securities. In addition to changes to the Fund’s sector allocation during the quarter, we continue to optimize positioning within sectors based on our view of the best relative value.
EM Debt and Non-U.S. Exposure: EM had a tough start to the second quarter due to a hangover from the mini-banking crisis of March and uncertainty about the next Fed move. Despite bouts of volatility throughout the quarter, June proved to be a resilient month, and EM put up decent monthly returns, helping to smooth the quarter’s performance. High yield outperformed investment grade names by 259 bps for the period. The new issue corporate market re-opened toward the end of the quarter, providing much needed liquidity. Our exposure remains near historic lows. Investment Grade Corporates: As regional banking fears calmed and prospects of a recession were pushed out further, investment grade spreads tightened 16 bps during the second quarter to +122. Financials, which had underperformed in 2022 and took a sharp downturn in the first quarter amid the banking turmoil, outperformed industrials in the second quarter, with banks and REITS tighter by 20 bps. We are selectively adding to underperforming financials where we believe the risk of a bank run is muted and the asset quality is strong. Elsewhere, elevated supply in the utility and healthcare industries detracted from performance – a technical underperformance we are keen to lean into. Overall fundamentals are stable, though we expect them to deteriorate slightly with higher rates and declining earnings. Encouragingly, fundamental improvements are most visible at the lowest-rated tiers within the asset class and fallen angel risk is currently very low, supporting our overweight to BBB-rated bonds. Corporate High Yield: The high yield market returned 1.75% during the quarter, with the entirety of the return coming in June. Despite the Fed’s hawkish outlook, high yield rallied along with equities on the back of better-than-expected economic data. Though the rebound led to increased supply during the quarter, the technical picture has improved, with the increase more than offset by positive fund flows and more rising stars leaving the sector. First quarter earnings show fundamentals continuing to weaken, with revenue and EBITDA down sequentially and cash balances returning to normal from elevated COVID-era levels. We continue to hold a below-average allocation to high yield given current spread levels combined with recession risks. We were more active in the new issue market this quarter, where we saw attractive valuations. These purchases, most of which were either BB-rated or split BB/B rated, continue our higher-quality theme. Securitized: Though total returns for securitized product were negative for the quarter, spreads for the asset class were marginally tighter versus U.S. Treasuries, thus generating positive excess returns versus risk-free assets. Street forecasts for unemployment are now in the low to high 4% range for the first quarter of 2024, though we believe consumer credit should still perform well in a high 4% or even low 5% unemployment rate scenario. During the period, we continued to push our marginal dollars into the more conservative parts of the capital structure. However, we also took advantage of unique opportunities to move down the capital stack to find better pricing and a better deal structure. Given the noise in the commercial real estate market, especially with office space, spreads have widened dramatically since the start of the year. We took our exposure up slightly in commercial mortgage-backed securities to take advantage of widening spreads across the capital stack, allocating new dollars to higher-quality tranches. As agency MBS spreads widened to extreme levels, we added to the sector as wide nominal spreads were historically cheap versus investment grade corporates.
Outlook
Our multi-sector relative value approach enables us to take advantage of opportunities when events that trigger volatility, such as inflation worries or concerns around the banking industry, affect valuations. In the current environment, we believe some of the best total return and yield opportunities can be found in spread sectors. However, given the risk of a recession, the Fund’s exposure to spread sectors that would typically be more negatively impacted, such as corporate high yield and bank loans, are at historically low levels. Credit selection and positioning remain key. Specific sectors that have historically demonstrated the best relative value for us include: