Targeting Your Income Needs
Key takeaways
- U.S. stock and bond markets initially struggled with high inflation expectations but rebounded as improved May inflation data boosted hopes for U.S. Federal Reserve rate cuts, leading to gains in broad equity markets, particularly in large-cap and growth stocks.
- In our view, a softening labor market should contribute to slower yet steady economic growth and declining inflation, but no immediate expectations of a recession.
- We continue hold a balanced posture between stocks and bonds and favor higher quality U.S. assets.
- The Fund achieved its primary investment objective, to meet its managed payment policy by delivering level monthly payments.
- During the period, the Fund underperformed the S&P Target Risk Moderate Index and its strategic allocation benchmark on a net asset value (NAV) basis.
- Alternative strategies detracted, while manager selection contributed.
Market review
U.S. stock and bond markets faced challenges at the beginning of the second quarter, as hot inflation readings dampened expectations for Fed rate cuts. Towards the end of the quarter, however, the outlook improved as favorable May inflation data increased investor confidence in potential Fed rate reductions by September. This, along with continued strength in the labor market and rising earnings optimism helped broad equity markets post gains for the period. Large-cap stocks outperformed small caps and growth beat value. Within the S&P 500 Index (SP500,SPX), technology, communication services and utilities sectors led, while materials, industrials and energy lagged.
International stocks also moved higher, with emerging markets (‘EM’) outperforming developed. China and India, the two largest countries within the EM equity Index, both performed well. Chinese equities were helped by government support for the real estate sector and improving industrial production, while Indian equities saw strong performance continue after general elections concluded and Prime Minister Modi secured his third term in office. Japanese stocks underperformed in the period primarily due to uncertainty surrounding the Bank of Japan’s monetary policy normalization and the expected appreciation of the yen, which raise concerns about the competitiveness of Japanese exports.
Fixed income markets had mixed performance but declined in aggregate as the U.S. Treasury yield curve rose slightly. High-yield (‘HY’) bonds performed well due to strong corporate earnings pulling spreads tighter. Like international equities, EM bonds outperformed developed market issues, as French government bonds dropped on political uncertainty.
Outlook
The impact of high interest rates is evident as growth trends below normal, putting downward pressure on prices. Recent data shows a quarterly gross domestic product (GDP) growth slowdown to 1.4% and a slight increase in unemployment to 4.1%. While employment indicators suggest a softening job market, a rise in job openings to 8.1 million indicates a gradual cooling. Disinflationary trends are resuming, which should support real incomes aligned with 2% inflation. While higher rates counteract some easing financial conditions, we expect inflation to continue decreasing without spiking unemployment, thus averting a recession. Equity markets may not see significant gains soon, especially with expected volatility as U.S. elections approach.
In this late-cycle environment, we maintain a neutral stance between stocks and bonds, balancing the risks associated with both asset types.
The current global economic landscape and market dynamics favor U.S. assets, particularly large cap stocks. Despite macroeconomic challenges, the United States is better positioned than most regions. U.S. capital markets, a global destination for investor flows, benefit from stable economic conditions, technological innovation and robust financial markets. Consequently, the U.S. is our preferred region, with large cap stocks appealing for their earnings quality, growth potential, and momentum. Technology-driven sectors offer unrivaled pricing power, promising positive real returns regardless of inflation levels. However, earnings expectations have outpaced actual earnings, and with nominal GDP growth declining, sales growth will be challenging. While high profit margins and returns on equity may support valuations, they are too high to expect further expansion. Much depends on the earnings growth of U.S. technology megacaps, which have driven recent gains but face scrutiny over their artificial intelligence investments. These firms must eventually demonstrate revenue and earnings from these investments, but immediate results are not necessary as AI infrastructure providers are generating significant cash flows. Companies need time to transition from training to production models before making accurate assessments. We also value the stability of large companies to buffer against global economic and geopolitical uncertainties, offering a compelling risk-reward opportunity.
For as long as we have favored U.S. large caps, we have been underweight in real estate investment trusts (REITs) due to rising interest rates increasing borrowing costs and pressuring their performance. The significant amount of commercial real estate debt needing refinancing at higher rates poses financial risks, especially for office and retail sectors facing structural challenges. Additionally, the volatility and potential overvaluation of publicly traded REITs relative to their NAV raise concerns about their return potential. Given these factors, we see more attractive investment opportunities elsewhere.
International stocks present mixed prospects. Japan struggles with a weak currency and challenges in normalizing monetary policy, despite potential rate hikes influenced by easing U.S. inflation and European Central Bank cuts. Europe faces sluggish growth due to high labor costs, persistent core inflation and geopolitical tensions, exacerbated by domestic political instability, particularly in France. In contrast, the United Kingdom appears more stable and attractive to investors, buoyed by political shifts towards Labour under Sir Kier Starmer, anticipated Bank of England rate cuts, and favorable macroeconomic data. Meanwhile, China’s stock market has rallied, driven by strong GDP growth and robust sectors like electric vehicles and industrial robotics. However, significant risks linger due to its ongoing property crisis and sensitive international relations, especially with the U.S.
We maintain a preference for higher quality within fixed income. Despite limited upside from tight spreads, the supportive macroeconomic environment and solid corporate fundamental factors make the yield from investment grade (‘IG’) bonds appealing. Securitized credit products, particularly consumer- oriented asset-backed securities (‘ABS’) and residential mortgage- backed securities (‘RMBS’), are attractive. The commercial mortgage-backed securities (‘CMBS’) sector, though beaten down, offers value opportunities for astute investors. Although higher interest costs impact HY credit quality, defaults remain limited, keeping us neutral due to increasing tail-risks. We lack a strong conviction on the near-term direction of rates but maintain a modest long duration in aggressive, equity-heavy portfolios for added stability. We prefer nominal over real bonds to hedge against equity downturns. With some foreign central banks cutting rates, certain international bond markets are appealing.
However, due to a strong U.S. dollar and potential negative currency impacts, we remain underweight on non-U.S. bonds.
Positioning
At the beginning of the period, there were no open tactical positions. At the end of February, the Fund’s strategic asset allocation was reset, with all tactical positions at the beginning of the period being subsumed into the revised strategic asset allocation, thereby becoming longer-term views.
The Fund continues to favor U.S. assets and maintain a balanced posture overall with a preference for U.S. large cap equities and core IG fixed income.
Performance
The Fund achieved its primary investment objective: to meet its managed payment policy by delivering level monthly payments. In addition, the Fund attempts to outperform its strategic allocation benchmark through tactical asset allocation, i.e. deviating from the composite benchmark over the short and medium-term, alternative strategies and active manager selection. For the second quarter of 2024, the Fund underperformed the S&P Target Risk Moderate Index and its strategic allocation benchmark on a NAV basis. Alternative strategies detracted, while manager selection contributed.
Tactical asset allocation was neutral during the period. Alternative strategies were a detractor. Both cross-asset relative value (‘CARV’) and tactical currency (‘TC’) delivered negative returns for the quarter.
The Fund also attempts to outperform its strategic allocation benchmark through the selection of managers to run the underlying funds, which represent the various asset classes within the composite. Manager selection was a contributor during quarter. Strategies that contributed most to excess returns in the quarter were Voya Intermediate Bond, Voya Multi-Manager International Equity and Voya Large Cap Value were the biggest contributors. The biggest detractors in the quarter were Voya Large-Cap Growth, Voya Multi-Manager Emerging Markets Equity and Voya Multi-Manager Mid Cap Value.
The Fund’s option overlay strategy is designed to support the monthly payment through premium generation and provide some downside protection if an underlying asset sells off substantially. This strategy seeks to accomplish these objectives through two sub-strategies. The first piece involves earning the volatility risk premium by selling options while hedging the delta exposure, in effect removing negative equity beta. The second leg provides downside protection. This involves buying puts and put spreads or selling calls and call spreads. These positions should add to performance when equities fall. Over the quarter, the option overlay was a contributor, with volatility premium capture delivering strong returns and the hedge leg modestly detracting.
You should consider the investment objectives, risks, and charges and expenses of the variable product and its underlying fund options; or mutual funds offered through a retirement plan, carefully before investing. The prospectuses / prospectus summaries / information booklets contain this and other information, which can be obtained by contacting your local representative or by calling(800) 992-0180. Please read the information carefully before investing. The S&P Target Risk Growth Index is comprised of nine multi-asset class indexes, each corresponding to a particular risk level. The nine multi-asset classes include U.S. large-cap equities, U.S. mid-cap equities, U.S. small-cap equities, international equities, emerging markets, U.S. real estate investment trusts (REITs), core fixed income, short-term U.S. Treasury securities and Treasury inflation-protected securities (OTCPK:TIPS). Each index is designed to provide varying levels of exposure to equities and fixed income. Investors cannot invest directly in an index. Risks specific to Managed Payment: The Fund is expected to make monthly payments under its Managed Payment Policy regardless of the Fund’s investment performance. Because these payments will be made from Fund assets, the Fund’s monthly payments may reduce the amount of assets available for investment by the Fund. It is possible for the Fund to suffer substantial investment losses and simultaneously experience additional asset reductions as a result of its payments to shareholders under the Managed Payment Policy. The Fund may, under its Managed Payment Policy, return capital to shareholders which will decrease their costs basis in the Fund and will affect the amount of any capital gain or loss that shareholders realize when selling or exchanging their Fund shares. Principal Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. Investing in stocks of Small- and Mid-Sized Companies may entail greater volatility and less liquidity than larger companies. Foreign Investing poses special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. Emerging Markets securities may be especially volatile. Convertible Securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than convertible securities with shorter maturities. Prices of Value-Oriented Securities tend to correlate more closely with economic cycles than growth-oriented securities, and generally are more sensitive to changing economic conditions. The Fund may use Derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses and have a potentially large impact on Fund performance. Other risks of the Fund include but are not limited to: Market Trends Risks, Other Investment Companies’ Risks, Price Volatility Risks, Inability to Sell Securities Risks and Securities Lending Risks. Investors should consult the Fund’s Prospectus and Statement of Additional Information for a more detailed discussion of the Fund’s risks. An investment in the Fund is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. The strategy employs a quantitative model to execute the strategy. Data imprecision, software or other technology malfunctions, programming inaccuracies and similar circumstances may impair the performance of these systems, which may negatively affect performance. Furthermore, there can be no assurance that the quantitative models used in managing the strategy will perform as anticipated or enable the strategy to achieve its objective. Variable annuities and group annuities are long-term investments designed for retirement purposes. If withdrawals are taken prior to age 59½, an IRS 10% premature distribution penalty tax may apply. Money taken from the annuity will be taxed as ordinary income in the year the money is distributed. An annuity does not provide any additional tax deferral benefit, as tax deferral is provided by the plan. Annuities may be subject to additional fees and expenses to which other tax-qualified funding vehicles may not be subject. However, an annuity does provide other features and benefits, such as lifetime income payments and death benefits, which may be valuable to you. Variable investments, of any kind, are not guaranteed and are subject to investment risk including the possible loss of principal. The investment return and principal value of the security will fluctuate so that when redeemed, it may be worth more or less than the original investment. In addition, there is no guarantee that any variable investment option will meet its stated objective. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies. Insurance products, annuities and funding agreements issued by Voya Retirement Insurance and Annuity Company (“VRIAC”), One Orange Way, Windsor, CT 06095, which is solely responsible for meeting its obligations. Plan administrative services provided by VRIAC or Voya Institutional Plan Services, LLC (“VIPS”). Securities distributed by or ottered through Voya Financial Partners, LLC (“VFP”) (member SIPC)or other broker-dealers with which it has a selling agreement. Only Voya Retirement Insurance and Annuity Company is admitted and can issue products in the state of New York. All companies are members of Voya Financial. This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an otter to sell or solicitation of an otter to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. Past performance is no guarantee of future results. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Portfolio holdings are fluid and are subject to daily change based on market conditions and other factors. The Fund discussed may be available to you as part of your employer sponsored retirement plan. There may be additional plan level fees resulting in personal performance to vary from stated performance. 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