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Voya Investment Management Update
Vantage Point
February 2015
Included in this issue:
Lower Oil Prices and Their Impact on the Investment Landscape and Solutions
What Should We Expect from the 114th Congress?
Senior Loans: 2014 Recap and 2015 Outlook
The Many Nuances of Fixed Income
New Rulings Support Use of Deferred Annuities in 401(k) Plans
Recent Money Market Reforms May Impact Your DC Plan
For Institutional Use Only
I N V E S T M E N T M A N AG E M E N T
voyainvestments.com
Editor in Chief
Daniel P. Donnelly
Art Director/Designer
Kim Jensen
Marketing
Voya Investment Management
230 Park Avenue
New York, NY 10169
[email protected]
NEXT ISSUE:
May 2015
This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained
herein should be construed as (i) an offer to sell or solicitation of an offer 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.
Voya Investment Management Co. LLC (“Voya”) is exempt from the requirement to hold an Australian financial services
license under the Corporations Act 2001 (Cth) (“Act”) in respect of the financial services it provides in Australia. Voya is
regulated by the SEC under US laws, which differ from Australian laws.
This document or communication is being provided to you on the basis of your representation that you are a wholesale
client (within the meaning of section 761G of the Act), and must not be provided to any other person without the written
consent of Voya, which may be withheld in its absolute discretion.
Past performance is no guarantee of future results.
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Performance and other data are presented as supplemental information to returns required
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please contact a regional manager listed on page 3. Consultants should contact any member
of the Consultant Relations team listed on page 3.
For Institutional Use Only
Contents
Overview
2 Profile
3 Contacts
Feature Articles
4 Letter From Our CEO
Jeff Becker, Chief Executive Officer
Market Review
5 Fourth Quarter 2014 in Review
Market Perspectives
7 Lower Oil Prices and Their Impact on the Investment Landscape
Paul Zemsky, CFA, Chief Investment Officer, Multi-Asset Strategies and Solutions
Derek Sasveld, CFA, Head of Asset Allocation
Timothy Kearney, PhD, Asset Allocation Strategist
10
What Should We Expect from the 114th Congress?
Sean Cassidy, Vice President of Federal Government Affairs, Voya Financial
11 Senior Loans: 2014 Recap and 2015 Outlook
Dan Norman, Group Head, Senior Loan Group
Jeff Bakalar, Group Head, Senior Loan Group
14
The Many Nuances of Fixed Income
Christine Hurtsellers, CFA, Chief Investment Officer, Fixed Income
Bas NieuweWeme, Head of Institutional Distribution
Reprinted from CIO magazine
DC Spotlight
17 New Rulings Support Use of Deferred Annuities in 401(k) Plans
19
Recent Money Market Reforms May Impact Your DC Plan
Strategy Review
21
Large Cap Value Equity
Large Cap Growth Equity
Mid Cap Growth Equity
Other Information
25 Core Fixed Income
Core Plus Fixed Income
Long Duration Credit Fixed Income
30 Client Profile
22 Small Cap Core Equity
Small Cap Growth Equity
SMID Cap Growth
26 High Yield Fixed Income
Investment Grade Credit
Senior Loan
32 Benchmark Definitions
23 Global Bond Fixed Income
Core Short Duration Fixed Income
Core Intermediate Government/
Credit Fixed Income
27 Target Solution Trust Series
24 Stable Value Fixed Income
Absolute Alpha
29 (L) Renta Fund US Credit
(L) US Growth
(L) Flex — Senior Loans
31
Disclosures
28 Custom Target-Date Funds
Multi-Credit Fixed Income
1
For Institutional Use Only
Overview
Profile
Voya Investment Management (Voya IM) is a leading active asset management firm. As of September 30, 2014, Voya IM
manages approximately $213 billion* for affiliated and external institutions as well as individual investors. Drawing on over
40 years of experience and an ongoing commitment to reliable investing, Voya IM has the resources and expertise to
help long-term investors achieve strong investment results.
We earn the trust of our clients by always putting their interests first. Guided by our understanding of their needs, we
focus on delivering unmatched service and strong long-term performance. With an emphasis on active management,
our investment skills are organized around disciplined processes designed to maximize the probability of repeatable
performance; our proprietary research and analytics seek unrecognized value ahead of consensus, and we construct
portfolios to ensure all risk positions are deliberate, diversified and consistent with client guidelines. By focusing on our
core capabilities, we aim to deliver consistent performance across a variety of strategies that will earn high rankings in
terms of excess returns and risk efficiency.
Voya Investment Management offers investment services to a variety of institutional clients including public, corporate
and union retirement plans, sub-advisory, OCIO service providers, endowments, foundations and insurance companies as
well as to individual investors via intermediary partners such as banks, broker/dealers and independent financial advisors.
*Voya IM assets of $213 billion include proprietary insurance general account assets of $85 billion calculated on a market value basis. Voya IM assets, as reported
in Voya Financial, Inc. SEC filings, include general account assets valued on a statutory book value basis and total approximately $207 billion. Both totals include
approximately $8 billion in Private Equity, $7 billion in Real Estate and $5 billion in other assets including those sub-advised through the Voya family of funds and the
Multi-Asset Strategies and Solutions product offerings. Approximately $0.6 billion of total fi xed income assets are also included in the Senior Loan and Private Equity
totals.
2
For Institutional Use Only
Contacts
Bas NieuweWeme
Managing Director
Head of Institutional Distribution
212-309-6457
[email protected]
Institutional Sales
Ken Sarafa
Senior Vice President,
Head of U.S. Sales and
Relationship Management
248-208-6028
[email protected]
Darren Massey
Senior Vice President,
Midwest Region
708-949-8865
[email protected]
John Simone, CFA
Senior Vice President,
Head of Insurance Investment
Management Sales and Solutions
212-309-8413
[email protected]
Sandy Sinor
Senior Vice President,
Western Region
212-309-6549
[email protected]
Jennifer Wu, CFA
Senior Vice President,
Eastern Region
212-309-6435
[email protected]
Hugh Boyle
Vice President,
Institutional Sales and
Relationship Management
212-309-8469
[email protected]
Kathy Martens
Senior Vice President,
Institutional Sales and
Relationship Management,
Europe
212-309-8480
[email protected]
Michael Alvarez
Assistant Vice President,
International Sales Specialist,
Europe
212-309-6409
[email protected]
Anita Erzetic
Strategic Sales Specialist
212-309-6443
[email protected]
Russell Greig
Assistant Vice President,
Strategic Sales Specialist
212-309-5903
[email protected]
Consultant Relations
Brian Baskir, FIA
Managing Director and
Head of Global Consultant Relations
212-309-6481
[email protected]
Brant Grimes, CFA, CAIA
Senior Vice President, Consultant Relations
Western Region
415-542-6524
[email protected]
Mike Beckerman
Senior Vice President, Consultant Relations
Eastern Region
212-309-5986
[email protected]
Conor Sullivan
Senior Vice President, Consultant Relations
Central Region
312-674-4808
[email protected]
Client Service
RFPs and Databases
Eileen Madden, CFA
Senior Vice President
Head of Client Service and
Relationship Management
860-275-4640
[email protected]
Jennifer Taglia
Senior Vice President
Head of RFP and Databases
212-309-8256
[email protected]
Jonathan Ng
Institutional Distribution
212-309-6542
[email protected]
3
For Institutional Use Only
Letter From Our CEO
Dear Investors,
Jeff Becker
Chief Executive Officer
First the good news: The price of oil has plummeted, a potential boon to consumers and to
countries less reliant on oil revenues. Now the bad news: The price of oil has plummeted,
putting downward pressure on energy and related sectors while painfully squeezing any number
of oil-exporting countries. And while a Fed rate hike looms thanks to the robust domestic
economy, global weakness may threaten the persistence of the U.S. expansion. The confluence
of these and other important economic events are examined in “Fourth Quarter 2014 in Review”
beginning on page 5.
With oil market dynamics suggesting that lower prices could be here for a while, what will that
mean for investors? In “Lower Oil Prices and Their Impact on the Investment Landscape,” members
of our four investment platforms — Multi-Asset Strategies and Solutions, Equity, Fixed Income and
Senior Loans — bore deeper into oil’s impact on their respective asset classes.
The midterm elections saw Republicans take control of the Senate while extending their majority
in the House. Sean Cassidy ponders the impact this may have on the waning days of the Obama
presidency in “What Should We Expect from the 114th Congress?”
Dan Norman and Jeff Bakalar take a look back at last year’s senior loan market and speculate on its
possibilities for the new year in “2014 Recap and 2015 Outlook.”
An interview with Fixed Income CIO Christine Hurtsellers and Head of Institutional Distribution Bas
NieuweWeme was recently featured in Chief Investment Officer magazine. In this reprint, you can
read their thoughts about “The Many Nuances of Fixed Income”.
Recent rulings by U.S. government agencies are likely to impact common retirement vehicles. Our
DC Spotlight examines the consequences in “New Rulings Support Use of Deferred Annuities in
401(k) Plans” and “Recent Money Market Reforms May Impact your DC Plan.”
Helping our clients confidently reach their long-term goals is Voya Investment Management’s sole
mission — that’s what we’re here for. We are your reliable partner, committed to reliable investing.
Sincerely,
Jeff Becker
4
For Institutional Use Only
Fourth Quarter 2014 in Review
Oil Instability Persists, as Does Ample Liquidity
After five years of relative stability, oil prices have been in free fall
since summer in the face of faltering global demand and greater-thanexpected supply from U.S. drillers. At the time of writing, the price of
West Texas Intermediate crude — the benchmark for U.S. oil prices —
was testing lows not seen since the 2009 depths of the financial crisis
near $45/ barrel, off more than 50% from June levels. Brent crude
— the global benchmark — has felt similar pressure. And while the
International Monetary Fund estimates that a 30% decline in oil prices
translates into 0.8% boost to developed economy growth, this benefit
comes at the expense of those nations dependent upon oil revenues:
Russia, for one prominent example, in mid-December hiked its key
interest rate to 17% from 10.5% to defend its currency.
While oil market gyrations resulted in widespread market
consternation during parts of the fourth quarter, lower energy costs
should ultimately work to the advantage of those economies that are
less reliant on oil revenues. This includes the U.S., which reported
blockbuster GDP growth of 5% in the third quarter, the fastest
quarterly expansion in 11 years. The domestic consumer, in particular,
should benefit, as the fall in the prices of gasoline, heating oil and
natural gas equates to a de facto $1,000 stimulus for the average
U.S. family over the next year. This is probably at least partially
responsible for the impressive consumer metrics we have seen in
recent weeks; the final December reading on consumer sentiment
from the University of Michigan came in at a seven-year high, for
example, while November retail sales rose 0.7% from the prior month.
Also helping bolster consumer spirits are nonfarm payrolls, which
ended a strong year on a strong note. The economy added 252,000
jobs in December, while results for November and October were
restated higher by a total of 50,000; full-year 2014 adds of nearly
3 million reflect the best annual pace since 1999. The unemployment
rate shed 20 basis points in December to reach 5.6%, down from
6.7% at year-end 2013 and the lowest level since mid-2008. And while
wage growth remains soft, helping subdue overall inflation pressures,
other metrics — including a survey of small-business hiring plans and
the Labor Department’s JOLTS report — bode well for the paychecks
of American workers.
However, while cheap oil should benefit consumers and business in
a variety of energy-importing economies, it’s questionable whether
this ersatz stimulus can lift the more challenged countries and regions
out of their malaise. In fact, despite the potential tailwind from oil and
expectations of relative strength in the U.S., the World Bank slashed
its expectation for 2015 global economic growth to 3.0%, from
3.4% in June. The euro zone is a poster child for this international
sluggishness, and recent data suggest that fourth quarter GDP
growth there is unlikely to be much better than the 0.6% annualized
rate recorded in the third quarter. Plus the trend in crude is putting
downward pressure on prices in a market desperate for inflation;
consumer prices in the euro zone fell 0.2% in December from yearago levels, the first contraction since 2009. As the world’s largest net
importer of oil, China also stands to benefit from cheaper oil; Bank
of America Merrill Lynch estimates that every 10% fall in the price of
oil boosts China GDP by 15 basis points. This potential boost comes
at an opportune time for the country, which continues to grapple
with what its leader has described as a “new normal” of slower but
higher-quality growth as it endures ongoing structural reforms. China
posted GDP growth of 7.3% in the third quarter, down from the second
quarter’s 7.5% expansion, and is expected to have slowed further
in the final quarter of 2014. And Japan, another major oil importer,
could use a lift of its own, having re-entered recession with a 1.9%
GDP contraction in the third quarter on the heels of a whopping
7.1% decline in the second.
Beyond oil, there was plenty of news out of Washington in the
fourth quarter. Midterm elections saw Republicans gain a majority
in the Senate while widening their advantage in the House of
Representatives, though significant change in policy direction
seems unlikely given the GOP’s lack of supermajority in either
chamber. While it looks like more of the same on Capitol Hill, a
few blocks away the Federal Reserve is slowly but surely changing
course. As expected, October marked the end of the central bank’s
asset-purchase program; however, the Fed has insisted that it plans
to take a “patient” approach to the looming rate-hike cycle given
uncertain global economic prospects, suggesting ample liquidity will
persist. This ongoing accommodation is especially true from a global
perspective, as a number of central banks worldwide are taking an
This commentary is intended for informational purposes only and should not be considered a recommendation or advice.
This material may not be reproduced in whole or in part without the prior written permission of Voya Investment Management.
5
For Institutional Use Only
increasingly divergent path from the U.S. Just two days after the
Fed ended its QE program, the BOJ unexpectedly moved to at
least partially fill the liquidity void, expanding its asset-purchase
program and tripling the rate at which it buys stocks and property
funds. The European Central Bank’s latest auction of cheap loans to
euro zone financial institutions — the so-called targeted longer-term
refinancing operation (TLTRO) — was met with a collective shrug,
intensifying pressures on the central bank to announce new steps in
its battle against deflation, perhaps including a longed-for sovereign
bond-buying program. And the People’s Bank of China unexpectedly
cut interest rates for the first time in more than two years in midNovember and later injected around $65 billion into the country’s
banking system.
A Volatile End to a Strong Year for U.S. Equities
Though the road got a bit rocky over the past few months, domestic
equity markets delivered a solid fourth quarter to punctuate a strong
year. The Dow Jones Industrial Average posted a 5.2% return for
the fourth quarter and a 10% gain for 2014 in full, while the S&P
500 Index hung total returns of 4.9% and 13.7% for those periods,
respectively. In addition to leading the way in the fourth quarter with
a 5.4% return, the Nasdaq was also the full-year winner among the
big three indexes, growing nearly 15%. Seven of the ten S&P 500
sectors reported positive performances in the fourth quarter, led by
consumer discretionary and consumer staples; energy was notably
weak for the period, while telecoms and materials also lagged. For
the year, utilities outpaced the competition, trailed by health care
and information technology, and energy was the only sector not
to finish 2014 in the black. In terms of capitalization, small caps
led the way in the fourth quarter but trailed large- and mid-cap
stocks by a large margin for the year. Growth and value delivered
similar performances across the capitalization spectrum during the
fourth quarter.
As they did for the year as a whole, international developed markets
lagged their U.S. counterparts during the fourth quarter. A 3.9%
quarterly loss by the MSCI EAFE Index was the icing on the cake of a
7.4% annual decline. While Europe was notably weak, softness was
widespread. New Zealand, Hong Kong and Ireland were among only
a handful of international developed markets to deliver a quarterly
gain, while Norway, Portugal and Italy were among the countries to
post double-digit losses for the period. Emerging markets suffered a
similar fate, dropping 4.9% in the last three months of 2014 to bring
their full-year loss to 4.6%. Eastern Europe was pummeled as the
rout on Russia continued, though a sharp 50%-plus rally by China
helped buoy emerging Asian markets.
Long Treasuries Dominate
Treasury securities continued to be an attractive safe haven during
the tumult of the fourth quarter. Yield on the benchmark ten-year
Treasury ended the period at 2.17%, down from end-September’s
2.52% and sharply lower than the 3.03% at which we finished 2013.
The widely watched Barclays U.S. Aggregate added 1.8% in the
fourth quarter, just shy of the 1.9% gain in Treasuries. Treasuries with
maturities in excess of 20 years continued to outperform the rest of
the market, posting an astonishing 27% return for 2014. Most sectors
of the fixed income market delivered positive absolute returns
during the quarter while falling short relative to Treasuries, though
emerging market debt, high yield bonds and senior loans were
notable negative outliers. Yields on money market instruments —
such as Treasury bills, short-term agency securities and high-quality
commercial paper — remained very low throughout the month as
the fed funds target rate traded within the 0.00–0.25% range. Libor
rates moved higher across the curve.
As evinced by its most recent policy statement, the Fed appears
committed to beginning its patient normalization process in 2015
amidst a backdrop of continued improvement in U.S. labor markets
and a perception that lower oil prices ultimately will translate into a
dividend for consumers. Our base case is that the U.S. will maintain
a modest pace of growth while central banks continue to fight
aggressively to improve their own near-term outlooks. As oil prices
begin to find their footing we expect better behavior by U.S. spread
sectors in 2015.
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For Institutional Use Only
Lower Oil Prices and Their Impact
on the Investment Landscape
This article first appeared in the January 2015 issue of Voya Investment Monthly.
Multi-Asset Strategies and Solutions
After trading in a stable range around $96/barrel (bbl)
for four years, the price of West Texas Intermediate
(WTI) crude oil — the primary benchmark for oil prices
in the United States — has fallen more than 50% since
June, and oil market dynamics suggest that lower
prices could be here for the foreseeable future.
There are a number of possible reasons for the current
steep price drop, including the shale energy revolution
in the United States, Saudi Arabia’s attempts to punish
ISIS/Iran economically and OPEC’s desire to engage
U.S. frackers in a price war. The International Monetary
Fund estimates that lower prices are 80% the result of
supply conditions and 20% due to wavering demand.
The rise in U.S. petroleum output led by shale fracking
has been spectacular. As illustrated below, after
bottoming below 5 million barrels per day (b/d) in
2008, U.S. output has skyrocketed to over 9 million
b/d at present; the U.S. now vies with Saudi Arabia and
Russia as the world’s largest producer. In addition, the
U.S. Energy Information Administration believes that at
least another 500,000 b/d in production could come
to market by 2019. But production gains have not been
limited to the U.S.; global oil output has risen to 94
million b/d after output in 2005–09 flattened around
83 million b/d. Middle Eastern supply from Libya has
been greater than expected, while OPEC and Russia
continue to produce at high levels to maintain market
share and meet public budgets as prices fall. Along with
so far ongoing rising supply, the International Energy
Agency expects demand growth to slow in 2015 as
global GDP growth moderates. Meanwhile, deflation
concerns — primarily in Europe and Japan — and
the recent strength of the U.S. dollar has pressured
commodities in general and oil in particular.
Fracking Has Led to a Spike in U.S. Oil Production
U.S. Crude Oil Production, 1990–present
10
Millions of Barrels per Day (b/d)
As a follow-up to our December 11, 2014, article Lower
Oil Prices May Persist, we spoke with our investment
platforms to get their views on what appears to be a
new oil price regime. Below, following a macroeconomic
overview provided by our Multi-Asset Strategies and
Solutions team, our Equity, Fixed Income and Senior
Loan teams provide asset class-specific reflections.
9
8
7
6
5
4
3
1990 1993 1996 1999 2002 2005 2008 2011 2014
Source: Energy Intelligence Group, Bloomberg
In driving oil prices to their current low levels,
markets have digested both the likelihood of Fed
tightening and OPEC’s disinclination to support oil
prices through output cuts. However, lower oil prices
themselves should support global economic growth
and hence demand, while supply should start to
ease as exploration and production projects are cut.
In terms of overall impact, lower oil prices should be a
net positive for the U.S. non-oil economy and markets;
as consumers benefit from cheaper gasoline and
heating oil, the inflation-dampening impact of low oil
prices will allow the Federal Reserve to take a cautious
approach to policy normalization. Many other markets
not dependent on oil revenues — for example, Japan
and Europe — should experience similar benefits.
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For Institutional Use Only
Equities
The rapid decline in oil prices in the second half of 2014 has resulted
in a significant drop in estimated revenues, cash flow and earnings for
energy-related companies and has thrown their stocks into a tailspin.
Exploration and production (E&P) budgets for the upcoming year
already have been slashed by 20% or more, reflecting lower return
expectations on future investments in oil and gas fields. Hardest
hit in this environment are oil service and drilling stocks, as the
aforementioned capital spending cuts directly impact their revenue
outlooks. Midstream or transportation and processing companies
with more stable cash flows from tariff-based revenue structures have
been more durable.
All energy companies are preparing to survive at current oil prices
by running existing assets as efficiently as possible and by focusing
future investments into those projects that offer the best risk/
reward profiles at current commodity price levels. Accordingly, equity
investors should focus on those companies whose managements
can improve their competitive positions and still generate acceptable
returns without depending on a recovery in oil and natural gas
pricing. Selected integrated oil and E&P companies offer investors the
opportunity both to remain exposed to the sector with modest risk
while also participating in the upward movement that would result
from a sudden unexpected rise in oil prices.
Meanwhile, a number of other equity sectors stand to benefit from
lower oil prices. The drop in gasoline prices is effectively a tax cut
for the average U.S. consumer, which should benefit stocks exposed
to consumers’ discretionary spending habits; this group includes
retailers, restaurants, hotels and gaming stocks. Companies that
directly consume oil in their business — such as airlines, truckers and
shipping companies — should also enjoy the low-price environment.
While select chemical manufacturers also benefit from lower
feedstock costs, product pricing in these areas — much like oil prices
— is currently under severe pressure, largely negating the improved
cost position.
Fixed Income
While the decline in oil prices toward the end of the year was a key
contributor to the credit market weakness we saw as 2014 drew to
a close, it wasn’t the only destabilizing factor; in fact, we view the
European Central Bank’s summer adoption of a negative deposit rate
as a major driver. The markets perceived the ECB move as a sign
Europe was shriveling, and bid up the currency of the much stronger
U.S. as a result. Meanwhile, the Bank of Japan’s surprise November
vow to purchase JGBs at a significantly faster clip further highlighted
the starkly divergent growth outlooks between the U.S. and the rest
of the world and exacerbated the rapid appreciation of the greenback.
This dollar strength further pressured oil prices that were already
contending with withering supply/demand conditions, leaving us
where we are today.
The dollar’s rise and oil’s fall caused a meaningful correction in credit
markets and a flattening of the yield curve. As oil prices begin to
find their footing we expect better behavior by U.S. spread sectors
in 2015. As such, the recent selloff in both high yield and investment
grade credit represents an attractive buying opportunity.
High yield corporate bonds bore the brunt of the fixed income
market’s pain, closely tracking the price movement in oil in large part
due to the concentration of energy issuers within the index. The most
severe price action occurred within the smaller, less well-capitalized
operators, the credits of which are most at risk from lower oil prices.
As usual, negative returns have led to fund outflows, which have
continued to pressure prices. In terms of investment grade corporates,
energy- and commodity-related industries unsurprisingly have been
the biggest driver of weakness. Most investors now expect lower
prices for the foreseeable future and have re-priced the energysensitive industries accordingly. While lower oil prices in concept
benefit the consumer and the rest of the economy, the impact is less
pronounced and less direct; in fact, we have yet to see a positive
spread off set to counterbalance the weakness in the energy-related
industries.
Volatility in the emerging markets also picked up significantly in
response to the selloff in oil prices, with commodity exporters and
high yield credits the most impacted. Russian assets, in particular,
have come under extreme pressure, with the ruble recently
widening to all-time lows versus the dollar and the euro. And while
some markets have rallied sharply in recent weeks, our outlook
for emerging market debt is cautious in the face of challenging
liquidity conditions.
Senior Loans
The ongoing volatility in the price of crude oil continues to weigh
heavily on the trading levels of loans issued by virtually all companies
in the energy sector. At this point, bids appear to have generally
stabilized at the prevailing lower levels but remain vulnerable to
significant short-term movements, typically in line with that of the
commodity itself.
We continue to believe the short- and long-term implications of
the move in oil prices will be predicated on how well positioned
the various issuers are on the production cost curve. Short term,
U.S. shale players will likely remain under pressure, impacting the
E&P and oil field services sub sectors. We do note, however, these
operators typically have greater operational flexibility than traditional
producers. In the long term we expect deep-water drillers, Canadian
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oil sands operators and the high-cost sovereign producers to be the
most impacted should oil prices remain at current levels or fall further
from here. We also believe the midstream sector (e.g., pipelines) will
fare better than the drillers/servicers due to the contracted and less
commodity price-sensitive nature of their revenue streams. Note that
issuers with exposure to the four key basins (Eagle Ford, Marcellus,
Bakken and Permian) will fare better than those positioned in the
peripheral basins.
The overall loan market’s direct exposure to the oil and gas sector is
estimated at 4.09%1 as a percentage of the S&P/LSTA Leveraged Loan
Index market value versus roughly three times that for the high yield
market. We now see heightened default risk among some high yield
issuers, and we will be on watch for spillover into the loan market due
to capital structure (i.e., loan versus bond) repositioning.
1
The sector weighting is based on our internal evaluation of all S&P/LSTA Leveraged
Loan Index issuers that we believe have direct exposure to the oil and gas sector;
some of these issuers may be classified differently by the index.
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What Should We Expect from
the 114th Congress?
This article appeared in the November 2014 issue of Voya Investment Monthly.
Sean Cassidy
Vice President of
Federal Government
Aff airs, Voya Financial
Although we still don’t know the outcome of every House
and Senate election, we do know that the Republicans
have increased their majority in the House by a minimum
of 12 seats and that they will assume control of the Senate
next year after gaining at least eight seats. Given that they
lack the majority in either chamber necessary to override
a presidential veto, however, has anything really changed?
Did this election matter?
We think it did; below we provide our expectations around
a number of key issues in 2015. It’s worth noting that there
is only a brief period during which Congress is likely to
pass any meaningful legislation — tax-related or otherwise
— before the 2016 presidential race further polarizes the
House and Senate and reduces the odds of bipartisan
cooperation dramatically.
Comprehensive tax reform. Given the many industries
and individuals invested in the current tax code,
comprehensive tax reform is difficult under any scenario.
However, the incoming chairman of the House Ways and
Means Committee — Rep. Paul Ryan (R-WI) — and the
incoming chairman of the Senate Finance Committee
— Sen. Orrin Hatch (R-UT) — both have indicated a
commitment to attempting tax reform and fully intend to at
least start the process next year. It’s not yet clear whether
they will hold many of the same fact-gathering hearings
that have been convened over the last several years or if
they will instead move straight to legislation. Regardless,
it’s almost certain that a variety of retirement-related
tax preferences will be considered as potential revenueraising options.
Repeal or substantial modification of the Dodd-Frank
Act. Lacking the ability to override a presidential veto
despite their majority in both chambers, Republicans
are unlikely to pass legislation repealing or substantially
weakening the Dodd-Frank Act. However, the House
passed a number of bipartisan bills in the 113th Congress
that would have amended the statute, and these are likely
to be repassed and considered by a Republican-controlled
Senate next year. For example, the House passed bills
to provide regulatory exemptions for the end users of
derivatives, to exempt inter-affiliate swap transactions
from some regulatory requirements and to increase
small business access to the capital markets.
Increased Congressional Oversight of the Fed, FSOC,
CFPB, and other agencies. The House Financial Services
Committee and Senate Banking Committee will almost
certainly conduct a variety of oversight hearings focusing
on financial industry regulators such as the Federal
Reserve, the Financial Stability Oversight Council (FSOC),
the Securities and Exchange Commission (SEC) and the
Consumer Financial Protection Board (CFPB). Incoming
Senate Banking Committee Chairman Richard Shelby
(R-AL), for example, has been a vocal critic of the FSOC’s
lack of transparency around its deliberations over which
non-banking firms should be designated as “systemically
important”, as well as the fact that CFPB is not governed
by a board composed of Senate-confirmed members.
Expanded definition of “fiduciary” under ERISA. The
Department of Labor (DOL) is widely expected to re-issue
a proposed rule that expands the definition of “fiduciary”
under ERISA, modifies a variety of “prohibited transaction
exemptions” and perhaps extends its jurisdiction to
include individual retirement accounts. The DOL faced
a barrage of industry criticism and bipartisan, bicameral
letter writing when it originally unveiled this proposal
several years ago, as it likely would have reduced
the amount of helpful information plan sponsors and
administrators shared with plan participants. DOL has
said repeatedly that it plans to move forward on this issue
in early 2015 but has not yet shared a revised proposal;
consequently, we assume the new proposal will be
substantially similar to DOL’s original proposal, which
is worrisome.
So while a number of observers have suggested that
2015 will look pretty much the same as 2014 despite
the Republican majorities in the House and Senate,
we beg to differ. We anticipate continued interest in
moving comprehensive tax reform, small but helpful
changes to the Dodd Frank Act, a series of aggressive
oversight hearings on range of relevant issues, and an
extensive education and lobbying campaign against
any DOL proposal that would make it more difficult
for individuals to access the information they need
to successfully save for retirement.
This commentary is intended for informational purposes only and should not be considered a recommendation or advice.
This material may not be reproduced in whole or in part without the prior written permission of Voya Investment Management.
10
For Institutional Use Only
Senior Loans:
2014 Recap and 2015 Outlook
This article appeared in the January 2015 issue of Voya Investment Monthly.
Dan Norman
Group Head,
Senior Loan Group
Jeff Bakalar
Group Head,
Senior Loan Group
2014 — The Big Picture
Notwithstanding a full-year total return that fell short of
initial expectations, the global loan market navigated
2014’s choppy waters in reasonably sound fashion. While
credit fundamentals remained relatively healthy, overall
investor sentiment and, in turn, average loan prices
were buffeted by a series of external headwinds. These
included, but were certainly not contained to widely
divergent views as to interest rate expectations and the
health of the global economy, intensifying geopolitical
risk globally, and escalating regulatory pressure on U.S.
financial markets.
Adding a little extra drama to the equation was the
post-Thanksgiving oil spill, and despite the loan market’s
significant underweight to energy as compared to high
yield bonds (4–5% vs. 15–17%), loans were pressured by
the stress and selloff in both high yield and equities. As
a result, the S&P/LSTA Leveraged Loan Index returned
1.60% for the year. The final number was not what we
and other managers were envisioning, but it was still
in the black, marking another positive annual episode
for an asset class with only one negative year in its
recorded history (i.e., the watershed year of 2008).
S&P/LSTA Leveraged Loan Index
Total Returns by Calendar Year
30%
20%
10%
1.60%
0%
-10%
-2.96%
-20% 1997 1999 2001 2003 2005 2007 2009 2011 2013 2014
YTD
Total Return
Market Value Return
on coupon alone, the difference was volatility. True to
historical form, loans during the year posted a lagging
12-month standard deviation of 0.56%, less than onehalf that of high yield (1.30%).
2014 — Technically Speaking
With fundamental credit risk still largely under wraps,
shifting market technicals (i.e., investor demand versus
overall supply, both new issue and secondary market)
were the real story of the year. Arguably the most
significant impediment to projected loan performance
was the reality that short-term rates spent another
year stuck at all-time lows, with little forward visibility,
despite increasingly positive U.S. economic data.
Stemming from this disappointment, demand from U.S.
retail investors, so strong in 2013 when the fear of rising
rates was palpable, waffled, regardless of the fact that
loan spreads and yields improved throughout the year.
And while the approximate $35 billion decline in mutual
fund/ETF loan investment from a March 31 peak of $175
billion was, in the aggregate, more than off set by CLO
and institutional inflow (the former posting an annual
record of $125 billion), selling pressure from open-end
retail funds (and many high yield portfolio managers,
to boot) in order to proactively create liquidity put
persistent weight on secondary prices for much
of the year.
Monthly Fund Flows
January 1, 2013, to December 31, 2014
15
10
5
0
-5
Source: Standard & Poor’s/LCD
Relatively speaking, 2014 underscored the behavior
of loans and high yield bonds in both robust and
stressed market conditions, at least in the post-crisis
era. Loans underperformed high yield bonds (2.50%, as
represented by the Bank of America/Merrill Lynch High
Yield Bond Index) for the full year but outperformed
significantly in the second half of 2014 (-0.98% vs.
-2.97%). Since loans can rarely compete with high yield
-10
1/1/13
4/1/13
7/1/13 10/1/13 1/1/14 4/1/14
CLOs
7/1/14 10/1/14
Funds
Source: Lipper, Standard & Poor’s Structured Finance Group, JP Morgan,
Merrill Lynch, Citigroup, S&P/LSTA Index, Standard & Poor’s LCD.
The other side of the technical coin, new-issue supply
was, at times during the year, surprisingly strong,
causing the universe of index loans to expanded to a
11
For Institutional Use Only
record $831 billion at year-end, a 22% increase from the prior year-end.
Clearly, the long-awaited surge in M&A, one that loan investors had
been clamoring for throughout 2013 as a tool to absorb record inflows,
and thus thwart the then seemingly endless wave of opportunistic
re-pricings, finally came to fruition. Alas, it occurred during a period
of moderating demand. Such can be the case in active markets.
2014 — The Riskiest Still Ruled
In the low-rate, low-default environment that defined most of 2014,
the best performing credit rating cohort of the index was the CCC
component, at 6.09%. This compared to 1.52% and 1.43% for double
and single Bs, respectively. As was the case throughout 2014, most
of the action within the CCC bucket was idiosyncratic in nature and
increasingly concentrated within a small number of issuers.
Somewhat surprisingly, the index’s CCC cohort performed
relatively well during the December pullback, perhaps traceable
to two major factors: 1) smaller exposure to the oil and gas
sector and 2) better-than-expected third quarter results for
a few distressed credits.
Default Activity — Still Benign and Expected
to Remain That Way
Although trailing default rates by amount picked up slightly in 2014,
they were down when measured by issuer count. During the year,
there were five defaulters, down from 12 in 2013 (totaling $11.4 billion).
The default rate by principal amount closed the year at 3.24%, up from
2.11% but identical (literally) to the long-term average and inclusive
of the very large, but anticipated, default of Energy Future Holdings
(EFH, formerly TXU). Excluding EFH, the year-end figure was a scant
0.34%. As calculated by the number of loans within the index, the rate
decreased to 0.62%, from 1.61% at the end of 2013.
Default Rate by Principal Amount
Default Rate by Issuer Number
8%
6%
Average Default Rate
by Principal Amount
3.24%
3.24%
2%
0%
1/1/99
0.62%
1/1/01
1/1/03
1/1/05
1/1/07
1/1/09
Average Secondary Spreads of Leveraged Loans
January 1, 1997, to December 31, 2014
2500
2000
1500
1000
Average Secondary Spread
L+507 bps
1/1/11
Secondary Spread
L+561 bps
500
1/1/03 1/1/05 1/1/07 1/1/09 1/1/11 1/1/13
Source: Standard & Poor’s/LCD
Note: Assumes three-year maturity. Three year maturity assumptions: 1) all loans
pay off at par in three years, 2) discount from par is amortized evenly over the three
years as additional spread, and 3) no other principal payments during the three years.
Discounted spread is calculated based upon the current bid price, not on par. Excludes
facilities that are currently in default.
10%
4%
The Meat and Potatoes: Valuation, Structure
and Credit Fundamentals
The combination of weaker technicals and the energy related risk
selloff at the end of 2014 had the effect of pushing loan prices to
95.92% of par at year-end, the lowest level since September 2012.
While clearly a negative for full-year total return, it does, we believe,
provide an interesting setup for 2015, particularly within the context
of a relatively sanguine credit outlook. In addition, the shift in the
balance of power away from issuers to some degree has worked to
lift average new-issue credit spreads and consequently overall yields.
As of December 31, the discount yield to three-year call for loans stood
at L+561 vs. L+482 at the end of 2013.
0
1/1/97 1/1/99 1/1/01
Lagging 12-Month Default Rate
S&P/LSTA U.S. Leveraged Loan Index
December 31, 1998, to December 31, 2014
12%
its December 15 bond coupon payments. The Caesars default moved
the lagging-12-month default rate by principal amount to 3.99%, but
with the EFH default scheduled to fall off the rolling calculation in April,
default rates for 2015 and early 2016 should remain moderate (again,
subject to no material untoward economic or macro developments), a
view supported by relatively benign forward default indicators within
the index.
1/1/13
Source: Standard & Poor’s/LCD
Note: Comprises all loans, including those not tracked in the LSTA/LPC markto-market service. Vast majority are institutional tranches. Issuer default rate is
calculated as the number of defaults over the last 12 months divided by the number
of issuers in the index at the beginning of the 12-month period. Principal default rate
is calculated as the amount defaulted over the last 12 months divided by the amount
outstanding at the beginning of the 12-month period.
As for 2015, consensus default expectations continue to be quite
modest, at least under a status quo economic forecast. As of the date
of this publication, the first default of 2015 has occurred — Caesars
Entertainment Operating Co., which tripped a default after skipping
Another positive, albeit nuanced, byproduct of a more balanced market
has been increased investor leverage in terms of deal structuring and
underlying credit terms. Although covenant-lite is likely here to stay
in some fashion until we hit the next real leverage-driven downturn
(the last one being in 2001), many of the more egregious examples
of documentation deterioration are now being actively challenged
by loan managers and a few have now become the exception rather
than the rule.
Speaking of credit fundamentals, average debt leverage multiples (e.g.,
debt/EBITDA) indeed crept higher during 2014. At December 31, the
index averages stood at roughly 5x total debt (including the unsecured
debt cushion) and 4x at the senior secured (i.e., bank loan) level. While
this number might seem reminiscent of where we stood in 2007, there
are a couple of reasons why we don’t think this story will end in the
same sorry fashion.
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For Institutional Use Only
For one, corporate earnings have remained healthy and average
interest and fixed charge coverage ratios, important and often
overlooked credit metrics, are at historically high levels (a good
thing). While leverage levels have been edging higher over the
last few years, they are, from a secured lender’s perspective,
within the historical range for the asset class. And while the
trend in leverage “creep” looks eerily similar to what we saw in
the 2005–07 period, drawing a conclusion that we must therefore
book an outcome similar to 2008 is dubious at best, given the
nature of that unprecedented liquidity-driven correction. Excess
debt leverage on company balance sheets was not the catalyst
to that unprecedented drawdown; overall financial system leverage
and the fear of systemic failure was the culprit.
Secondly, leveraged lending guidance, jointly issued by the U.S.
Federal Reserve, the Federal Deposit Insurance Corporation and
the Office of the Comptroller of the Currency in 2013, took root as
regulators began actively reviewing bank underwriting practices
and, as time passed, started publically calling out the worst violators.
The guidance is intended to modify the behavior of corporate and
investment bankers, highlighting leverage in excess of certain
thresholds, debt servicing capacity and an absence of certain
financial covenants.
The process of implementation has been slow thus far, but we
believe that the main intention of regulators is to improve the
safeguards against aggressive leveraged lending, not impair
growth financing for below investment grade corporations.
That’s not to say there might not be some unintended
consequences — potentially constraining capital formation and/
or pushing the excesses into the unregulated non-bank part of
the financial system. Only time will tell, but ultimately we believe
it will still be a positive step toward maintaining a healthy balance
within the asset class.
As a final thought on this issue, we also firmly believe a rising shortterm rate environment would effectively mitigate the potential worstcase outcome surrounding risk retention. Under that scenario, CLOs
will be but one of several types of investors, institutional and retail
alike, attracted to our floating-rate asset class.
The Road Ahead
So that brings us to the outlook for 2015. With a couple of weeks of
the new year now under our belt, we can say with perfect hindsight
that things did not start off terribly well. The energy crash that
so disrupted this past December continues to dominate financial
headlines and, at best, cause investment gridlock across many asset
classes. Add to that a few new headwinds, including but not limited
to a potential global currency war, renewed political discord between
the executive and legislative branches of the U.S. government, and
the pending Greek election (the last two conjuring less than fond
memories of 2001). Taken together, these issues constitute a classic
“wall of worry,” almost certain to cause further market turbulence.
But worry itself isn’t much of an investment strategy, and there
are solid reasons why loans look interesting, even in the face of
these challenges. Among those front and center: attractive yields,
regardless of any movement upward in short-term rates; improved
valuations and potential capital gain upside; and widening credit
spreads. Not to mention the potential benefit of being a floating rate
asset class (dare we mention the prospects of rising interest rates…?).
For those concerned about taking greater credit risk, historical data
clearly proves secured loans clearly carry less risk of loss given default
than a typical unsecured high yield bond. And, important when viewed
through a lens of expected macro uncertainties, loans, by way of
being secured by issuer assets and interest rate neutral, are inherently
less volatile than most other high income producing asset classes.
More Regulation
On the topic of regulation, we would be remiss not to mention the
additional challenge of the U.S. Credit Risk Retention Rules, which
were adopted on October 22, 2014. CLO managers will be required
to retain 5% risk, or “skin in the game.” As these rules do not become
effective until 2016, it is too early to make any definitive assertions
on the likely impact, but it is not unreasonable to think that the CLO
market landscape will change over the medium term, with perhaps
reduced CLO issuance and fewer managers going forward.
That is not to say that we enter into 2015 without a strong appreciation
for a unique set of risk factors. December in particular reminded us
of the liquidity challenges loans continue to face. While asset-level
liquidity (actual trading volumes, the number of dealer desks making
a market in a given issue, and the width of the bid-ask spread) has
been adequate through most market conditions, settlement liquidity
(the time it takes for cash to change hands) remains a concern,
particularly against a backdrop of persistent outflows from open-end
retail platforms and less capital buttressing banks’ trading activities.
So far, so good in this area, but the astute loan investor is wise to
remain vigilant in his/her analysis of this dynamic.
In the short term, as the market digests the new rules, we might
experience a reduction in CLO issuance, especially among
managers of lesser scale, as investors question the sustainability
of small-scale managers. It is our belief that a workable solution
will be identified to keep, at a minimum, the larger, more
experienced loan managers in the CLO origination business, be
it through new capital-raising initiatives and/or iterative changes
to the pending legislation. To that latter point, the financial markets
have a history of adapting and finding solutions to regulatory changes.
Last, but certainly not least — the “number.” At the risk of being
caught repeating ourselves, we fully expect the global hunt for yield
to continue, and, again, the loan asset class is well positioned to
deliver on that thesis. Our overall Index total return expectation for
2015 falls within the 4–5% band, with a mild bull case at 6–7% (i.e.,
coupon plus two to three points of market value pickup). A moderate
to “angrier” bear case would fall in the range of 2–3% and getting
there would necessitate an unexpected spike in volatility; again, we
believe, driven by factors external to the loan market itself.
13
For Institutional Use Only
Bas NieuweWeme and Christine Hurtsellers
CIO: Let’s begin on the demand side.
What and where is the demand within the
institutional fixed income market?
derivative strategy that Voya has used
in its proprietary insurance accounts for
almost 20 years.
NieuweWeme: The demand for fixed
income has never been homogeneous
within institutional channels, but in this lowyielding environment, we’re seeing client
demand for more customized and specialty
fixed income types of strategies, with a
focus on higher potential returns—not only
for increasing potential returns, but also for
managing downside risk and diversifying
their fixed income portfolio.
For endowment and foundation (E&F)
funds, that same mortgage investment
fund plays very well. E&F investors are
willing to take a little bit more risk typically,
and are often focused on higher return
products. We’ve also seen an increased
demand for unconstrained fixed income.
Defined benefit plans are gradually
disappearing. Plan sponsors are increasing
their fixed income allocations and creating
a liability-driven bucket and a returngenerating bucket; within the liabilitydriven bucket, we see liability matching,
and in the return-generating bucket, we
see plans willing to take more risk with
higher return strategies.
In the return-generating space, we’ve
had increased interest in our mortgage
derivative hedge fund. This is a mortgage
Similarly, large public plans have been
moving away from the traditional Barclays
Aggregate and the more conventional
mandates, and have been looking for
additional yield beyond traditional core and
core plus strategies.
The defined contribution (DC) market is
interesting because that has historically
been either stable value, money market
funds, or core plus bond funds. The big
question is, will fixed income menus and
allocations within DC evolve as well and
pick up more unconstrained type of strategies? I know of one plan sponsor who tried
it, and the majority of the assets remained
in core plus, but that’s just one data point.
I think core plus is still the mainstream
product in DC, but I do expect that over
time, participants are going to ask for products that are more diversified and can take
advantage of other segments of the fixed
income landscape.
CIO: Focusing on publics and non-profit,
are they looking for the return-seeking
portfolio more than avoiding drawdowns
at this point?
NieuweWeme: Yes, I do see that in both
the E&F and the public fund market.
They have an investment goal they need
to hit, and they need to find the return
somewhere. They are willing to seek high
risk-adjusted returns, and are willing to
go outside the box and look at strategies
like private placements, securitized credit,
or commercial or residential mortgagebacked securities (MBS), as well as other
non-traditional avenues for investment.
CIO: Talk about the changes in demand
that you’ve seen, from pre-crisis to the
REPRINTED FROM CIO December 2014
14 14
For Institutional Use Only
Photography by Noah Rabinowitz
Despite much talk of
alternatives and other “sexy”
investment strategies, fixed
income still dominates today’s
institutional portfolios. With
that in mind, Chief Investment
Officer (CIO) Editor-in-Chief
Kip McDaniel recently
sat with Voya Investment
Management’s CIO for
Fixed Income Christine
Hurtsellers, as well as Head
of Institutional Distribution
Bas NieuweWeme—and what
he discovered is that fixed
income can be just as exciting
as any other asset class.
current—we hope—post-crisis era?
Hurtsellers: Everything old is new again.
During the crisis, we saw a real fear of
illiquidity as investors flocked to Treasuries
and Treasury-like investments. But as
we emerged from the financial crisis, the
government got more involved, and rates
became quite low because of a significant
amount of quantitative easing (QE) and the
state of the global economy. You then saw
a shift away from traditional indices, such
as the Barclays Aggregate, that investors
used to feel fit their liability structure and
return targets, but which no longer worked
for them. As a result, more and more
investors have been moving away from
Treasuries in the last few years, asking for
something different.
More recently, we’ve seen a tremendous
fear of duration risk, which is logical given
the yield on the 10-year Treasury below
2.5%. What’s going to be tricky for investors in the longer run, however, is reconciling duration risk fears with the structural
diversification benefits of Treasury-like
duration exposure found even in traditional
core and core plus products, particularly as
we get back to a normal rate environment.
Going back to the beginning of my career,
benchmark awareness didn’t really exist,
and it evolved over time. We’re now back to
where my career started, which was much
more solutions-oriented—customized fixed
income, as opposed to “core.” So again,
everything old is new again, and we’re back
to caring less about the benchmark.
CIO: You mentioned the focus has moved
away from core and core plus, but they
are still the majority—if not the vast
majority—of fixed income mandates for
asset owners. You think that the focus
will return to those once rates normalize?
Hurtsellers: The fixed income portfolio is
normally a core bond portfolio with, say, a
five-year duration, to help counter equity
volatility. In this environment, where rates
can’t go much lower to buffer you against
an equity blowup, it’s a little bit more
challenging. You’re likely to see clients go
back to more traditional fixed income when
rates normalize. It’s always very important
to ask clients what their goals are with
fixed income, because even with rates so
low—when you think about what happened
in September in the stock market, where
we had quite a bit of downside volatility
in the S&P 500—interest rates fell. Your
traditional fixed income portfolio was a
good hedge to equity risk, even in this low
rate environment.
CIO: If rates remain where they are, will
these unconstrained mandates gain in
popularity as plan sponsors continue to
face the idea that we’re in such a low yield
market and need to find ways around that?
Hurtsellers: Yes, absolutely. In addition to
unconstrained portfolios, one of the things
that we’re discussing with clients is a focus
on strategic fixed income investments that
are either driven by different market factors
or operate in less liquid markets. Bas
mentioned our mortgage derivative hedge
fund that we launched in 2011, but we’re
also seeing client interest in commercial
mortgage-backed securities and in direct
lending markets such as commercial real
estate loans and private debt. In the world
of private investment grade debt, you get
paid for reduced liquidity, averaging about
80 basis points over time—versus public.
For longer-term investors, this tradeoff can make a lot of sense, particularly
when you consider the reduced liquidity
found today in even the most traditional
public markets such as corporates and
Treasuries. In a post-Dodd-Frank, Basel III
world, reduced balance sheet capabilities
of traditional players in the public markets
could even warrant new premiums for the
ability to source and trade public bonds.
CIO: As people go into unconstrained fixed
income, and we start hearing what people
used to refer to as alphabet soup—MBS,
CMBS, etc.—and as the world is known to
do, eventually something goes wrong. Are
they going to turn around in five years and
say, “Wait a second, I didn’t know I was in
that” or that they didn’t understand it?
Hurtsellers: That’s a very important
question. The unconstrained product is
basically untested, for the most part, in the
retail market. As such, investors probably
don’t have an appreciation for how these
products might behave over time. But as
an investment manager, we’re spending a
significant amount of time examining the
unconstrained space to understand the
market drivers and risk factors that make
up these strategies.
Clients should absolutely do the due
diligence and be sure they understand what
the portfolio strategy is—what is the absolute level of risk, and what sort of leeway do
the managers have in changing the duration
of the strategy? For our unconstrained fixed
income products, we thought very long and
hard about smart portfolio construction
and making sure that we have diversified
sources of alpha, along with a slightly net
long-duration bias, because duration will
always be the best natural hedge against
credit spread widening.
NieuweWeme: Leverage was one of the
issues during the crisis in 2008, and I
don’t see that in the products these days.
That is a big difference. I also see the
involvement of investment consultants, in
both the corporate and the public markets,
has increased since the crisis. So plan
sponsors are better informed today. First
of all, they are pretty sophisticated, and
now they are advised by very sophisticated
investment consultants. If you add the
input from a sophisticated asset manager,
with everyone acting in a partnership
arrangement, you come up with solutions
that not only offer potentially higher
returns, but also much better risk control
today than was typical before the crisis.
CIO: Why should fixed income still be a
central part of investment portfolios?
Hurtsellers: It’s the certainty of cash
flows. You always get paid back at par or
100 cents on the dollar with Treasuries;
and with high grade corporate bonds, the
historical default rate is very low, resulting
in a reliable income stream and capital
preservation. That reliability has a real
value for investors that we think will only
REPRINTED FROM CIO December 2014
For Institutional Use Only
15
grow over time, despite low yields, because
as people age they need certain income,
certain outcomes, and they’re less riskseeking. That’s why there’s always going to
be a place for fixed income.
On the institutional side, we see a continuing need to de-risk pension plans over
time. Immunization is a strategy where
fixed income is the only real solution.
CIO: There is an ongoing dialogue in
Washington about housing markets and
potential housing reform. Given that,
what kind of investment opportunities
are you seeing?
Hurtsellers: Fannie and Freddie have
started originating and selling off their
credit risk into the market, so you’re
able to get diverse pools of underlying
mortgages on the private side. While the
non-agency market has shrunk in private
label securitization, new risk-transfer
mortgage securities, such as the Structured
Agency Credit Risk or “STACR” bonds,
are an interesting innovation by the two
government-sponsored enterprises to share
the risk of loss with investors for the first
time. We think this market will continue to
grow over time, even if they are combined.
In terms of housing reform, the government
is in a very interesting place. It needed to
raise the cost of credit because things were
way too easy prior to 2008, as we saw what
happened with the losses that Fannie and
Freddie took in the great financial crisis. So,
as the government had to make it tougher
to buy a home, we returned to the time
when buyers needed a 20% down payment
or secured additional private mortgage
insurance. As a result of these changes,
we are left finding, in some pockets of the
market, homeowners who no longer have
the ability to refinance as easily as before.
The bottom line here now is that with so
many different types of mortgage pools
out there—based on inception date of the
mortgage, how much equity they have, how
old they are, what sort of lending is available
to them—prepayment experience can be
very unpredictable. Exploiting these diverse
opportunities for us serves as the cornerstone of our flagship mortgage derivative
investment strategy.
CIO: Are there factors outside the US
that you think will have a big effect going
forward?
16
Hurtsellers: Yes. Our investment process
is very dynamic and centers around the
macro economy. As such, we actively
adjust our portfolio allocation to match the
macroeconomic climate. Over the past year,
we have maintained an overweight to US
spread assets, believing that the banking
system in the US is healthier than it is in
Europe, that small businesses are getting
stronger, and energy costs are lower. There
are a lot of themes we follow that definitely
support sectors like commercial real estate
backed securities or even high yield bonds.
We mostly worry about the European
Central Bank (ECB). While they’re definitely
trying to fight falling inflation, it is somewhat
alarming when the president of the Bundesbank publicly declares that the ECB won’t
be able to conduct sovereign quantitative
easing. The fear factor is—if the market
wakes up one day and realizes, “Wow,
Draghi doesn’t have the tools he needs to
fight deflation in Europe” things could get
ugly quickly, fostering fears of default again
for peripheral Europe. That would be a dark
scenario. Within our portfolio, we’ve hedged
this tail risk using iTraxx, a European credit
hedge, to protect from this scenario.
CIO: Looking forward, what trends do you
expect to emerge that perhaps are just
incipient trends right now?
NieuweWeme: For defined benefit plans,
there is not that much more left. That is,
plans are de-risking. However, Voya is
active in the pension buyout business; that
way fixed income assets could come back
onto Christine’s platform.
I still see stable value as an important
offering in the DC market for participants
that are close to retirement. Neither money
market funds nor core plus bond funds can
replace that. There is a fiduciary risk for
those who oversee DC plans, and I don’t
expect them in the short run to take too
much risk on core plus—that is, to become
very aggressive.
What could happen in the next five years
is that in addition to core plus, plans are
going to offer a more all-weather or strategic income type of unconstrained fixed
income offering.
risk-seeking than defined contribution plans.
There’s a huge opportunity in the next five
to ten years to continue to develop solutions
for large public plans and to work with them
on a glide path towards a better funding
status, and develop some creative solutions
with non-traditional fixed income.
CIO: Christine, what do you see?
Hurtsellers: Simply due to demographics,
there is an organic, growing demand for
fixed income assets because people are
getting older and not taking on as much
debt. At the same time, corporations
also aren’t leveraging as much, just at
the time when there’s lower net supply
of fixed income assets thanks to massive
central bank balance sheet expansion. This
development is here to stay for a while.
As a result, I would expect additional
client demand for non-traditional and less
liquid sectors. As part of that, the demand
for real estate, long duration assets, and
private debt will continue to grow. Right
now when a pension fund de-risks, they
ask for a portfolio based on, say, a long
corporate bond index with only about 200
issues that they can invest in. So, there’s
a lot of concentration risk. Investment
managers will have to offer more
innovative long-duration credit overlays
and solutions to meet that client demand.
Even liquid markets are becoming less
liquid, so that in the longer run, we may
see the fixed income market evolve further.
Persistently low yields, lower supply, and
reduced liquidity across markets are likely
all additional reasons, too, why institutional
clients are seeking specialty or unconstrained fixed income solutions. We think
that phenomenon will likely continue. Q
Past performance is no guarantee of
future results. Nothing contained herein
should be construed as (i) an offer to buy
any security or (ii) a recommendation
as to the advisability of investing in,
purchasing or selling any security.
©2014 Voya Investments Distributor, LLC,
230 Park Avenue, New York, NY 10169
Public plans are definitely challenged with
their funding status, but they face less pressure than corporate plans to fully fund quite
as quickly. They’re going to be open to more
REPRINTED FROM CIO December 2014 ©1989-2014 Asset International, Inc. All Rights Reserved. No reproduction or redistribution without prior
authorization. For info: call (203) 595-3276 or email [email protected].
For Institutional Use Only
DC Spotlight: New Rulings Support Use of
Deferred Annuities in 401(k) Plans
This article appeared in the December 2014 issue of Voya Investment Monthly.
As part of their ongoing efforts to facilitate innovative solutions that
help workers manage their savings in retirement, the Department of
the Treasury, the Internal Revenue Service and the Department of
Labor recently issued guidance further supporting the use of deferred
annuities in 401(k) plans. In short, these rulings established that,
when certain conditions are met, the use of deferred annuities within
a target date fund (TDF) does not constitute discrimination against
younger employees nor does it disqualify such funds’ qualified
deferred investment alternative (QDIA) status or the plan sponsor safe
harbor relief that accompanies it.
A New Focus on Participant Outcomes
It may or may not have been a coincidence that the government’s
latest ruling on the topic was released on October 24, 2014 — the
seven-year anniversary of the DOL’s rules defining and permitting
QDIAs. Nevertheless, the October missive from Treasury represented
the second this year that focused on in-plan guaranteed income and
expanding the use of deferred income annuities within 401(k) plans,
suggesting a concerted effort to increase direct support of in-plan
guaranteed income solutions.
■ Treasury and IRS released Notice 2014-66 providing a “special
rule” for target date funds that allows them to incorporate deferred
income annuities provided that certain requirements are met.
■ The DOL released an accompanying Information Letter reconfirming
that a TDF with a deferred annuity as part of its fixed income
investments maintains its status as a qualified default investment
alternative (QDIA).
Below we take a closer look at each of these.
Treasury/IRS Guidance. The Treasury Notice was released before the
DOL Letter and was drafted to answer a specific question: Can TDFs
that include a deferred annuity still satisfy the non-discrimination
requirements of section 401(a)(4) of the Internal Revenue Code and
Treasury Regulation 1.401(4)-4? These tax provisions essentially
provide that any “benefits or features” available within a plan must be
made available to all participants in the plan on a non-discriminatory
basis and may not favor higher-compensated employees.
It’s clear how there may be confusion around this point in the context
of a TDF offering an annuity. The sensible inclusion of annuities
within a target date fund would dictate that they be offered only
to those employees for whom they are appropriate — primarily
older participants nearing or at retirement, employees that tend
to have higher salaries as well as higher account balances due to
their longer participation in the plan. In fact, these factors raise the
question as to whether offering of an annuity within a TDF, by its very
nature, could be considered some form of discrimination against
younger employees.
Treasury’s stance on this is “no”. According to the ruling, the TDF
series — inclusive of all individual TDFs and the annuity component —
is viewed as a single right or feature offered to all plan participants as
long as certain conditions are met. Said another way, all participants
will have access to the same benefits offered through the TDF,
including the annuity, at some point during their participation
in the plan.
Of course, the TDFs covered by this ruling must meet certain Treasury
requirements, as outlined below:
■ The TDFs must be restricted to participants based on age bands; for
example, a 30-year-old participant cannot have access to a 2015
target date fund that includes an annuity.
■ The same investment manager must manage all of the TDFs using
the same methodology, deviating only to adjust the asset mix
between target date funds.
■ The deferred annuities don’t provide a guaranteed minimum
withdrawal benefit (GMWB) or a guaranteed lifetime withdrawal
benefit (GLWB).
■ The TDFs don’t hold employer securities that are not tradable on an
established securities market.
■ All other aspects of the TDFs are the same except for the change in
asset allocation between TDFs as participants near the retirement
date.
As part of its ruling, Treasury provided an example of a plan and TDF
product that would satisfy these requirements. In the example, a
qualified plan:
■ Uses age 65 as the normal retirement date at which retirees can
commence distributions
■ Offers a TDF series managed by a 3(38) investment manager as its
QDIA that meets all of the requirements listed above
■ Holds unallocated deferred annuity contracts as a portion of
its fixed income exposure in the TDF available to 55-year-old
participants
■ “Dissolves” at its target date, with a participant’s interest in the
annuity converting into a “certificate” that provides for immediate
or deferred commencement of annuity payments
17
For Institutional Use Only
DOL Information Letter. The guidance from Treasury in and of itself
was not enough to address the key question plaguing the industry for
the past few years: Do TDFs that offer an in-plan annuity qualify as a
QDIA? The DOL’s accompanying Information Letter, also released on
October 24, was meant to fill that gap.
In its letter, the DOL restated Treasury’s example of a compliant plan
and confirmed that such a TDF would satisfy QDIA requirements.
In addition, the DOL’s letter reiterated language from its QDIA
regulation to the effect that “…it is the view of the Department that
the availability of annuity purchase rights, death benefit guarantees,
investment guarantees or other features common to variable annuity
contracts will not themselves affect the status of a fund, product
or portfolio as a qualified default investment alternative when the
conditions of the regulation are satisfied.”
The letter confirms that, under the annuity selection safe harbor, the
selection of an annuity provider and contract for benefit distributions
satisfies the requirements of ERISA if the fiduciary:
■ Engages in an objective, thorough and analytical search for the
purpose of identifying and selecting providers from which to
purchase annuities
■ Appropriately considers information sufficient to assess the ability
of the annuity provider to make all future payments under the
annuity contract
Conclusion
While the “annuity safe harbor” language in the past has not given
many plan sponsors the confidence to include a guaranteed product
as a QDIA, restating this language in a more focused context may
encourage action. Nonetheless, the Notice did stop short of providing
plan sponsors a clear “safe harbor” for selection of an annuity
provider, which is still a major fiduciary concern.
Overall, however, the Treasury/IRS ruling and DOL follow-up is
a significant step in the ongoing improvement of the defined
contribution system, as government emphasis continues to shift
to participant outcomes rather than simply asset accumulation. To
keep this momentum going, we would look for additional guidance
regarding a fiduciary safe harbor for selection of an annuity
provider from the IRS/DOL, perhaps addressing some of these key
remaining questions:
■ How should the industry think about TDFs incorporating
guaranteed lifetime withdrawal benefit (GLWB) and guaranteed
minimum withdrawal benefit (GMWB) features?
■ Can the investment manager acting as the 3(38) fiduciary and the
insurer providing the guarantee be affiliated?
■ Do these notices constitute a “definitive” safe harbor in selecting
an annuity provider? What if any additional criteria are there?
■ Appropriately considers the cost (including fees and commissions)
of the annuity contract in relation to the benefits and administrative
services to be provided under such contract
■ Appropriately concludes that, at the time of the selection, the
annuity provider is financially able to make all future payments
under the annuity contract and the cost of the annuity contract is
reasonable in relation to the benefits and services to be provided
under the contract
■ Consults with an appropriate expert or experts, as necessary, to
meet these conditions
Finally, the letter concludes that a plan fiduciary that prudently
appoints an investment manager to manage the TDF will generally
not be liable for the investment manager’s selection of the annuity
provider. This is a critical distinction, as the fiduciary standard for
annuity selection is considerably more stringent than that of an
investment manager.
18
For Institutional Use Only
DC Spotlight: Recent Money Market Reforms May Impact
Your DC Plan
This article appeared in the December 2014 issue of Voya Investment Monthly.
The Securities and Exchange Commission recently approved
long-awaited reforms to money market funds that likely will impact
a variety of retirement plans, including defined contribution plans
that include these capital-preservation vehicles in their product
lineups. With many provisions not scheduled to take effect until 2016,
however, affected plan sponsors have time to consider their options.
Building on reforms adopted by the SEC in 2010, the latest
amendments to the rules that govern money market funds —
announced on July 23, 2014 — result in two significant changes
for retirement plans:
■ Institutional money market funds must now use a “floating” net
asset value. This change will mostly impact defined benefit plans.
■ Boards of institutional and retail money market funds may impose
liquidity fees or temporarily suspend redemptions from the fund,
a change more germane to defined contribution plans.
Money Funds Under Fire
Money market funds for years had played a prominent role as the
default vehicle many DC plan participants. However, their popularity
has been in steady decline since they were excluded from the
Department of Labor’s roster of qualified default investment
alternatives (QDIAs) in 2007. Aon Hewitt reports that while 56%
of plans used stable value/money market funds as a default
vehicle in 2005, that number had dropped to just 5% by 2009.
Investing in high-quality short-term debt, money market mutual funds
offer investors stability and liquidity and generate returns similar to
short-term interest rates. Rule 2a-7 under the Investment Company
Act of 1940 includes a number of risk-limiting provisions that are
intended to help a money fund maintain a stable $1 per share price
except in very unusual circumstances. This stability of principal has
long held appeal for a variety of retail investors as well as institutional
investors like defined contribution and defined benefit plans, which
use money market funds as a temporary cash vehicle, for example,
or the low-risk option on a DC plan menu.
The 2008 financial crisis placed significant stress on the liquidity
and stability of money market funds and drew the attention of U.S.
regulators. In September of that year, a major money fund “broke
the buck” — that is, saw its net asset value drop below $1 per share
— thanks to short-term investments in the collapsing Lehman Brothers,
resulting in heavy redemption pressures across money funds. While
the Treasury quickly stepped in with a temporary insurance program
to restore investor confidence, a longer-term solution was sought to
help prevent a future run on money market funds.
SEC Adopts Reforms to Promote Stability
After years of consideration following the financial crisis, the SEC
has adopted amendments to the rules that govern money market
funds along with a new definition of “retail” and “institutional”
funds; in some cases, application of the rules differs according
to the type of fund. A retail fund limits its beneficial owners to
natural persons. In the preamble to the proposed amendments,
the SEC clarified that money market funds may be treated as retail
even if the fund’s shareholders include defined contribution plans,
individual retirement accounts and 403(b) custodial accounts,
ostensibly because the “beneficial owner” of the fund is ultimately
the participant. An institutional money market fund, on the other hand,
includes investors that are not natural persons; this includes defined
benefit plans.
While the SEC’s package of reforms consists of a variety of changes
to existing practices, there are two that we anticipate may have the
biggest impact on retirement investors.
■ Net asset value. The new SEC rules dictate that institutional
funds (to be used by DB plans) must now use a floating net asset
value, meaning that instead of a steady $1, daily share prices of the
funds will fluctuate with the value of their underlying investments.
While these changes will have significant tax implications for many
institutional investors, defined benefit plans are tax-exempt and
thus are not generally affected by these tax issues.
Retail money market funds — such as those used by DC plans —
may continue to price their portfolios using amortized cost and
penny rounding to maintain a stable $1 per share net asset value.
■ Liquidity fees and redemption gates. The SEC amendments also
imposed rules permitting (but not requiring) both institutional and
retail funds to impose a liquidity redemption fee of up to 2% or
to temporarily suspend — or “gate” — redemptions if the fund’s
liquidity falls below certain levels. Under the amended rules, the
fund is required to lift any suspension within ten business days.
If an institutional or retail fund’s liquidity levels — weekly liquid
assets — fall below 10%, the fund is required to impose a 1% fee
unless the fund’s board determines the fee is not in the best
interest of the fund. The new liquidity and redemption rules do not
apply to “government” funds — money funds that invest essentially
all assets in Treasury securities and cash — although these funds
may choose to adopt them. It is expected that the imposition of
such liquidity fees and gates will be a very rare occurrence.
19
For Institutional Use Only
Under the amended rules, money market mutual funds now are
required to report any imposition of liquidity fees or redemption
gates to shareholders. In addition, funds must now disclose on
a daily basis their levels of daily and weekly liquid assets, net
shareholder inflows or outflows and their market-based net asset
value per share.
New Rules, New Options
The amended rules could impact plan sponsors whose plans
invest in money market funds for liquidity needs or offer a money
market fund on a 401(k) or 403(b) plan’s menu. Plan sponsors that
offer retail money market funds (or their service providers) may
need to communicate, possibly on short notice, the fact that a
plan investment option is imposing a liquidity fee or suspending
distributions, a potentially sensitive communication given that
these actions would impact the ability of participants to reallocate
plan assets.
To avoid contending with these reforms, some plan sponsors —
depending on their preferences and the assets within their existing
money fund option — may choose to move away from money market
funds to other short-term vehicles that are generally exempt from the
new rules. Sponsors considering this route have a variety of options.
■ Stable value. A plan that already has both a stable value and
money market option could consolidate the two into the stable
value product. Plans that do not currently offer a stable value
option may be well advised to reconsider. While the use of stable
value by participants has ebbed and flowed over the years and
remains below 2008-level usage, it still tends to be the most
popular option among pre-retirees and retirees. Moreover, the
stable value environment today is far more appealing today than
it was in the years immediately following the financial crisis, when
market forces drove stable value wrap fees higher and guarantees
lower. In addition, product innovation has resulted in more stable
value options from which sponsors can choose.
The SEC has given the fund industry two years to come into
compliance with these changes, and we expect that a number of
important implementation challenges will need to be addressed in
this time. As implementation moves forward, plan sponsors should
evaluate whether any plan assets invested in a money market fund
should be moved to another similar short-term investment, depending
on the plan’s needs and goals.
■ Government money market funds. Sponsors may move to a
government money market fund that elects not to impose liquidity
fees and gates. Note, however, that while the new liquidity and
redemption rules do not apply to government funds, these funds
may choose to impose liquidity fees and gates, an option that
may give plan sponsors pause.
■ Ultra-short duration funds. While an ultra-short duration or similar
strategy would sidestep the issue of fees and gates, it’s debatable
whether such products represent a true capital-preservation option.
■ CITs/separate accounts. DC plan sponsors with fairly large
money market fund balances may consider establishing a
collective investment trust or separate account managed
pursuant to a plan-specific money market strategy. These
products are not registered with the SEC and are therefore
not subject to the Investment Company Act of 1940 or any
of the new reforms.
20
For Institutional Use Only
Quarter ended December 31, 2014
Strategy Review
Voya Large Cap Value Equity
Summary
Account Performance
This strategy seeks to capture the benefits of
both high-dividend yield and dividend growth.
The portfolio managers target a gross dividend
yield at or above the Russell 1000 Value Index.
Stock selection by an experienced and specialized
research team is the primary driver of excess
returns. The objective is to outperform the Russell
1000 Value Index by 1.5–3% annualized before
management fees over full market cycles with an
expected annualized tracking error of 3–6%.*
The strategy underperformed its benchmark due to unfavorable security selection, notably in the
financials and materials sectors; stock selection in health care and consumer staples contributed
positively to performance. Among the key detractors from performance were Royal Dutch Shell
and Freeport-McMoRan, casualties of weakness in oil and copper prices, respectively. Among the
positive contributors was Pinnacle West Capital, which raised its dividend.
Performance (%)
Annualized
Inception (01/01/08)
Composite
*There is no guarantee that this objective will be achieved.
Quarter
1 Year
Gross:
3.39
Net:
3.23
4.98
Russell 1000 Value Index
3 Years
5 Years
Since Inception
10.75
18.99
16.39
9.78
10.10
18.29
15.65
9.03
13.45
20.89
15.42
6.45
Voya Large Cap Growth Equity
Summary
Account Performance
This is an actively managed strategy that relies
on fundamental research and analysis to identify
companies with strong and accelerating business
momentum, increasing market acceptance
and attractive valuations. The objective is to
outperform the Russell 1000 Growth Index by
2–3% annualized before management fees over
full market cycles with an expected annualized
tracking error of approximately 4–6%.*
The strategy outperformed its benchmark due to sector allocation and stock selection. At the sector
level, information technology and consumer staples were the biggest contributors, while consumer
discretionary and materials detracted. Stocks that contributed most to the quarter’s performance
were Delta Air Lines, CVS Health and IBM. Key detractors for the quarter were Anadarko Petroleum,
Cameron International and LyondellBasell Industries.
Performance (%)
Annualized
Inception (01/01/83)
*There is no guarantee that this objective will be achieved.
**May 1, 2004, was the starting date for a new
Large Cap Growth investment team and process.
Composite
Quarter
1 Year
3 Years
5 Years
10 Years
Since Inception**
Gross:
5.38
14.34
21.37
17.00
9.95
10.29
Net:
5.22
13.66
20.66
16.27
9.17
9.49
Russell 1000 Growth Index
4.78
13.05
20.26
15.81
8.49
8.60
Voya Mid Cap Growth Equity
Summary
Account Performance
This is an actively managed strategy that relies
on fundamental research and analysis to identify
companies with strong and accelerating business
momentum, increasing market acceptance
and attractive valuations. The objective is to
outperform the Russell Midcap Growth Index by
2–3% annualized before management fees over
full market cycles with an expected annualized
tracking error of approximately 4–6%.*
The strategy outperformed its benchmark primarily due to stock selection. At the sector level,
information technology and materials contributed the most to relative performance, while industrials
and energy detracted. A key contributor to relative performance was an overweight in Southwest
Airlines, a potential beneficiary of lower oil prices. Key detractors were Quanta Services, Cameron
International and SM Energy, all of which were negatively impacted by the steep drop in oil prices.
Performance (%)
Annualized
Inception (08/01/05)
Composite
*There is no guarantee that this objective will be achieved.
Quarter
1 Year
3 Years
5 Years
Since Inception
Gross:
7.17
9.78
18.89
17.24
11.95
Net:
6.97
8.97
18.02
16.36
11.03
5.84
11.90
20.72
16.94
9.18
Russell Midcap Growth Index
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
21
Quarter ended December 31, 2014
Voya Small Cap Core Equity
Summary
Account Performance
This is a small-cap strategy driven by bottom-up
fundamental research. We seek high-quality
companies that are beneficiaries of sustainable
growth trends to build portfolios that will
outperform benchmarks and peer group
competitors. The objective is to outperform the
Russell 2000 Index by 2.5–3.5% annualized
before management fees over full market
cycles with an expected annualized tracking
error of 4–7%.*
The strategy performed roughly in line with its benchmark. Unfavorable sector allocation had the
greatest influence on results. While our underweights in pharmaceuticals and biotechnology detracted
from results, stock selection in those groups was positive. Allocations to software and services stocks
as well as cash also detracted from performance. Selection in bank and real estate stocks added
value, though Atlas Air Worldwide (trucking) and La-Z-Boy (furniture) were the leading contributors.
Performance (%)
Annualized
Inception (08/01/05)
*There is no guarantee that this objective will be achieved.
**August 1, 2005, was the starting date for a new
Small Cap Core investment team and process.
Composite
Quarter
1 Year
3 Years
5 Years
Since Inception**
Gross:
9.77
7.30
19.74
16.16
9.95
Net:
9.54
6.40
18.74
15.19
9.02
9.73
4.89
19.21
15.55
7.70
Russell 2000 Index
Voya Small Cap Growth Equity
Summary
Account Performance
This is a small-cap growth strategy driven by
bottom-up fundamental research. We seek
high-quality companies that are beneficiaries
of sustainable growth trends to build portfolios
that will outperform benchmarks and peer group
competitors. The objective is to outperform
the Russell 2000 Growth Index by 2.5–3.5%
annualized before management fees over full
market cycles with an expected annualized
tracking error of 4–7%.*
The strategy underperformed its benchmark due to unfavorable stock selection, mainly in the software
and services and pharmaceutical and biotechnology groups. Cash was also a drag. By contrast, stock
selection in retail and capital goods stocks produced positive results. Key detractors from performance
were C&J Energy Services and Unit Corp., which were adversely impacted by overall weakness in the
energy sector and declining oil prices.
Performance (%)
Annualized
Inception (08/01/05)
*There is no guarantee that this objective will be achieved.
**August 1, 2005, was the starting date for a new
Small Cap Growth investment team and process.
Composite
Quarter
1 Year
3 Years
5 Years
Since Inception**
Gross:
8.53
6.46
20.17
18.82
11.42
Net:
8.29
5.51
19.11
17.77
10.44
10.06
5.60
20.14
16.80
8.73
Russell 2000 Growth Index
Voya SMID Cap Growth
Performance (%)
Summary
This strategy is driven by bottom-up fundamental
research. We seek high-quality companies that
are beneficiaries of sustainable growth trends to
build portfolios that will outperform benchmarks
and peer group competitors. The objective is to
outperform the Russell 2500 Growth Index by
2.5–3.5% annualized before management fees
over full market cycles with expected annualized
tracking error of 4–7%.*
Annualized
Inception (06/01/12)
Composite
Quarter
1 Year
Since Inception
Gross:
6.58
8.84
20.96
Net:
6.09
7.61
19.77
7.49
7.05
21.78
Russell 2500 Growth Index
*There is no guarantee that this objective will be achieved.
22
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
Quarter ended December 31, 2014
Voya Global Bond Fixed Income
Summary
Account Performance
This strategy is designed to outperform the
Barclays Global Aggregate Index over reasonably
long time periods by investing in a wide range
of debt and derivative securities such as global
sovereign and corporate bonds, emerging
markets debt, global high yield bonds, and
mortgage-backed securities, plus foreign
exchange forwards, currency and interest rate
swaps. The portfolio consists of investments
denominated in U.S. dollars, euros and other
currencies of developed and emerging market
countries. The strategy seeks to maximize total
return through a combination of current income
and capital appreciation with an annualized
tracking error of approximately 2.5%.*
The strategy produced negative absolute results and underperformed its benchmark. Spread sector
overweights dragged down relative returns, as lower Treasury yields and energy sector risks drove
credit spreads significantly wider late in the quarter. While commercial mortgage-backed securities
were fairly resilient, commodity-sensitive high yield and emerging market bonds suffered from the
fall in oil prices. Interest rate positioning also detracted. The strategy was underweight interest rate
risk, leading to underperformance as rates rallied in the U. S. and reached all-time lows in some
other global markets. Currency exposures were positive, as an overweight to the U.S. dollar proved
to be the strongest performing major currency.
Performance (%)
Annualized
Inception (08/01/06)
Quarter
1 Year
Gross:
(1.45)
0.86
Net:
(1.54)
0.51
Barclays Global Aggregate Index
(1.04)
0.59
0.73
Composite
*There is no guarantee that this objective will be achieved.
3 Years
5 Years
Since Inception
2.14
3.14
6.66
1.78
2.75
6.25
2.65
4.45
Voya Core Short Duration Fixed Income
Summary
Account Performance
This is a short duration core fixed income strategy
that invests only in investment-grade securities
while maintaining short duration close to that of
the benchmark. We believe fixed income segment
returns vary over time, and macro theme analysis,
combined with disciplined research and relative
value analysis, will identify unrecognized value
investment opportunities and produce superior
long-term performance. The objective is to
outperform the Barclays 1–3 Year Government/
Credit Index by 0.25% before management fees
over a full credit cycle with annualized tracking
error of approximately 0.5%.*
The strategy outperformed its benchmark due to positive asset allocation. An overweight to
spread sectors, specifically commercial mortgage-backed securities and asset-backed securities,
contributed positively. In particular, commercial-mortgage backed securities continue to provide a
boost to results. CMBS remained largely resilient into year-end, as the housing market continues to
recover, but at a slower pace. Duration and security selection were neutral.
Performance (%)
Annualized
Inception (09/01/96)
Composite
Quarter
3 Years
5 Years
10 Years
Since Inception
Gross:
0.21
1.20
1.48
1.95
3.00
4.39
Net:
0.14
0.90
1.16
1.61
2.65
4.03
0.17
0.77
0.89
1.41
2.85
4.10
Barclays 1-3 Year Gov’t/
Credit Index
*There is no guarantee that this objective will be achieved.
1 Year
Voya Core Intermediate Government/Credit Fixed Income
Summary
Key Benefits
This is a core fixed income strategy that invests
only in government and credit investment-grade
securities while maintaining an intermediate
duration. We believe fixed income segment
returns vary over time, and macro theme
analysis combined with disciplined research and
relative value analysis will identify unrecognized
value investment opportunities and produce
superior long-term performance. The objective
is to outperform the Barclays Intermediate U.S.
Government/Credit Index by 0.35–0.50% over a
full credit cycle with annualized tracking error of
less than 1%.*
■
*There is no guarantee that this objective will be achieved.
23
■
■
■
■
A seasoned team of market specialists examines the widest possible opportunity set.
Top-down macro themes shape overall strategy and provide context for our bottom-up security selection.
Balanced emphasis on quantitative and qualitative inputs fosters strong checks and balances and
validation for our investment themes.
Proprietary risk budgeting and management tools guide portfolio construction.
Strategy offers competitive performance over time and within each component of the portfolio.
Performance (%)
Annualized
Inception (07/01/03)
Composite
Quarter
1 Year
3 Years
5 Years
10 Years
Since Inception
Gross:
0.89
3.32
2.39
3.80
4.39
4.16
Net:
0.82
3.01
2.08
3.46
4.04
3.81
0.89
3.13
2.03
3.54
4.10
3.83
Barclays Intermediate
U.S. Gov’t/Credit Index
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
Quarter ended December 31, 2014
Voya Stable Value Fixed Income
Performance (%)
Summary
Voya Stable Value fixed income products are
designed for defined contribution plan sponsors
seeking to provide participants with capital
preservation and attractive rates of return. Voya
Investment Management provides a full range of
actively managed strategies that are appropriate
for stable value investing. Book value guarantees
are available through Voya Retirement Insurance
and Annuity Company. The objective is to provide
above benchmark returns with limited risk
to principal.*
Voya Core Intermediate Composite —
Inception (08/01/04)
Composite
Annualized
Quarter
1 Year
3 Years
5 Years
10 Years
Gross:
0.98
4.03
2.48
3.96
4.25
4.33
Net:
0.91
3.72
2.17
3.64
3.91
3.99
1.20
4.12
2.19
3.72
4.34
4.42
4.20
4.71
6.11
Barclays Intermediate
U.S. Aggregate Index
Since Inception
Voya Government Securities Composite — Inception (04/01/91)
Composite
Gross:
1.30
3.75
Net:
1.23
3.44
1.77
3.85
4.31
5.67
1.32
4.08
1.59
3.96
4.36
5.84
Custom Index (3.5 YR)
2.08
Voya Multi-Sector Short Duration Stable Value Composite — Inception (01/01/12)
Composite
*There is no guarantee that this objective will be achieved.
Gross:
0.37
1.63
1.73
NA
NA
1.73
Net:
0.31
1.38
1.48
NA
NA
1.48
U.S. Treasury Bellwethers:
3 Year Index
0.40
0.92
0.49
NA
NA
0.49
Voya Absolute Alpha
Performance (%)
Summary
Voya Absolute Alpha uses a multi-strategy
approach combining an optimal mix of
uncorrelated sources of alpha into a customized
portfolio to meet the dynamic needs of our
clients. To generate and sustain attractive alpha,
we access the best ideas of Voya investment
professionals around the country that are deeply
experienced and have diverse professional
backgrounds.
Custom Composite — Inception (02/01/07)
Composite
Net:
Custom Benchmark*
24
Quarter
1 Year
3 Years
5 Years
Since Inception
4.47
12.35
20.61
14.86
8.77
4.21
11.24
19.47
13.79
7.78
3.97
9.73
18.57
13.40
8.00
S&P 500 Composite — Inception (10/01/08)
Composite
*Custom benchmark is a client-specific combination of the
S&P 500, S&P MidCap 400 and MSCI EAFE Net indexes.
Gross:
Annualized
Annualized
Quarter
1 Year
3 Years
5 Years
Since Inception
Gross:
5.37
16.11
22.04
16.66
10.45
Net:
5.10
14.96
20.88
15.58
9.43
4.93
13.69
20.41
15.45
10.26
S&P 500 Index
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
Quarter ended December 31, 2014
Voya Core Fixed Income
Summary
Account Performance
This is a core fixed income strategy that invests
only in investment-grade securities. The strategy
capitalizes on the talents of an experienced fixed
income investment team working across multiple
sectors and industries. We believe fixed income
segment returns vary over time, and macro theme
analysis, combined with disciplined research and
relative value analysis, will identify unrecognized
value investment opportunities and produce
superior long-term performance. The objective is
to outperform the Barclays U.S. Aggregate Index
by 0.75% over a full credit cycle with annualized
tracking error of 1.0%.*
The strategy underperformed its benchmark for the quarter. Security selection and an overweight
to investment grade corporate credit detracted from performance, as energy- and commodityrelated issues drove the credit market weakness. An overweight in securitized bonds — commercial
mortgage-backed securities and asset-backed securities — was positive for asset allocation, and
CMBS security selection was also favorable. Rates and yield curve management were detractors.
*There is no guarantee that this objective will be achieved.
Performance (%)
Annualized
Inception (02/01/98)
Composite
Quarter
1 Year
3 Years
5 Years
10 Years
Since Inception
Gross:
1.60
6.21
3.37
5.10
4.19
5.54
Net:
1.52
5.89
3.04
4.76
3.84
5.17
1.79
5.97
2.66
4.45
4.71
5.43
Barclays U.S.
Aggregate Index
Voya Core Plus Fixed Income
Summary
Account Performance
This fixed income strategy invests in broad bond
sectors embraced by the Barclays U.S. Aggregate
Index and opportunistically up to 20% (total) in
below-investment-grade securities and emerging
markets debt. We believe fixed income segment
returns vary over time, and macro theme analysis,
combined with disciplined research and relative
value analysis, will identify unrecognized value
investment opportunities and produce superior
long-term performance. The objective is to
outperform the Barclays U.S. Aggregate Index by
1.25-1.75% over a full credit cycle with annualized
tracking error of 1.5-2.5%.*
The strategy underperformed its benchmark, driven mainly by duration posture. U.S. Treasury yields
dipped while our duration was slightly short. In asset allocation, an overweight to high yield bonds
was a drag, as high yield followed the price decline in oil. Allocation was positive for commercial
mortgage-backed securities, asset-backed securities and non-agency mortgage-backed securities;
selection was also positive in those areas, but was off set by investment grade credit.
*There is no guarantee that this objective will be achieved.
Performance (%)
Annualized
Inception (01/01/99)
Composite
Quarter
1 Year
3 Years
5 Years
10 Years
Since Inception
Gross:
1.49
7.18
5.61
7.01
5.41
6.65
Net:
1.42
6.86
5.27
6.65
5.03
6.25
1.79
5.97
2.66
4.45
4.71
5.28
Barclays U.S.
Aggregate Index
Voya Long Duration Government/Credit
Summary
Key Benefits
This fixed income strategy invests in an array
of long-dated corporate and treasury bonds
included in the Barclays U.S. Long Government/
Credit Index. Macro theme analysis, combined
with disciplined credit research and relative value
analysis will identify unrecognized investment
opportunities and produce superior long-term
performance. We believe this process is the
cornerstone of our active management style
and delivers.
The strategy modestly underperformed its benchmark. Positive security selection and sector
allocation contributed to relative results, but were more than off set by negative effects from
duration and yield curve positioning. Five year and longer Treasury rates fell over the quarter given
the sharp decline in oil prices and the related decline of inflation expectations. The U.S. dollar’s rise
and oil’s fall caused a meaningful correction in credit markets, a flattening of the yield curve and
eventual contagion into equities. Energy- and commodity-related industries have been the biggest
driver of corporate market weakness of late, as the sharp U.S. dollar rally has had a negative impact
on commodity prices. Most investors now expect lower prices for the foreseeable future and have
re-priced energy-sensitive industries accordingly.
Performance (%)
Annualized
Inception (01/01/10)
Quarter
1 Year
3 Years
5 Years
Since Inception
Gross:
5.27
20.17
5.35
10.73
10.73
Net:
5.19
19.82
5.03
10.40
10.40
Barclays U.S. Long Government/
Credit Index
5.60
19.31
5.77
9.81
9.81
Composite
25
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
Quarter ended December 31, 2014
Voya High Yield Fixed Income
Summary
Account Performance
This is a high yield fixed income strategy that
invests in below investment-grade securities.
The strategy capitalizes on the talents of an
experienced high yield team focused primarily
on fundamental credit analysis and security
selection. Implementation of broad investment
themes and portfolio diversification help minimize
the impact of negative idiosyncratic events, and
broad market strategy ensures portfolios are
positioned to capitalize on secular and cyclical
trends affecting the asset class. The objective
is to outperform the Barclays U.S. High Yield 2%
Issuer Constrained Index by 1% annually over a full
credit cycle with tracking error not to exceed 2%.*
High yield bonds lost ground for the quarter, and the strategy underperformed its benchmark. The
losses were concentrated in the commodity sectors — energy and metals & mining. Notably, high yield
energy bonds lost 10.6% while the rest of the market had a positive return of 0.7%. Our overweight to
energy producers negatively affected returns, as falling oil prices and OPEC’s willingness to allow them
caught us off guard. Performance benefited from exposure to the media and entertainment bonds,
where higher quality holdings outperformed.
*There is no guarantee that this objective will be achieved.
Performance (%)
Annualized
Inception (01/01/99)
Composite
Quarter
1 Year
3 Years
5 Years
Gross:
(1.11)
2.28
9.27
9.88
7.28
7.44
Net:
(1.24)
1.77
8.75
9.37
6.77
6.88
(1.00)
2.46
8.42
8.98
7.73
7.24
Barclays U.S. High Yield –
2% Issuer Cap Index
10 Years
Since Inception
Voya Investment Grade Credit
Summary
Account Performance
This strategy offers a comprehensive approach
to investing in U.S. corporate bonds by utilizing
a combination of qualitative and quantitative
assessments to evaluate the fundamental
attractiveness and relative value of industries,
issuers and issues. We integrate our bottom-up
views within our top-down macro-economic
framework, thus providing the opportunity to
uncover multiple sources of value for corporate
bonds in the context of dynamic market conditions
and correlations. The strategy seeks to maximize
total return through a combination of current
income and capital appreciation while maintaining
duration within ±20% of the Barclays U.S.
Corporate Investment Grade Index.*
The strategy slightly outperformed its benchmark for the quarter. Utilities led the investment
grade sector followed by financials and industrials. Higher-rated issues prevailed over more
speculative bonds as volatility ticked up. Modest allocations to off-index Treasuries added value,
but poor security selection within industrials mostly off set this positive. Selection within utilities
provided modest incremental positive returns, especially late in the quarter. Duration and yield
curve positioning was a drag on performance, given the strong Treasury rally as the quarter came
to a close.
*There is no guarantee that this objective will be achieved.
Performance (%)
Annualized
Inception (02/01/09)
Composite
Quarter
1 Year
3 Years
5 Years
Since Inception
Gross:
1.85
8.76
7.99
9.08
11.42
Net:
1.78
8.45
7.64
8.69
11.02
1.77
7.46
5.13
6.49
8.48
Barclays U.S. Corporate
Investment Grade Index
Voya Senior Loan
Summary
Account Performance
This strategy is an actively managed, ultra-short
duration floating rate income strategy that invests
primarily in privately syndicated, below investment
grade senior secured corporate loans. Managed by
the Voya Senior Loan Group, the strategy may be
employed with or without leverage. Senior loans
are floating rate instruments that can provide a
natural hedge against rising interest rates. They are
typically secured by a first priority lien on a borrower’s
assets, resulting in historically higher recoveries than
unsecured corporate bonds. The strategy’s investment
objective is to seek superior long-term risk-adjusted
total returns over a full credit and interest rate cycle by
investing primarily in a broadly diversified portfolio of
senior secured floating rate loans.*
The strategy outperformed its benchmark for the quarter, attributable primarily to an underweight of
the energy sector and individual credit selection; specifically, avoidance of any of the top five index
underperformers for the period, while owning four of the five largest positive contributors to index
returns. The strategy held no exposure to drillers and coal issuers and had only minimal exposure to
the other energy sub-sectors.
*There is no guarantee that this objective will be achieved.
**Net assumes expenses of 50 basis points per year.
26
Performance (%)
Annualized
Inception (04/02/01)
Composite
Quarter
1 Year
3 Years
5 Years
Since Inception
Gross:
0.28
2.55
6.71
6.39
6.06
Net**:
0.15
2.04
6.18
5.82
5.46
(0.51)
1.60
5.46
5.57
4.94
S&P LSTA/
Leveraged Loan Index
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
Quarter ended December 31, 2014
Voya Target Solution Trust Series
Summary
Voya offers ten Target Solution trusts to meet participant needs in accumulating funds for retirement. Based on their planned retirement date and risk
tolerance, participants can select the appropriate Voya Target Solution Trust, all of which feature Voya and externally managed funds and both active and
passive investment strategies.
Voya Target Solution Trusts Strategic Asset Allocations (%)
Retirement
Target Year
2045,
2050, 2055
2040
2035
2030
2025
2020
2015
Income
48.0%
46.0%
41.0%
39.0%
32.0%
29.0%
23.0%
23.0%
14.0%
14.0%
12.0%
12.0%
12.0%
10.0%
7.0%
6.0%
5.0%
4.0%
4.0%
4.0%
3.0%
3.0%
—
—
19.0%
16.0%
16.0%
12.0%
11.0%
9.0%
7.0%
4.0%
7.0%
7.0%
7.0%
5.0%
4.0%
—
—
—
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
5.0%
5.0%
8.0%
12.0%
22.0%
26.0%
37.0%
40.0%
—
—
2.0%
6.0%
6.0%
6.0%
8.0%
8.0%
—
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
—
2.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
—
—
—
—
—
7.0%
8.0%
9.0%
100.0%
100.0%
100.0%
Equity
■ U.S. Large Cap Equity
■ U.S. Mid Cap Equity
■ U.S. Small Cap Equity
■ International Equity
■ Emerging Markets
■ Real Estate
Fixed Income
■ Bonds
■ Short Term Bonds
■ High Yield Bonds
■ Senior Loans
■ TIPS
Total
100.0%
100.0%
100.0%
100.0%
100.0%
As of 12/31/14
The strategic allocations for the Voya Target Solution Trusts are suggested long-term targets. Voya IM makes tactical changes to the trusts based on current market conditions
and opportunities which may not reflect the strategic allocations.
There is no guarantee that any investment option will achieve its stated objective. Principal value fluctuates and there is no guarantee of value at any time, including the target
date. The “target date” is the approximate date when an investor plans to start withdrawing their money. When their target date is reached, they may have more or less than the
original amount invested. For each target-date portfolio, until the day prior to its target date, the portfolio will seek to provide total returns consistent with an asset allocation
targeted for an investor who is retiring in approximately each portfolio’s designation target year. On the target date, the portfolio will seek to provide a combination of total
return and stability of principal.
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
27
Quarter ended December 31, 2014
Voya Custom Target-Date Funds
Summary
Many plan sponsors realize that customizing their target date portfolios will better align their plan with their investment philosophy, long-term goals and
participant demographics. Voya IM’s Custom Target Date funds are built around services such as analysis of plan demographics to structure custom-made
asset allocation and glide path; use of Voya funds, externally managed funds, the sponsor’s preferred funds, or any combination; tactical asset allocation to
manage short-term risk and volatility; and customized market commentary and employee communications. Other related services are available on request.
Voya Multi-Credit Fixed Income
Summary
Key Benefits
This strategy is a diversified fixed income solution
that integrates high yield bonds and senior loans
with complementary high-quality mortgagerelated assets. Through active asset allocation
and a flexible duration posture, the strategy seeks
high return potential even in a rising interest rate
environment.
■
28
■
■
■
High income and return potential
Participation in a rising interest rate environment
Unique blend of potentially high-return and high quality assets complements core bond holdings
Leverages Voya’s multi-sector expertise across corporate bonds, senior loans, mortgages and
structured credit
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
Quarter ended December 31, 2014
ING (L) Renta Fund US Credit
Summary
Account Performance
This strategy offers a comprehensive approach
to investing in U.S. corporate bonds by utilizing
a combination of qualitative and quantitative
assessments to evaluate the fundamental
attractiveness and relative value of industries,
issuers and issues. We integrate our bottom-up
views within our top-down macro-economic
framework, thus providing the opportunity to
uncover multiple sources of value for corporate
bonds in the context of dynamic market conditions
and correlations. The strategy seeks to maximize
total return through a combination of current
income and capital appreciation while maintaining
duration within ±20% of the Barclays U.S.
Corporate Investment Grade Index.*
The strategy slightly outperformed its benchmark for the quarter. Utilities led the investment
grade sector followed by financials and industrials. Higher-rated issues prevailed over more
speculative bonds as volatility ticked up. Modest allocations to off-index Treasuries added value,
but poor security selection within industrials mostly off set this positive. Selection within utilities
provided modest incremental positive returns, especially late in the quarter. Duration and yield
curve positioning was a drag on performance, given the strong Treasury rally as the quarter
came to a close.
*There is no guarantee that this objective will be achieved.
Performance (%)
Annualized
Inception (01/01/99)
Composite
Quarter
1 Year
3 Years
5 Years
10 Years
Gross:
1.80
8.71
8.20
9.35
6.25
Net:
1.54
7.62
7.13
8.24
5.17
1.77
7.46
5.13
6.49
5.53
Barclays U.S. Corporate
Investment Grade Index
ING (L) US Growth
Summary
Account Performance
An actively managed fund that offers non-U.S.
investors access to growth-oriented, largecapitalization, high quality U.S. companies with
a relatively low risk profile. The objective is to
outperform the Russell 1000 Growth Index by
2-3% annualized before management fees over
full market cycles with an expected annualized
tracking error of approximately 4-6%.*
The strategy outperformed its benchmark mainly due to sector allocation effects. Within security
selection the biggest positive contributors were energy stocks; avoiding telecommunication
services entirely was a plus. In contrast, health care and consumer discretionary stock selection
detracted the most. Key security level contributors to performance were overweights in Home
Depot, which performed well after the company restated its bullish view on near-term demand,
and CVS Health, which reaffirmed its five-year financial targets and raised the dividend. Among key
detractors were Amazon.com, where online sales sagged, and Eastman Chemical, which suffered
from weakening commodity prices.
Performance (%)
Annualized
Inception (12/01/06)
Composite
Quarter
1 Year
3 Years
5 Years
Since Inception
Gross:
5.31
13.98
21.00
16.58
9.90
Net:
5.09
13.06
19.96
15.62
9.05
4.78
13.05
20.26
15.81
8.78
*There is no guarantee that this objective will be achieved.
Russell 1000 Growth Index
ING (L) Flex — Senior Loans
Summary
Account Performance
This is an actively managed, ultra-short duration
floating rate income strategy that invests primarily
in privately syndicated, below-investment-grade
senior secured corporate loans. Managed by the
Voya Senior Loan Group, the strategy may be
employed with or without leverage. Senior loans
are floating rate instruments that can provide a
natural hedge against rising interest rates. They
are typically secured by a first priority lien on a
borrower’s assets, resulting in historically higher
recoveries than unsecured corporate bonds. The
strategy’s investment objective is to seek superior
long-term risk-adjusted total returns over a full
credit and interest rate cycle.*
The strategy outperformed its benchmark driven mainly by minimal exposure to oil and gas credits,
reflecting a strict underwriting process that tends to avoid issuers with concentrated, especially
commodity-sensitive, businesses. Other positive factors included the strategy’s European loans,
which performed better than U.S. loans; and its underweight in second-lien loans, as investors were
decidedly risk-averse late in the year. Cash had no significant impact on performance.
Performance (%)
Annualized
Inception (05/18/09)
Composite
Quarter
1 Year
3 Years
5 Years
Since Inception
Gross:
0.55
2.53
6.08
5.79
7.93
Net:
0.33
1.65
5.15
4.87
7.00
(0.51)
1.60
5.46
5.57
8.78
S&P LSTA/
Leveraged Loan Index
*There is no guarantee that this objective will be achieved.
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
29
Quarter ended December 31, 2014
Voya Investment Management Client Profile
As of September 30, 2014
Number of Accounts
Assets ($ millions)
Corporation
495
$13,385
Public/Government
101
$12,197
Insurance Company
13
$2,261
Taft-Hartley/Union
66
$547
1
$10
53
$1,529
2
$3
Sub Advised
30
$10,461
Clients Invested in the Alternative/Structured Products
60
$16,476
Mutual Fund — Institutional Shares
69
$34,638
Total Institutional
890
$91,505
Mutual Fund — Non-Institutional Shares and Managed Accounts
176
$36,845
Proprietary General Account Assets
769
$84,261*
Endowment and Foundation
Health Care
Religious
Grand Total
1,835
$212,611**
*Proprietary general account assets are presented at market value. General account assets, as reported in Voya SEC filings, are valued on a statutory book
value basis of approximately $79 billion.
**Voya IM assets of $213 billion include proprietary insurance general account assets of $85 billion calculated on a market value basis. Voya IM assets, as
reported in Voya Financial, Inc. SEC filings, include general account assets valued on a statutory book value basis and total approximately $207 billion.
30
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
Quarter ended December 31, 2014
Disclosures
Composites
Each Voya Investment Management composite represents a group of
portfolios that are managed according to a particular investment objective
or strategy without material client restrictions.
The composite performance information represents the investment
results of a group of fully discretionary accounts managed with the
same investment objective of outperforming the benchmark. Information
is subject to change at any time. Gross returns are presented after all
transaction costs, but before management fees. Returns include the
reinvestment of income. Net performance is shown after the deduction
of a model management fee equal to the highest fee charged.
Voya Investment Management Co. LLC (“Voya”) is exempt from the
requirement to hold an Australian financial services license under the
Corporations Act 2001 (Cth) (“Act”) in respect of the financial services it
provides in Australia. Voya is regulated by the SEC under U.S. laws, which
differ from Australian laws.
A full presentation is available; for sales, please contact a regional
manager listed on page 3. Consultants should contact Brian Baskir
at 212-309-6481.
Composite Benchmark Sources
Standard & Poor’s: Absolute Alpha and Senior Loan
Russell Investments: Large Cap Growth, Large Cap Value,
Mid Cap Growth, Small Cap Core, Small Cap Growth and SMID Cap Growth
Barclays: Core, Core Intermediate Government/Credit, Long Duration,
Core Plus, Core Short Duration, Global Bond, High Yield, Investment
Grade Credit, Stable Value and Liability-Driven Investing
MSCI: Absolute Alpha
The indexes do not reflect fees, brokerage commissions, taxes
or other expenses of investing.
Investors cannot directly invest in an index.
This document or communication is being provided to you on the basis of
your representation that you are a wholesale client (within the meaning
of section 761G of the Act), and must not be provided to any other
person without the written consent of Voya, which may be withheld in its
absolute discretion.
Past performance is no guarantee of future results; the possibility
of loss does exist.
Performance and other data are presented as supplemental
information to returns required by GIPS®. The presentation
must be preceded (within the last 12 months) or accompanied
by a presentation that conforms to GIPS® standards.
See disclosure page for important performance disclosure information.
Performance shown is supplemental information to the full composite presentation.
For Institutional Use Only
31
Benchmark Definitions
Barclays Intermediate U.S. Government/Credit Index is a market
value-weighted performance benchmark for government and corporate
fixed-rate debt issues (rated Baa/BBB or higher) with maturities between
one and ten years.
Barclays Intermediate U.S. Aggregate Index is an unmanaged index
of intermediate duration fixed-income securities. The index reflects
reinvestment of all distributions and changes in market prices.
Barclays U.S. Aggregate Bond Index is a widely recognized, unmanaged
index of publicly issued investment grade U.S. Government, mortgagebacked, asset-backed and corporate debt securities.
Barclays 1-3 Year Government/Credit Index covers treasuries, agencies,
publicly issued U.S. corporate and foreign debentures and secured
notes that meet specified maturity, liquidity, and quality requirements.
For comparison purposes, the index is fully invested, which includes
the reinvestment of income. The returns for the index do not include
any transaction costs, management fees or other costs.
Barclays Global Aggregate Bond Index measures a wide spectrum
of global government, government-related, agencies, corporate and
securitized fixed-income investments, all with maturities greater
than one year.
Barclays U.S. Corporate Investment Grade Index is a market
capitalization-weighted index often used to represent investment
grade bonds being traded in the United States.
Barclays U.S. High Yield 2% Issuer Constrained Index is an unmanaged
index that covers U.S. corporate, fixed-rate, non-investment grade
debt with at least one year to maturity and at least $150 million in par
outstanding. Index weights for each issuer are capped at 2%.
Barclays U.S. Treasuries 20+ Years Index measures the performance of
U.S. Treasury securities that have a remaining maturity of at least 20 years.
MSCI EAFE Index is a free float-adjusted market capitalization-weighted
index designed to measure developed markets’ equity performance,
excluding the U.S. and Canada, for 21 countries.
Russell 1000 Growth Index measures the large-cap growth segment
of the U.S. equity market including Russell 1000 companies with higher
price-to-book ratios and forecasted growth.
Russell 1000 Value Index measures the large-cap value segment of
the U.S. equity market including Russell 1000 companies with lower
price-to-book ratios and lower expected growth.
Russell 2000 Index measures the performance of the small-cap segment
of the U.S. equity market including approximately 2,000 of the smallest
securities based on market capitalization.
Russell 2000 Growth Index measures the performance of small-cap
growth stocks in the U.S. equity market including Russell 2000 companies
with higher price-to-value ratios and forecasted growth.
Russell 2500 Index measures the performance of the small to mid-cap
segment of the U.S. equity universe, commonly referred to as “smid” cap.
Russell 2500 Growth Index measures the performance of the small- to
mid-cap growth segment of the U.S. equity universe. It includes those
Russell 2500 Index companies with higher price-to-book ratios and higher
forecasted growth values.
Russell Midcap Growth Index measures the performance of the mid-cap
growth segment of the U.S. equity market including Russell Midcap Index
companies with higher price-to-book ratios and forecasted growth.
Barclays U.S. Intermediate Government/Credit A or Higher Index is
a market value weighted performance benchmark for government and
corporate fixed-rate debt issues (rated Baa/BBB or higher) with maturities
between one and ten years.
Standard & Poor’s 500 Index is an unmanaged capitalization-weighted
index of 500 stocks designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
Barclays U.S. STRIPS 4-5 Years Index is composed of U.S. Treasury fixedincome securities with maturities between 4–5 years, sold at a significant
discount to face value and offer no interest payments because they
mature at par.
S&P MidCap 400 Index is a benchmark for mid-sized companies, which
covers over 7% of the U.S. equity market and reflects the risk and return
characteristics of the broad mid-cap universe.
Barclays U.S. STRIPS 29-30 Years Index is composed of U.S. Treasury
fixed-income securities with maturities between 29–30 years, sold
at a significant discount to face value and offer no interest payments
because they mature at par.
Barclays Long Corporate Bond Index (Customized Exclude BBB-) is
composed of U.S. dollar-denominated, investment-grade (Baa3/BBBor higher) taxable securities with maturities greater than 10 years and
have an outstanding par value of at least $250 million.
S&P/LSTA (Loan Syndications and Trading Association) Leveraged
Loan Index (LLI) is a total return market value index that tracks fully
funded, senior secured, first lien term loans syndicated in the U.S., as
well as dollar-denominated overseas loans, including 90–95% of the
institutional universe.
Synthetic MBS 3.5-Year Duration Index is managed against an internally
developed synthetic benchmark consisting of Government National
Mortgage Association (GNMA) and Treasuries backed by the full faith and
credit of the U.S. Government. The benchmark is created by adjusting the
Barclays GNMA Index to the 3.5-year target duration of the account.
32
For Institutional Use Only
What Defines A Successful Core Plus Bond Manager?
Experience. Adaptability. Results.
In an uncertain fixed income environment it is important to look for experienced, well-resourced managers that employ
a time-tested, active and nimble investment process well positioned to capitalize on opportunities as they emerge.
Voya’s Core Plus capability is an all-weather strategy built around the business cycle and focused on providing investors
with strong risk-adjusted returns in both up and down markets.
Voya Core Plus Strategy
eVestment Percentile Rankings – Information Ratio
Up and Down Market Capture
Versus eVestment Core Plus Fixed Income Universe
(As of 12/31/14)
(As of 12/31/14)
3-Year
Up Markets
Voya
Index
5-Year
141%
0%
18th
9th
3-Year
5-Year
65%
68%
131%
25%
100%
Median
75%
100%
Down Markets
100%
3-Year
5-Year
Voya Intermediate Bond Fund
Best Core Bond Fund
over Three Years
Morningstar Rating
Ranked #1 (Class W) out
of 437 eligible funds
based on risk-adjusted
performance as of 11/30/13
3-year & 5-year rating
as of 12/31/14 for
Class I Share
★★★★★
Call us now to learn
more about how our
investment solutions
can benefit you and your
clients’ portfolios.
Contact:
Bas NieuweWeme
Managing Director
Brian Baskir
Managing Director
Head of Institutional Distribution
Head of Global Consultant Relations
212-309-6457
[email protected]
212-309-6481
[email protected]
Source: Voya Investment Management, eVestment, Morningstar and Lipper. The index represented is the Barclay’s Aggregate Bond Index. The Up and Down Capture Ratios are statistical
measures of an investment manager’s overall performance in up and down markets. The Information Ratio measures the returns above the returns of a benchmark to the volatility of those returns.
Lipper Award: The Lipper Fund Awards program honors funds that have excelled in delivering consistently strong risk-adjusted performance, relative to peers. Classification averages are
calculated with all eligible share classes for each eligible classification. The highest Lipper Leader for Consistent Return (Effective Return) value within each eligible classification determines the
fund classification winner over three, five, or ten years. For a detailed explanation, please review the Lipper Leaders methodology document at www.lipperweb.com.
Morningstar Rating: For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for
variation in a fund’s monthly performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each 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. (Each share class is counted as a fraction of one fund within this scale and
rated separately, which may cause slight variations in the distribution percentages.) Voya Intermediate Bond Fund Class I ranked: 3 Yrs. 5 Stars (86/913); 5 Yrs. 5 Stars (34/807); 10 Yrs. 3 Stars
(200/588) and Overall 4 Stars (out of 913) in the Intermediate Bond Morningstar category. The Overall Morningstar risk-adjusted return rating for a fund is derived from a weighted average of the
performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. Morningstar Ratings are for the I share classes only; other classes may have different
performance characteristics.
Principal Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. High Yield Securities, or “junk bonds”, are rated lower
than investment-grade bonds because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. To the extent that the Fund invests
in Mortgage-Related Securities, its exposure to prepayment and extension risks may be greater than investments in other fixed-income securities. 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. Foreign Investing does pose special risks including
currency fluctuation, economic and political risks not found in investments that are solely domestic. As Interest Rates rise, bond prices fall, reducing the value of the Fund’s share price. Other
risks of the Fund include but are not limited to: Credit Risks; Extension Risks; Investment Models Risks; Municipal Securities Risks; Other Investment Companies’ Risks; Prepayment
Risks; Price Volatility Risks; U.S. Government Securities and Obligations Risks; Inability to Sell Securities Risks; Portfolio Turnover 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 investor should consider the investment objectives, risks, charges and expenses of the Fund(s) carefully before investing. For a free copy of the Fund’s prospectus,
or summary prospectus, which contains this and other information, visit us at www.voyainvestments.com or call (800) 992-0180. Please read prospectus carefully
before investing.
Past performance is no guarantee of future results.
For qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public.
©2015 Voya Investments Distributor, LLC
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