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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. We’re on Twitter! All-new and institutionally focused @VoyaInvestments 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. A full presentation is available; for sales, 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. 6 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. 7 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 8 For Institutional Use Only 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. 9 For Institutional Use Only 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. 12 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 230 Park Avenue, New York, NY 10169 | 254AD6MW4;A΄ IN VEST ME NT MANAG EM EN T voyainvestments.com Voya® Investment Management ΠH^hM;]eRbc\R]cb5WbcaWOdc^a͜>>4΄ BMaY2eR͜@RfK^aY͜@K VP 4Q14 • 10822 • 164339