We had an in house meeting with the Virtus Asset Management group on February 15th, 2017. We had requested this meeting in order to discuss the ongoing transition from the previous Chief Investment Officer Rajiv Jain to Matthew Benkendorf. This transition occurred within the Virtus Emerging Market Opportunities Fund. Rajiv had been the Chief Investment Officer of the fund since 2006 and departed on March 7, 2016. He had been with the firm for more than 22 years, but decided to leave in order “to realize his own entrepreneurial plans.” As of this time, Rajiv is the only management level person to be leaving the firm. Rajiv had done extremely well in managing the Emerging Markets Opportunities Fund as it had often bested more than 75% of its peers on a 3, 5 and 10 year basis. This was done by establishing an investment strategy rooted in picking lower risk, higher quality and attractively valued stocks within the space.
As Benkendorf took over the reigns, we were critical as to how the transition was coming along. We were assured that the transition was entrenched in bringing people within the firm together. Benknedorf has been with the group since 1999 in various capacities and that his goal was to expand the team. In our discussions, we were hoping to get some insight as to if the strategy in stock selection would be changing from how Rajiv had been running the fund. We were assured that the strategy would remain the same.
However, since Benkendorf had taken over, the fund has lagged its peers and the benchmark for the past year. We have been told that the poor performance has not been due to a change in the strategy, but due to a shorter term shift in the emerging market space. We have been told that many of the lower quality stocks have rallied and thus higher quality stocks have lagged. The Virtus Emerging Markets Opportunities Fund has always been focused on higher quality stocks and thus they have not captured a lot of the upside that has recently occurred. We were told that Virtus believes the trend of low quality stocks moving higher is getting long in the tooth and that the euphoria is wearing thin. They believe there will be a reversion to the mean and that the current market environment is a bit irrational.
We will continue to monitor this position going forward due to this extraordinary change in the management team for either a continuation or change in trend and adjust the portfolios accordingly.