In the initial quarter of 2026, the Virtus Duff & Phelps Water Fund experienced a mixed performance, largely due to challenges in specific sectors such as life sciences, engineering & construction, and international utilities. Despite these setbacks, the global equity markets witnessed a dynamic interplay of factors, with early signs of economic strength and moderating inflation fostering a positive environment for risk assets.
The first three months of the year presented a complex picture for worldwide stock markets. Initially, robust economic expansion and a favorable inflation outlook provided a tailwind for various asset classes, encouraging broader participation in the equity rally. However, this optimistic sentiment underwent a transformation as March progressed. Renewed geopolitical tensions, particularly in the Middle East, introduced an element of uncertainty, shifting market dynamics.
Looking ahead, the ongoing developments in the Middle East are anticipated to exert significant influence on global energy prices, shape inflation expectations, and contribute to increased volatility in interest rates. These variables are crucial determinants for equity valuations and will require careful monitoring by investors. The fund's strategy in this evolving landscape involves a selective focus on industrial companies benefiting from inherent structural advantages, while maintaining a cautious stance on markets tied to construction activities.
Despite recent stock declines in Xylem (XYL) and Veralto (VLTO), the fund maintains a positive outlook. Both companies are projected to experience softness in the near term, with their 2026 guidance heavily weighted towards the second half of the year. However, the long-term fundamentals for these entities remain attractive, supported by anticipated margin expansion and strong positions in key end-markets. SBS also demonstrated strong performance, driven by privatization initiatives and increased capital expenditure, while Severn Trent benefited from favorable UK regulatory changes and improved visibility into returns.
The first quarter of 2026 was characterized by a push and pull in global equity markets. The Virtus Duff & Phelps Water Fund navigated these conditions with a strategic approach, adjusting its positioning to capitalize on emerging opportunities and mitigate potential risks, particularly those stemming from geopolitical events and their impact on commodity markets.
