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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
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"Secular spending to address global water scarcity, aging municipal infrastructure, and data center liquid cooling provides robust tailwinds that counterbalance cyclical headwinds in residential construction."
The Virtus Duff & Phelps Water Fund Class INST generated a net return of -4.75% in the third quarter of 2026, bringing year-to-date net performance to -3.25%. The fund trailed broad global equity markets as measured by the MSCI ACWI Net Index (+1.60%) and performed roughly in line with the benchmark S&P Global Water Net Index (-4.64%). Within the portfolio, relative performance was driven by positive security selection across engineering & construction, environmental services, and filtration, treatment & testing, though this was partly dampened by selection headwinds in utilities and agriculture. The global macroeconomic environment grew increasingly volatile during the quarter as oil price shocks, lingering inflation pressures, and higher sovereign bond yields induced restrictive monetary policies from central banks. This fluid environment has generated bifurcated fundamentals across water end-markets: industrial and municipal categories remain resilient, buoyed by reshoring initiatives, utility capex programs, and artificial intelligence-driven data center expansion. Conversely, elevated interest rates continue to severely restrict new residential and commercial construction activities. Portfolio performance was spearheaded by top contributors Georg Fischer and Veralto, both of which benefited from positive earnings revisions and surging demand for ultrapure water and liquid cooling infrastructure. Performance was dragged down by Xylem, which suffered from temporary metering order deceleration, and Pentair, which faced significant distributor destocking in pool equipment. Management maintains a disciplined stance, reassessing position sizes in cyclically exposed construction while maintaining core allocations to secular compounders.
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