Great-west Funds N-CSRCertified annual shareholder report (management investment company)

The global bond market suffered pronounced weakness in 2022. Coming into the year, investors were already on edge as the investment community slowly began to understand that inflation would not be as “transitory” as initially expected. The outlook grew even more challenging after Russia’s invasion of Ukraine caused a jump in commodity prices and additional disruptions in global supply chains. Consumer price inflation (“CPI”) further increased as a result, with year-over-year gains of more than 8% in each monthly report of the second quarter. Inflation stayed elevated for the rest of the year before showing signs of cooling in the fourth quarter. Still, CPI remained above 7% in both the October and November reports, well above the Federal Reserve’s (the “Fed”) 2% target.

These developments prompted the Fed and other major central banks to tighten monetary policy aggressively. The Fed, in addition to ending its stimulative quantitative easing policy, raised interest rates at seven consecutive meetings from March onward. The benchmark fed funds rate, which stood in a range of 0% to 0.25% at the start of 2022, finished the year at 4.25% - 4.50%. This represented the most aggressive increase in short-term rates since the early 1980s.

The backdrop of high inflation and rising rates weighed heavily on U.S. Treasurys. The yield on the two-year note surged from 0.39% to 4.41% over the course of 2022, while the 10-year yield climbed from 1.44% to 3.88%. The Treasury market suffered its second consecutive year of negative returns in 2022 - the first time this has happened since 1958-59. One result of these moves was that the yield curve inverted significantly (meaning that short-term yields traded above those on longer-term debt), an unusual event that typically precedes a recession.

Investment grade corporate bonds posted a double-digit loss and lagged Treasurys. In addition to suffering from the uptrend in prevailing yields, corporates experienced a large increase in yield spreads relative to government debt. Rising spreads were the result of investors’ declining appetite for risk and concerns about the impact slowing economic growth could have on corporations’ earnings and balance sheets.

High yield bonds, while finishing 2022 in the red, outperformed U.S. Treasurys and other segments of the investment grade market. The category was helped by its higher income, lower interest rate sensitivity, and a relatively large representation of the energy sector. Senior loans, which experienced elevated demand due to their floating rate feature, were the best performing segment of the fixed income market for the year with a return just below the break-even mark.

Securitized assets - including agency mortgage-backed securities (“MBS”), asset-backed securities (“ABS”), and commercial mortgage-backed securities (“CMBS”) - posted negative total returns but

Emerging market bonds underperformed the U.S. due to the combination of growth fears, investors’ increased aversion to risk, the conflict in Ukraine, and negative headlines out of China. U.S.-based investors were also hurt by a meaningful decline in emerging market currencies in relation to the U.S. dollar.

On an excess basis, securitized markets positively contributed to performance as the sector generated the greatest returns within the strategy. Exposure across the ABS other, car loan, and home equity names moderately aided excess return.

The exposure to non-U.S. dollar denominated issues generated positive return during the year. Our holdings denominated in the Brazilian real, Mexican peso, and Indian rupee were the best performers within the allocation.

The overweight allocation to high yield credit limited performance for the year. On an absolute basis, performance in the sector had the greatest negative impact in the strategy. Security selection had the most negative effect in this sector.

Central banks embarked on the first meaningful tightening of monetary policy in several years in response to elevated inflation during the period. Their messaging has been consistent: they will stay focused on returning high inflation levels to target. The backdrop clouded the outlook for global and regional economies, with the probability of recession rising. This has resulted in negative total returns for most assets. The pandemic is still a global issue, with China’s zero-Covid policy continuing to delay the normalization of supply chains, though the rigid policy is expected to ease in the coming months. Meanwhile, the war between Russia and Ukraine is an ongoing economic shock to food and energy prices. These unresolved issues make economic forecasting and modeling a challenge and will likely contribute to a volatile investing environment for the next several quarters.

The Fed and other major central bank rhetoric shifted sharply hawkish in response to elevated inflation measures. The Fed raised its main policy rate 425 basis points (“bps”) during the fiscal year including four jumbo moves of 75 bps each and indicated its resolve to restore price stability. The Fed began to shrink its $8.9 trillion dollar balance sheet and increased the pace of run-off in September. While we still expect this to be a largely passive exercise, the market is watching for signs that the Fed may be open to selling off its MBS when caps are not met. The European Central Bank (“ECB”) also joined the

In the twelve-month period ended December 31, 2022, volatility in the fixed income markets increased both due to a more hawkish Fed policy and the Russian invasion of Ukraine. U.S. Treasuries generally outperformed spread sectors on an excess return basis. With the spike in U.S. Treasury yields, less interest rate-sensitive sectors such as high yield bank loans, and other shorter-duration asset classes, including ABS, generally outperformed on a total return basis.

Sector Changes: Over the year, we primarily reduced exposure to high yield bank loans, corporate high yield, and emerging markets high yield securities. We redeployed the sale proceeds primarily into corporate investment grade and U.S. Treasury securities.

EM Debt and Non-U.S. Exposure: Our exposure was lower over the year. Within the space, high yield EM outperformed investment grade. We continued to execute relative value swaps within curves, credit buckets, and between sovereigns and quasi-sovereigns as relative value dictates. While we feel as though U.S. dollar strength has peaked, we have not yet added non-U.S. dollar exposure to the Virtus portfolio. Our exposure to EM has stayed at historically low levels.

Corporate Investment Grade: After declining more than 20% at the lows, the investment grade market rallied in the fourth quarter of 2022, with total returns of 3.63%. The full year total return of -15.76% is still the worst on record. Spreads rallied 25 bps up to the 130s, a level that hits the 75th percentile over a five-year range, but just 10 bps north of the five-year average. Yields are still at post-global financial crisis (“GFC”) highs, though they compressed more than 80 bps off the year-to-date highs. As fundamentals improved throughout the post-Covid period and interest coverage levels stay at decade highs, we are constructive on the asset class. Higher rates will have minimal immediate impact to issuer fundamentals because the average maturity is over eleven years in length. We are overweight financials and commodities and find banks to be the most attractive industry. We are positioned with an overweight to the BBB segment of the market because we are constructive on the market’s fundamentals, and view fallen angel risk as broadly low.

Corporate High Yield: While maintaining a meaningful allocation, we reduced high yield exposure over the year. The high yield market finished the year -11.2% with CCC’s significantly lagging. Our 2023 outlook for high yield is cautious, we view recession risk as material given the Fed continues its hawkish path to reduce inflation. Parts of the economy are already slowing due to interest rate hikes, with housing being the main example. Despite credit spreads being wide of average levels, they remain well inside of recessionary levels, so we remain cautious on the asset class. The largest meaningful counterpoint to a cautious view would be the resilience of credit fundamentals, which remain at strong levels. Aggregate leverage is below pre-Covid levels for high yield bonds, with net leverage in an even stronger position as companies hold onto cash raised during Covid. The technical environment remains neutral. 2022 saw large outflows, but very limited new issuance. Our allocation remains below our long-term average. In 2023, we will stay responsive to developments on the macro side, since data on inflation, growth and housing will continue to play key roles in the overall direction of the market. Beyond the macro, there are many storylines across several industries that offer opportunities to generate outperformance.

Securitized: We see yield opportunities not seen in many years. In the near term, low unemployment, strong consumer savings, and real wage growth suggest that the U.S. consumer will stay timely with its debt service payments. However, we are selective with our transactions, as we believe unemployment will tick higher, which may result in higher consumer delinquencies. We believe the risk/reward of higher quality, short duration securitized products is extremely attractive. Most securitized products we invest in are being scrutinized using the GFC as a measure, and our thesis continues to be driven by good fundamentals. On the mortgage side, delinquencies are at historical lows, with limited to no affordability products compared to the market in the last housing crisis. With higher mortgage rates and a subsequent fall in housing activity, we will see less supply for the new year. This should set up a favorable technical for the MBS market. As a result, the Virtus portfolio has an overweight to the sector.

This graph compares the value of a hypothetical $10,000 investment in the Fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records) with the performance of the Fund’s benchmark index. Results include the reinvestment of all dividends and capital gains distributions. Past performance is no guarantee of future results. The graph does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance does not include any fees or expenses of variable insurance contracts, individual retirement accounts (“IRA(s)”), qualified retirement plans or college savings programs. If such fees and expenses were included, returns would be lower.

Results include the reinvestment of all dividends and capital gains distributions. Past performance is no guarantee of future results. The table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance does not include any fees or expenses of variable insurance contracts, IRAs, qualified retirement plans or college savings programs. If such fees and expenses were included, returns would be lower.

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

The first row of the table below provides information about actual account values and actual expenses. You may use the information in this row, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first row under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

The second row of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second row of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.