Investment Update


Investment Update – Large Cap Growth

Commentary as of October 21, 2020

The Ivy Large Cap Growth Fund’s investment philosophy has been in place since 1995, and we continue to execute on the idea that investors tend to place too much focus on near-term trends, thereby embedding overly optimistic expectations in growth stocks. Realization of long-term success is less dependent on near-term trends and more dependent on strength of the business as the forces of capitalism are relentless. Most businesses lack something unique that keeps competitors and other disruptors away. We believe this presents real long-term opportunity to identify companies that can endure.

We think this is an appropriate lead-in to our current environment.

The Fund has produced attractive returns since March lows, but on a relative basis we have lagged our benchmark, the Russell 1000 Growth Index. The chart below illustrates the Fund’s performance both on an absolute basis and relative to the index. Absolute returns (shown in green) at first glance would appear quite attractive with returns of more than 60% in just under seven months’ time. (View Fund’s standardized performance.) Our focus on remaining invested in high-quality, durable business models has allowed us to participate in the recovery from pandemic lows. Relative returns (shown in gray) also shows that these returns have struggled to keep pace with the benchmark. The index has returned over 70% during the same period.

Chart Showing Ivy Large Cap Growth Fund (IYGIX) Performance from March 23, 2020 - October 20, 2020

Source: FactSet, Ivy Investments. Past performance is no guarantee of future results.

The difference in short-term performance is largely explained by our exposure (or lack thereof) to a specific segment of the high-growth companies uniquely positioned to benefit from pandemic trends. Many of these companies are unprofitable – the segment of the Russell 1000 Growth Index with negative price-to-earnings (P/E) ratios, and thus negative earnings, outperformed the index by about 54% from March lows through the end of the third quarter 2020. This is in direct contrast with our approach of identifying profitable, durable business models, and we would not expect to outperform in such an environment.

Furthermore, expectations for large-cap growth businesses in general are high. The chart below illustrates the trailing P/E ratio (this ratio looks at a company's share price in the market relative to its past year's earnings per share) of the Russell 1000 Growth Index relative to the Russell 3000 Index. Over the past 15 years, relative expectations have never been higher, and the data tells a similar story looking at forward earnings expectations. That may make some sense, as some large-cap growth businesses have shown incredible resilience in recent months. Long-term, risk-aware investors like us question the sustainability of these businesses. Some will prove to be durable, deserve a premium valuation, and are likely to offer attractive long-term returns. History suggests many will not, which will result in fundamental disappointments and compounded compressing valuations. Our goal is to sift through data, assess the fundamentals of the underlying businesses, and seek out the companies with a unique competitive edge that will allow them to continue to grow well after pandemic trends fade.

Chart Showing Relative Earnings Multiple Reflects High Investor Expectations

Source: FactSet, Ivy Investments.

In our view, the perception of persistently low interest rates and growth has helped push some of these stock prices beyond what seems rational. When expectations are elevated, our research suggests leadership often turns over. Said differently, what the market believes is attractive in the current pandemic environment is very unlikely to be attractive next year. As we take a step back and reassess the environment and individual companies, we would remind investors that markets are likely to reset. Drawdowns will likely occur. And from a starting point of extremely high expectations, the penalty for being wrong could be very detrimental to long-term performance.

In conclusion
While our stock picking could have been better since March and companies like Cerner, Motorola Solutions and Coca-Cola Co. have turned out to be bad “pandemic stocks,” we’ve reexamined those names to make sure the long-term thesis is still intact. In the current style-driven market, where momentum, growth and risk are all being rewarded, we have chosen to stay the course and continue to seek out those companies we believe have the potential to deliver results to investors over the long term.

Past performance is no guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through October 21, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Top 10 holdings (%) as of 09/30/2020: Microsoft Corp. 9.7, Apple, Inc. 8.6,, Inc. 7.4, Visa, Inc. 4.3, Alphabet, Inc. 3.8, Facebook, Inc. 3.7, Motorola Solutions, Inc. 3.3, Adobe, Inc. 3.2, Coca-Cola Co. 2.9 and Electronic Arts, Inc. 2.8.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. It is not possible to invest directly in an index.

All information is based on Class I shares. Class I shares are only available to certain investors.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with greater diversification. The Fund typically holds a limited number of stocks (generally 40 to 60), and the Fund’s portfolio manager also tends to invest a significant portion of the Fund’s total assets in a limited number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund’s NAV than it would if the Fund invested in a larger number of securities or if the Fund’s portfolio manager invested a greater portion of the Fund’s total assets in a larger number of stocks. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.