Investment Update

10.28.20

Ivy Asset Strategy Fund – Investment Update

Commentary as of October 28, 2020

This has been a challenging market environment with the continuation of COVID-19, volatile energy prices, travel demand collapsing, an unclear U.S. economic stimulus package and the upcoming Presidential election resulting in unpredictable times. Despite these current events, since the market bottom on March 23, the Ivy Asset Strategy Fund has been resilient. From the March 23 low through October 27, the Fund is up approximately 38% and has outpaced its Morningstar World Allocation peers by approximately 1,000 basis points (bps). See below for the Fund’s standardized performance information.

A key aspect we would like to address and believe many advisors struggle with is our asset allocation. Advisors over the last few years have been hesitant to use asset allocation funds within their firm models. We believe they are generally concerned about receiving variance reports from their home office – a few competitor funds have had big allocation swings and have been losing assets, despite good performance.

Looking at the Ivy Asset Strategy Fund positioning since the third quarter of 2017, the equity portion has shifted by only 1-2% (quarter over quarter) on average. The Fund was well-positioned going into the COVID-19 crisis, so even as a major event struck the globe, there was not a big equity shift in the portfolio.

What kind of expectations should we set for clients in terms of how quickly equity allocations might change and what would it take to drive a major allocation shift in a short timeframe?

Chace: The thing to keep in mind is that we are constrained by the volatility window that we must stay inside of, which is 70-90% of the MSCI ACWI Index. We go where our equity analysis leads us, same thing on the other side with credit. For the Fund to make a dramatic change in a short time, it would probably take a dramatic move in the market. Typically, it would happen at the end of a recession or downturn in business cycle, and we would hopefully recognize that occurrence.

We haven’t had a normal cycle in quite a while. If you think of years like 2003 or 2009 where you are truly coming off a business cycle, you would probably see us move into risk. Now we are in a period where there are a lot of cross-currents. We are trying to isolate the Fund from some of the large macro factors and take the risk at an idiosyncratic level rather than employing large market calls or sector weights.

Jeff: The volatility constraint is always going to act as a natural guardrail on what we do. When correlations spike, we have to adjust the portfolio. Correlations came off peak but are still elevated. Our fixed-income sleeve is currently taking up more of the risk budget than it typically has because correlations are high. This does slightly limit our flexibility on the equity side.

Where are you finding value today?

Jeff: Given the current unpredictable market environment, our focus has remained on individual security selection. We’re very conscious right now on not having too much factor exposure. Dispersions are wide and being driven by macro events, primarily driven by COVID-19. We do not claim to have unique insights on the virus, as a result, we are neutral to factors currently.

Regarding derivatives, are you still finding opportunities there?

Chace: We have four key positions currently. We always look at options as an alternative when considering a stock. Over the last three to four months, there have been dramatic moves on the option side, especially calls. When volatility rises and call options become expensive, we’ll do things like write call options to bring us down to market weight. The amount we would have earned on a few of our existing holdings without options was close to two-thirds value. When puts become very expensive, which has been the case recently, you often can buy 1.5 calls for the same price as a put.

Do options increase or decrease portfolio volatility?

Chace: Our aggregate options position has a delta of less than 1% of additional equity exposure. If we have 100 shares notional, it may act like 50 shares or something near that. If you’re writing a call option against a position you own, you’re really dampening volatility. To the extent the stock falls, it’s a stock we’d like to buy anyway and will purchase additional shares at a perceived attractive price.

Has there been any change to the Fund’s gold or gold-related positioning? Would a second stimulus package of approximately $1.8 trillion or more influence the weighting?

Chace: The Fund’s gold position is around 6% currently, we also still own Barrick Gold Corp. which was trimmed a few months ago. We believe gold is at an interesting point right now. Like the credit book, gold has become more correlated to equities. Usually over long periods of time, it has low correlation. If you want to look at one price on your screen to see how gold is likely to be doing, it’s the 10-year TIPs yield which is at -94 bps today. This is basically telling you that you are earning 1% less return than the inflation headwind that you are likely to experience. With the additional stimulus being discussed and as inflation expectations pick up, the yield curve steepens. We believe the U.S. Federal Reserve (Fed) will have to resort to yield curve control at some point. Implicitly, that will cause yields to become increasingly negative. If you cause that relationship to accelerate, it becomes even more pronounced and that’s about the best environment possible for gold.

Back to fixed income, what is the current yield for the fixed-income portfolio?

Jeff: Yield-to-maturity is close to 6%. The Fund’s 30-day SEC yield was 1.74% as of 9/30/2020. We had a pretty good handle on the fixed-income market back in March/April and we were putting every incremental dollar we could find into the investment grade market. We are now starting to take some of that off the table. Investment grade was 30% of the fixed-income sleeve and that allocation is now closer to 22%. A lot of our investment grade bonds are up 10 points or more currently, so we are cycling the capital out. That money has primarily been going to high yield, emerging markets and non-U.S. investment grade. If one spot has become more pronounced in the fixed-income portfolio, it is non-U.S. investment grade holdings. A number of large foreign companies are coming into the U.S. market to seek financing. Generally speaking, we feel U.S. investors are not familiar with some of these names, so this has allowed us to get a significant yield premium. They are large and sound companies, so we don’t believe we are taking on a lot of risk in doing this. Again, we are really looking on a security-by-security basis. Half of the fixed-income portfolio is non-investment grade, but with a different set of risks that you would not normally associate with a high-yield portfolio.

Risk was close to the top of your range due to elevated correlations at the end of the second quarter, even with a relatively low mid-60s equity position. Is that still the case today?

Jeff: It has come down a hair, at 85-86% of the expected risk of the MSCI ACWI Index. This stems from cross-correlations remaining elevated. A lot of longer duration investment grade is still showing up as risky. Many securities were off 30 plus points, and the risk metrics are still picking that up and it probably won’t fall out of the models for another three plus months. Until that normalizes, the Fund will likely remain at the higher end of the risk boundary.

Searches for global equity are trending up, with UBS and others placing the asset class as a tactical overweight. Do you think this portfolio works as a reduced volatility global equity position?

Chace: The models that wealth managers are using have become more restrictive. I’ve always looked at this as a blended Fund with some discretion to asset allocation. We do that in a bottom-up, unique way. What we’ve seen more recently is that individuals in the market look at this as a lower risk substitute to solely equity funds. I believe if investors are familiar with the risk parameters/unique fund structure and are interested in exposure to the MSCI ACWI Index, then the Ivy Asset Strategy Fund may fit their needs.


FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

Past performance is no guarantee of future results.The opinions expressed in this commentary are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Sept. 02, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. It should not be assumed that investments made by any Ivy Investment product will match the suggested performance or character of the investments discussed in this commentary. Investors may experience materially different results. This commentary 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. Any securities discussed herein are presented in a fair and balanced manner and were chosen based on objective, non-performance-based criteria, and securities discussed may or may not be held now, or in the future, by any Ivy Investment product. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

This commentary may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All such forward-looking statements are conditional and are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates and availability of leverage, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors, any or all of which could cause actual results to differ materially from projected results.

View Fund Performance

Top 10 equity holdings as a percent of net assets as of 09/30/2020: Microsoft Corp., 3.0%; Amazon.com, Inc. 3.0%, Taiwan Semiconductor Manufacturing Co. Ltd., 2.6%; Visa, Inc., Class A, 2.0%; Adobe, Inc. 1.9%; Reliance Industries, Ltd. 1.7%; Intuit, Inc. 1.6%; QUALCOMM, Inc. 1.6%; Apple Inc. 1.5% and Union Pacific Corp. 1.4%.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. 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. The Fund may allocate its assets among different asset classes of varying correlation around the globe. The Fund’s Equity Sleeve typically holds a limited number of stocks (generally 50 to 70). 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 it invested in a larger number of securities. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. The Fund’s Diversifying Sleeve includes fixed-income securities, that are subject to interest-rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Fund may seek to hedge market risk via the use of derivative instruments. Such investments involve additional risks. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Markets for commodities are likely to be volatile and the Fund may pay more to store and accurately value its commodity holdings than it does with the Fund’s other holdings.

Diversification does not ensure a profit or protect against loss in a declining market.

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.