Investment Update


Investment update – IVY SMALL CAP GROWTH FUND

Commentary as of February 01, 2021

Since early October 2020, small caps, as measured by the Russell 2000 Growth Index (the Fund’s benchmark), had volatile returns. How has our strategy fared in this environment?

Tim Miller: Overall, it was a great fourth quarter for small caps as they experienced record returns during the period. The Fund’s strong performance during the quarter was driven by optimism and expectations for recovery against the backdrop of successful vaccine production and possible stimulus relief. (View Fund’s standardized performance.) Biotechnology and solar companies specifically had strong returns in the quarter. In fact, four of our stocks were up over 100% during the three-month period. During the quarter, we also made some changes by adding to information technology and financials exposure. We continue to seek opportunities in areas of the U.S. economy that should benefit from the recovery.

You take a balanced approach toward investing in small-cap growth companies by diversifying exposure across four risk buckets: Aggressive Growth, Accelerating Growth, Consistent Growth and Out-of-favor Growth. What are some examples of Fund holdings that fall into these different risk buckets?

Ken McQuade: One example of an aggressive growth holding in the industrials sector is Plug Power, Inc. This company is engaged in the development of hydrogen fuel cell systems that replace conventional batteries in equipment and electric-powered vehicles. With a total addressable market of trillions of dollars, there is a nearly unlimited number of applications for alternative energy. Given this scenario, we think Plug Power should experience a lot of momentum going forward. The company fits our style as it already has an established market in the forklift industry. There is a track record and evidence of its product having success in the marketplace. We think Plug Power can parlay its niche into larger markets like the automotive industry. The company’s valuation looks very extended as it is comparing the large total addressable market to the current revenue on a smaller market.

Brad Halverson: Five9, Inc., a leading provider of cloud call center software, is a holding we consider to be in the consistent growth bucket. This company appears well positioned for the shift from a physical call center model to a distributed call center model. While the market isn’t quite 15% penetrated at this point, we expect most, if not all of it, to move to the distributed call center model eventually. We think Five9 can consistently attain over 30% growth for the foreseeable time horizon. At some point, the company will probably graduate out of the small-cap range before the high growth phase ends.

Shift Four, a leading provider of integrated payment processing and technology solutions, is a holding we place in the accelerating growth bucket. We believe this company has the potential to grow north of 20% and that this growth should accelerate in the next couple of years.

Tim Miller: Fourth quarter 2020 also experienced a huge initial public offering market that really took off during the period. There were plenty of examples of these opportunities within the Fund. While the core of the Fund’s portfolio is held in names we consider to be in the consistent and accelerating growth buckets, the hunting ground for new opportunities is very strong right now with all the deal activity taking place.

How do interest rate spreads affect the Fund’s portfolio?

Tim Miller: The biggest macroeconomic factors we look at are spreads and rates and how they will affect valuations? We tend to own higher valuation stocks in the Fund. Interest rate spikes in fourth quarter spooked investors and put pressure on building-related stocks. It may have affected some of the higher growth software companies as well. Our macroeconomic expectation going forward is that interest rates will not rise – they may creep up from time to time – but they will stay relatively low, which should allow growth stocks to continue to perform.

What is your current view on industrials?

Ken McQuade: When the market went down due to COVID-19, we took advantage as strong industrials names dropped and became attractive. We sold more of the portfolio’s cyclical names to fund the move. The V-shaped recovery ended up being far more pronounced than expected, so that wasn’t the best move for the short term. However, for the long term, we feel strong about our outlook.

Tim Miller: The solar surge hurt us last year in industrials, but we have made a few adjustments and currently hold an overweight position in the sector. Additionally, we added a few economic stimulus plays and shifted our information technology weightings among our holdings. We are making moves to participate in the re-opening trade without buying low-quality companies. The companies in our portfolio need to meet our quality growth criteria. One area we haven’t moved into is the energy sector as hydrocarbon energy is in the crosshairs of the new administration in Washington.

Past performance is not a 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 Feb. 1, 2021, 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 a % of net assets as of 12/31/2020: Biotech Swap 7/1/21 4.1, Five9, Inc. 3.5, CareDx, Inc. 3.1, Varonis Systems, Inc. 2.5, PetIQ, Inc. 2.3, Monolithic Power Systems, Inc. 2.2, Brink’s Company 2.2, Mercury Systems, Inc. 2.1, Vericel Corp. 2.1 and Q2 Holdings, Inc. 2.0.

The Russell 2000 Growth Index is an unmanaged index comprised of securities that represent the small cap sector of the stock 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 small-cap stocks may carry more risk than investing in stocks of larger more well-established companies. The Fund may invest in Initial Public Offerings (IPOs), which can have a significant positive impact on the Fund’s performance that may not be replicated in the future. 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. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.