Ivy Asset Strategy Fund – Investment Update

09.02.20

Ivy Asset Strategy Fund – Investment Update

Commentary as of September 02, 2020

Regarding the Fund, what has worked well and what has detracted from performance? Also, given five months of strong market performance and major indexes at all-time highs, what do you think about equity valuations?

Chace: We’ve certainly benefitted on the equity side from a continued run up in some highly valued technology stocks as well as gold and gold-related stocks. The portfolio has bumped into our ceiling on the information technology weight, so we’ve continuously trimmed larger positions. We added Apple Inc. back into the portfolio in April, partly in an effort to get ahead of the upcoming product cycle. We also dramatically increased our weight in Amazon. Many positions have benefitted from negative real rates, policy response, with solid growth stories given a huge tailwind based on U.S. Federal Reserve (Fed) policy.

We strive to maintain a balanced position overall. We are not making a bet on COVID-19 with regards to the speed of re-openings or elections for that matter. The portfolio contains no significant factor exposure to speak of other than cap size. Our position is neutral to momentum and other key factors. We are also thoughtful about trying to find value – we’ve mentioned before our holding in Deutsche Telecom which we think is massively undervalued based on their stake in T-Mobile.

Jeff: The fixed-income portfolio struggled in March, however, we were able to get the portfolio switched and right-sided quickly since the end of March. A significant part of the portfolio is now in investment-grade credits. U.S.-based high yield exposure has been brought down to about 16%. We have added to mortgage-backed securities and reduced Treasury exposure in favor of physical gold. From here, we are comfortable with current positioning and do not expect to make major changes.

As a reminder, we run a risk target versus the benchmark that ranges between 70-90%. Coming into March, we were at the lower end and are currently at the other end of the range – near 86%. This higher risk level may seem odd since we’ve increased credit quality, however, the risk model considers the recent increased volatility from February-March and shows credit to track more closely with equities than in the past. We expect the risk model to normalize over time.

Do you believe you can achieve equity-like returns out of the diversifying sleeve today?

Jeff: It’s possible and depends on how much return you think equities will deliver. Coming out of March, we were quite confident that fixed income could deliver outsized returns. Now we are looking to take some risk off the table and are more focused on getting the perceived diversification benefits.

There was a story out earlier this week about the $15.7 billion Ohio Police and Fire pension allocating 5% to gold based on the advice of their consultant. Any thoughts? What is your gold position currently and how is it used for asset allocation?

Jeff – We have long thought gold holds and important allocation benefit as it can provide diversity and total return, especially in the current environment where the Fed is supportive. We are finding less and less protection in traditional areas such as U.S. Treasuries, partially due to low rates. In the long term, you have an economy that needs to be saved by low rates and fiscal stimulation. Therefore, we switched our weight from Treasuries into gold and gold-related equities. Gold has been a strong performer and we recently trimmed gold slightly. Our position today is about 6%.

What causes more concern for the market over the next few months, COVID-19 or the election?

Jeff – I would say COVID-19. That said, we are not going to try to predict what happens with COVID-19 and, in our view, the election is too close to call. As such, we are trying to be as neutral as possible, hence avoiding factor exposure. We don’t feel we have much of an edge there. The portfolio holds no significant beta, growth, value or momentum bets. Market capitalization is the only factor exposure, which is based on our avoidance of small-cap international names that happen to be part of the benchmark index.

Chace – This election is going to be a coin flip right up to the end, or even a few days after the election. We will focus on individual security selection while maintaining neutral factor exposure.


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.

Top 10 equity holdings as a percent of net assets as of 06/30/2020: Microsoft Corp., 3.0%; Amazon.com, Inc. 2.7%, Taiwan Semiconductor Manufacturing Co. Ltd., 2.6%; Visa, Inc., Class A, 2.0%; Adobe, Inc. 1.8%; Zimmer Holdings, Inc. 1.6%, ASML Holding N.V., Ordinary Shares 1.6%, Intuit, Inc. 1.5%, ORIX Corp. 1.5% and Ingersoll-Rand, Inc. 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.