Market Sector Update

• International small-cap equities experienced a positive return during the fourth quarter. Equity markets continued to gain ground over the quarter aided by significant fiscal support and monetary accommodation combined with improving economic data and further progress in reopening the major global economies despite some setbacks.

Portfolio Strategy

• The Fund produced positive performance but underperformed its benchmark for the period. At the country level, stock selection in the U.K., Ireland and Sweden were the top detractors to relative performance, while stock selection in Germany, Japan and Switzerland were the top contributors to relative performance. At the sector level, stock selection in communication services, financials and materials were the top detractors to relative performance, while stock selection in consumer staples, health care and consumer discretionary were the top contributors to relative performance.
• Top relative individual detractors to performance for the period included Uniphar, an Irish-based health care company; Future, a U.K.-based media company; and Stillfront Group, a Sweden-based communications services company.
• Top relative individual contributors to performance for the period included Vivoryon Therapeutics, a Netherlandsbased health care company; ASM International, a Netherlands-based semiconductor equipment company; and Westwing Group, a Germany-based e-commerce platform company.
• Portfolio changes within the Asia-Pacific region over the quarter included the addition of Beach Energy, an Australian oil & gas exploration and production company. The company has an attractive growth portfolio of assets and we are constructive on the outlook for energy prices over the upcoming year as global economic and travel activity begins to normalize. The Fund also participated in the initial public offering of Roland Corporation, a Japanese producer of electronic musical instruments. The company was founded in 1972 but has been in private ownership following a management buyout in 2014. The company’s products are famous and highly regarded amongst professional musicians the world over and the earnings structure of the business has been positively transformed during this period of privatization. These additions were funded by the sale of NGK Spark Plug, an automotive component maker, and Treasury Wine Estates.
• European additions to the portfolio over the quarter included Verbio. Verbio is a German-based renewable transport fuel provider of biodiesel, bioethanol, biomethane with biofertilizer and feeding stuffs. With its proprietary production technology, we believe VERBIO’s transport fuels stand out through their higher energy efficiency and quality products compared with the competition. On the one hand, the higher quality raw materials allow for by-products used in the pharma, life sciences and food industry. On the other hand, the self-developed technology allows the company to reduce greenhouse gas emissions in the production process of its biofuels. This is beneficial as VERBIO sells greenhouse-gas emission reduction through the sale of biofuels. The lower the greenhouse gas footprint the product has, the more greenhouse gas reduction the company can sell, which is a main margin driver. VERBIO already provides compressed natural gas (CNG) in Germany through the national gas grid. Because bio-certificates for CNG are hard to convey across borders, VERBIO has started to market liquefied natural gas (LNG) that can easily be delivered outside of Germany. This move enables VERBIO to sell its CO2 emission reduction tickets that are driven by the regulatory environment outside of Germany and across Europe.
• Over the quarter, we initiated a position in the Belgium-based life and non-life insurer Ageas. We were attracted to the group’s low risk business model which focuses on guaranteed life insurance products whose contract durations are limited to eight years plus one day and whose liabilities are backed by bonds of equal duration. We believe the group is well placed to capitalize on the rapidly growing Asia-Pacific life market through its joint venture with Taiping Life. The financial targets, set to be outlined by the firm’s new and well-regarded CEO Hans De Cuyper, should act as a catalyst for the stock in 2021. Finally, it is our view that increased monetary and fiscal stimulus is likely to lead to higher inflation and yields, which should positively impact Ageas.
• Over the quarter, we eliminated our position in Grand City Properties, the German based property group. This decision was based on our increasing concerns about the change in the group’s strategy of diversifying geographically away from German residential, where the group had its core competency. Grand City's CEO Christian Windfuhr who had been central to the success of the group over many years also retired during the quarter. More recently, we believe that increased monetary and fiscal stimulus is likely to lead to higher inflation and hence yields which is likely to be negative for the residential real estate sector.

Outlook

• The portfolio management team continues to believe the pace of the recovery from the unprecedented shock on the global economy of COVID-19 will be the main factor affecting equity prices for the next several quarters. The rapid spread of COVID-19 during the northern hemisphere winter months across the U.S., Europe and parts of Asia Pacific, particularly Japan, will have a negative impact on upcoming earnings. This is against a backdrop of global vaccine approvals and distribution. We expect the market to look through short-term earnings weakness toward a recovery of economic activity in the second half of the year.
• The outcome of the November U.S. presidential and congressional elections is important as it has resulted in unified Democratic party control of the presidency and both houses of congress, which only became apparent in early January with the results of the State of Georgia runoff senatorial elections. This unified government should ensure sustained fiscal support for the world’s largest economy while vaccines are distributed over 2021. We continue to remain cyclically constructive and are concerned about the valuations of some growth sectors that have benefitted from earnings multiple expansion, which could be tested as bond yields rise on higher inflation expectations.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through December 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. 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. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Effective Feb. 21, 2019, Ivy IG International Small Cap Fund was renamed Ivy International Small Cap Fund. Additionally, the name of the sub-adviser changed from I.G. International Management Limited to Mackenzie Investments Europe Limited. Mackenzie Investments Europe Limited delegates to its subsidiary, Mackenzie Investments Asia Limited, for additional portfolio management responsibilities. References to Mackenzie Investments Europe Limited include both entities.

Top 10 equity holdings as a percent of net assets as of 12/31/2020: Uniphar plc 3.8%, Games Workshop Group plc 2.8%, Steadfast Group Ltd. 2.3%, ASM International N.V. 2.2%, SCSK Corp. 2.2%, Outotec Oyj 2.0%, TechnoPro Holdings, Inc. 2.0%, Future plc 2.0%, The Bank of Kyoto Ltd. 1.9% and Ryohin Keikaku Co. Ltd. 1.8%.

All information is based on Class I shares.

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.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. 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. Investing in small-cap stocks may carry more risk than investing in stocks of larger more well-established companies. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.