The Fed shifts on inflation – What does it mean?
The Fed unveiled a revision to its monetary policy, allowing for higher inflation to help support the labor market. We believe this action could keep interest rates low for years.
Zack: In today’s environment, it’s quite clear that many people consider themselves to be an expert on the pandemic when in truth, given the uncertainty that remains, the right answer is often “I don’t know.” Acting on behalf of our clients, our goal is to find companies and ultimately investments that are prepared for whatever lies ahead. We are operating in a unique environment in which society is in many ways changing, sometimes instantaneously. People are learning more about themselves, employees, products and organizations, which collectively provides incredible investment opportunities.
On a year-to-date basis as of yesterday, the Dow Jones Industrial Average is down roughly 3%, the S&P 500 Index is up 3%, the NASDAQ is up 20% and the Ivy Science and Technology Fund is up low double-digits. A handful of large technology stocks have driven performance for the last five years, some with returns above 150%, while some lost 50% and others somewhere in between. Over the last five years, 25% of the S&P 500 Index return has been driven by the FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks.
With that market backdrop, it’s important to point out that we look broadly at innovation, with most of the Fund invested in technology, communication services and consumer discretionary, along with approximately 15% allocated to health care. We look for innovative companies that are going to transcend disruptions and that are sustainable. We try to think about some of the things that have been pulled forward and some that have been delayed. For example, part of why Microsoft is doing so well is due to an acceleration towards cloud computing. Apple and Qualcomm are well-positioned for the long-awaited upgrade to 5G connectivity.
Additionally, Moderna is a biotechnology company we talked about prior to the pandemic. Well-highlighted in our process, we spent time in Bob Langer’s lab at MIT before Moderna was even a public company. We identified what we thought was a strong platform to bring a better product to market at a competitive cost. We’re excited about the recent performance of the stock and development of a potential COVID-19 vaccine, but would highlight the strength of the platform to develop an array of products, especially in the fight against cancer and other ailments.
For the second half of 2020, there are four broad issues we are focused on: pandemic, economy, election and timing, which I’ll let Brad elaborate on.
Brad: At a high level, I think we were all surprised by how quickly the market has recovered from the selloff in March. The unprecedented moves by the Federal Reserve and other central banks around the world reacted rapidly to limit the damage. As we think about the set-up in the second half, we think the economic data is likely to be weak, while stimulus measures, low borrowing rates and all of the discounting mechanisms lead to a tug of war which is likely to create volatility – none of this a surprise.
From a political standpoint, looking three-to-five years out, the political ramifications around Big Tech remain uncertain. And as we see more confidence around a vaccine and if it shows promise, we think you’ll see this discounting mechanism in the broadening of the market. To the extent we see more confidence around the vaccine and re-openings, the market will react. But we believe there will be continued volatility and mixed messages as noise comes into the market.
That said, what this period has done is pulled forward trends we’ve seen for several years – such as the pull into cloud and 5G connectivity. We expect to see a big launch for Apple in the fall based on its 5G phone and communication will accelerate that connectivity which we now rely on for productivity. All of this affects how we work in the office and at home. Payment methods are also changing as people prefer not to touch payment terminals – the current environment is pulling this in.
We expect to see a pullback in PCs. In mobile handsets, we expect a big bounce back related to Apple’s upcoming launch. Handset value is higher in people’s minds as they are not spending as much on other things. This also has broad implications for semiconductors.
Looking further in the future at 2021, we see a strong setup with continued low rates with easy monetary policy across the board with low cost of capital. Looking at the elections, the U.S. economy with a split congress would be a goldilocks scenario – not a significant increase in tax rates, which are a significant headwind in the mind of markets.
Regardless of the backdrop, innovation is going to push forward. We believe U.S-China relations get tougher and will match our conviction with anticipated downsides when investing in Chinese tech. We’ll continue searching for strong management teams and platforms, such as Moderna, where we are not looking for one-hit wonders, but technology that can work broadly.
Tech stocks would probably be much lower if you were to remove Chinese tech, any thoughts on opportunities outside the U.S.?
We think not only about where companies are based, but where they generate revenues. From a weighting standpoint FAANG are really the drivers for many indexes. WeChat is part of Tencent and less than 2% of its revenue is driven by the U.S. We think that it is poised to flourish either way. It is a critical part of everyday life. We’ll continue to add names globally, but we’ll continue to balance the risks with the underlying innovation. We’re going to remain well-educated about what’s going on overseas.
What do you think about the potential acquisition of TikTok by Microsoft?
If you look at what Microsoft has done, it has been involved in just about every aspect of technology. It has done very well in the enterprise – good examples are LinkedIn and gaming. TikTok would take them into the social media space. The management team has changed under Satya Nadella. The potential acquisition would give them a broader platform and access to a younger generation as well. We believe this could be a great strategic move and add another layer to its overall abilities.
Top 10 equity holdings as a percent of net assets as of 6/30/2020: Microsoft Corp. 10.4%, Apple, Inc. 7.5%, Facebook Inc. 6.1%, Vertex Pharmaceuticals, Inc. 4.8%, Micron Technology Inc. 4.8%, Alibaba Group Holding Ltd. ADR 4.1%, Amazon.com, Inc. 4.1%, Aspen Technology, Inc. 4.0%, ASML Holding 3.6%, Cerner Corporation 3.5%
S&P 500® Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market.
NASDAQ is an electronic exchange founded in 1971 that lists roughly 5,000 common stocks. The NASDAQ stock market comprises two separate markets, namely the NASDAQ National Market, which trades large, active securities and the NASDAQ Smallcap Market that trades emerging growth companies.
Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange.
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 August 12, 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.
Risk Factors: The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund invests more than 25% of its total assets in the science and technology industry, the Fund’s performance may be more susceptible to a single economic, regulatory or technological occurrence than a fund that does not concentrate its investments in this industry. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. In addition, the Fund’s performance may be more volatile than an investment in a portfolio of broad market securities and may underperform the market as a whole, due to the relatively limited number of issuers of science and technology related securities. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. 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.