Trade tumult: What's next for U.S.-China trade?

After weeks of build up about a possible trade deal between the U.S. and China this month, negotiations have come to a screeching halt. Trade representatives from both sides have accused the other of unfair practices or reneging on parts of the agreement framework. In response, President Donald Trump increased existing tariffs on $200 billion of Chinese goods from 10% to 25% effective May 10, as well as threatened to place tariffs on all remaining products from China, an estimated $250-$300 billion in goods. China retaliated with the announcement it would raise tariffs on $60 billion in U.S. goods, beginning in June.

As the world’s two largest economies struggle to come to an agreement, there are growing fears that the dispute could escalate. Equity markets sent a clear message to that effect on May 13 with a massive sell off across most indexes in the U.S. and around the world.

Derek Hamilton, global economist with Ivy Investment Management Company, says it’s in the best interests of both the U.S. and China to come to an agreement, but the possibility of a recession intensifies if a stalemate lingers late into the second half of 2019.

“The cost of the increased tariffs on U.S. gross domestic product growth would likely be a couple of tenths of a percent, which the U.S. economy could absorb,” says Hamilton. ”However, the impact to business confidence could be more profound, as capital expenditure plans could wane. Another consideration is the latest proposed tariffs are on goods that are almost all consumer-facing, and companies are likely to pass the cost of the tariffs directly to consumers.”

A hit to consumption at the same time as a decline in business confidence would escalate the risk of a U.S. recession, Hamilton says.

So what’s next? The fluidity of this situation creates ongoing market uncertainty, but Hamilton says Ivy’s base case scenario has not changed. He still expects a trade deal by midyear with a recovery in the global economy in the second half of the year.

“We believe it's going to be rocky for a couple of months, but a deal between U.S. and China could happen sometime in the summer,” he says.


Risks vs. Reality: Are the markets out of step?


Brexit, trade wars and geopolitical intrigue dominate the headlines. Check out this highlight from the recent Ivy Live to hear our take.

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Past performance is not a guarantee of future results. Investment return and principal value will fluctuate, and it is possible to lose money by investing.

The opinions expressed 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 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.

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China still seeks growth while navigating new challenges

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Trade talks between the U.S. and China have stalled. Ivy believes a near-term deal is still in the cards, but a prolonged stalemate heightens the possibility of recession.

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– Trade negotiations between the U.S. and China have come to a halt
– The U.S. and China have increased tariffs on each other's goods
– Ivy believes a near-term deal, while challenging, can still be reached
– However, a prolonged stalemate would devastate the global economy

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Active allocation: A world of ideas

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Global equity markets regained the ground lost in late 2018, with economic stimulus in China fueling emerging market performance and a newly dovish Fed boosting U.S. equities. Where might the markets go from here? We’ll explore the investment landscape and ideas to guide allocation decisions.

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Jonas Krumplys, CFA
Portfolio Manager
Ivy Investment Management Company
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Jeff Surles, CFA
Portfolio Manager
Ivy Investment Management Company
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Global equity markets regained the ground lost in late 2018, with economic stimulus in China fueling emerging market performance and a newly dovish Fed boosting U.S. equities. Where might the markets go from here? We’ll explore the investment landscape and ideas to guide allocation decisions.

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Individual Investor Blurb

An investor account may only be opened through a registered financial advisor. Once established, your account offers a variety of services designed to simplify the management of your investments. Of course, your financial advisor is your best resource to advise you on account activity and help to ensure that your

Active management: Going beyond the index

Actively managed funds? Passively managed index-based funds? Reports about the merits of each approach are published on a regular basis. Yet the evolving needs of investors mean many financial advisors want the flexibility to use both types of funds in the investment planning process.

Many passively managed funds seek to match the return of a market index, essentially tracking an average. Active managers, however, seek to exceed the returns of index averages by managing securities selections and seeking opportunities using research techniques that go beyond tracking an index. Active and passive investing strategies are not mutually exclusive and many investors use both as they allocate across a balanced portfolio. While Ivy offers passively managed funds, we also believe investors can derive the most long-term benefit through exposure to well-researched actively managed funds.

Why? In our experience, investors don’t set “average” goals – they instead put a priority on important milestones in their lives. When it comes to investing for those major goals, the right information can make a meaningful difference in going beyond average results.

In this review, we take a closer look at Ivy’s commitment to active management and the reasons we believe it can provide benefits to investors. With decades of experience in actively managing money for investors, we’ve learned that differentiated ideas, skilled interpretation of data and experienced professionals are important to successful investing over time.

Our portfolio managers and analysts conduct their own original research, every day. They don’t simply repackage the work of others. This approach leads to individual ideas, collaboration and conviction in the holdings we select. Active investment options typically have higher expenses than passive, but there is more at stake for investors than simply the cost.

Active selection of fund holdings

Because we do our own research, our funds tend to be more concentrated. For example, our equity funds average 55 holdings in each portfolio.1 In addition, 72% of Ivy Funds’ active portfolios have lower turnover than their Morningstar peer group averages.1 We believe it is best to know and understand what you own.

Breakdown of S&P 500 index holdings
Chart Showing Breakdown of S&P 500 index holdings

Top holdings shown as average percentage of total index as of 12/31/2018

Consider funds based on the S&P 500 Index and the several hundred stocks it represents. That many holdings can make it difficult to understand exactly where investment dollars are going and how they are performing. By Dec. 31, 2018, the top 50 holdings within the S&P 500 Index on average made up about 51% of the weight of the index. The top 200 holdings — or 40% — made up about 83% of the index.1

However measured, that concentration indicates that index investors are not getting market exposure that is as wide as the index name suggests. In addition, holdings outside of these concentrated groups may hurt performance in down markets more than they help in up markets. Research shows that since the Great Depression, the correlation of returns was greater in down months than in up months — in other words, stocks tended to move down together. And even in up markets, index investors lose the chance to achieve more than average returns. That may be because of large investors taking short positions in exchange-traded funds (ETFs) and other pooled vehicles to get defensive when the market falls.

From 2008 through 2018, the correlations increased, especially in down months.2 Indexes that track the market overall reflect those close correlations, while actively managed funds have the opportunity to be more selective.

Active management offers potential in rising and falling markets

The “efficient markets theory” states that the prices of stocks and other securities fully reflect all available information at any time. According to the theory, investors find it very difficult to identify securities that allow them to consistently perform better than the market.4

But history shows that markets often are not efficient. Certain categories of mutual funds historically have presented particular opportunities for active managers to outperform. In general, these categories often are considered less efficient in terms of the information available about the types of securities they represent.

In addition, investor behavior can exert a direct impact on prices and markets. Stock market volatility in reaction to geopolitical uncertainty or other factors often has lasted a relatively short time and shown the potential of careful stock selection.

Active managers have the ability to exploit potential market inefficiencies, or to “overweight” or “underweight” fund holdings in different proportions to a given index. Based on that capability, we believe actively managed funds offer the potential for above-market returns as well as the potential for downside protection. That’s a combination the index-tracking funds may have difficulty matching.

Many investors have shown they agree. Of the roughly 11,200 mutual funds and ETFs available at the end of December 2018, approximately 8,700 were actively managed and represented $13.2 trillion of the total $19.7 trillion in assets under management.3

Chart Showing Actively managed mutual funds stats

As of 12/31/2018. 3

We live in a time of global rebalancing, with rapid economic growth in emerging markets as well as accelerating innovation in technology, health care and other areas. These changes often bring opportunity for the right companies and potentially for investors. The Ivy investment team uses a disciplined, collaborative research process as part of our active approach to finding potential opportunities for investors.

1Source: Morningstar Direct as of 01/23/2019

2Sources: Empirical Research Partners, S&P 500 Monthly Average Return Correlations, Small- and Large-Cap Growth Stocks, 1928-2016 ; Morningstar Direct, 1928-2018

3Source: Strategic Insight Simfund, mutual funds and exchange traded funds, as of 12/31/2018

4Source: University of Chicago Booth School of Business, www.chicagobooth.edu


Active allocation: A world of ideas


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Past performance is not a guarantee of future results. Investment return and principal value will fluctuate, and it is possible to lose money by investing. 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 opinions expressed 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 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.

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Long-term investors should look beyond stock market volatility

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We believe investors can derive the most long-term benefit through exposure to well-researched actively managed funds.

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Story Highlights: 

- Active management offers potential in rising and falling markets.
- Certain categories of funds historically have presented particular opportunities for active managers to outperform.
- Ivy uses a disciplined, collaborative research process as part of our active approach.

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Wednesday, October 16, 2019 - 01:00

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Preparing for parenthood: Millennial style

Becoming a parent can be both an exciting and nerve-racking time. Although you and your friends may still feel young, the number of Millennial parents is growing. More than a million Millennials become parents each year – in addition to the 16 million Millennials who are already parents. 1 But don’t fret too much about parenthood; your unique generational characteristics will allow you to handle the daunting journey of preparing for kids with relative ease.

Seeking durable quality in a volatile market

The past six months has been “a tale of two quarters,” but also part of a new market reality. The Fund’s blended structure seeks to build a portfolio with equilibrium of risk and reward to withstand this type of highly volatile environment.

Forgive us for co-opting the Charles Dickens’ classic A Tale of Two Cities, but it serves as a good frame of reference for asset class performance over the last six months ending March 31, 2019.

Intense volatility throughout the fourth quarter of 2018 triggered dramatic declines across all equity indexes. This selloff was accentuated by the December performance of the S&P 500 Index, the Fund’s equity benchmark, which plummeted 9% for the month, marking its worst performance for the final month of a year since 1931. On the fixed income side, the yield curve flattened with the spread in yields between the 2-year and 10-year Treasury notes narrowing to 19 basis points (bps) at year’s end, coming uncomfortably close to inversion*. Fast forward to March 2019. The equities selloff has reversed, with the S&P 500 Index up 12% since the start of the year while fixed income markets appear to be holding steady.

(* An inverted yield curve occurs when the yield on a fixed-income instrument, or bond, with a shorter duration is higher than the yield on a bond with a longer duration. An inverted yield curve has been a precursor to every modern-era recession.)

It’s against this erratic backdrop that the Fund offers a strategy looking to optimize the equilibrium of risk and reward while seeking to manage volatility.

The Fund is a blended strategy with predictable guardrails that generally invest at least 50% of its assets in equities and at least 30% in fixed-income securities, giving investors the chance to seek consistent growth and current income while managing risk.

The equity portion of the portfolio typically holds a limited number of stocks (generally 45–55), with a maximum sector weight of 35%. We look for profitable companies and identify the fundamental drivers of those returns and the likelihood they can sustain growth projections over a two- to three-year investment horizon.

Our fixed income approach focuses on companies with solid balance sheets and cash flow metrics, with at least 70% of the fixed-income portion of the portfolio comprised of investment grade debt securities.

The Fund’s current allocation (as of 03/31/2019) is 64% equity and 35% fixed income, with the balance invested in cash. Over the course of the last six months, the Fund’s allocation was relatively stable outside of impacts from market action. These periodic bouts of volatility can be unnerving, but the Fund’s performance over the past 12 months is a reminder of the value of patient, disciplined investing with a long-term perspective.

What is durable quality?

We define durable quality as the ability for a security to exhibit above-average profitability that has the potential to persist over time. The Fund is predicated on finding investment ideas we believe demonstrate durable quality from the universe of profitable companies.

Part of our screening process includes an assessment of companies by their structural competitive advantages. These metrics can include a company’s brand equity, proprietary technology, economies of scale and capital intensity. We further narrow the list to companies we believe are trading at a reasonable valuation with visible catalysts that can help drive high performance over the next year or beyond. The remaining pool of candidates is sufficiently small and relatively stable, allowing our team to adequately vet and identify attractive investment opportunities.

Our emphasis on durable quality helps us to sharpen our focus on what we believe are successful and proven companies whose pedigree inspires our belief in them across economic cycles. Equally important, it disciplines us to reduce or divest positions when relative valuation suggests their inherent characteristics are fully appreciated by the market.

Assessing holdings with our approach

Let’s look at how we apply our durable quality investment philosophy.

Union Pacific Corp. (UNP) Yum! Brands, Inc. (YUM)

Market Cap: $120 billion

Market cap: $31 billion

Valuation: 18 times
2019 earnings estimates

Valuation: 26 times
2019 earnings estimates

Current fund holding: yes

Current fund holding: no

UNP is the most profitable U.S. railroad company with an expansive physical rail footprint. However, its operating costs, adjusted for length of haul, were above the industry average. In response, UNP implemented an efficiency strategy it believes will improve the company’s efficiency ranking to a best-in-class level over the next several years. In our view, this idiosyncratic driver of earnings growth is an underappreciated catalyst, which is not reflected in UNP’s current valuation using its forecasted 2019 earnings.

YUM is a quick-service restaurant holding company comprised of three chains: Kentucky Fried Chicken, Pizza Hut and Taco Bell. These brands have successfully brought innovation to their menus with an emphasis on value that has resulted in strong same-store sales, net new unit growth and profitability. YUM’s success has been recognized by the equity market and its valuation metrics have expanded meaningfully over the past five years. While we continue to believe in YUM’s business model, our valuation discipline motivated us to close our position in this holding after several years of profitable ownership.

While uncertainty and volatility ebb and flow, we believe a blended portfolio of assets, diversified across sectors, with security selection governed by a disciplined emphasis on finding what we believe to be durable quality will continue to be a sound approach for investors. Across economic cycles and irrespective of market moods, this approach has served investors well and our confidence in it has not waned.

Top 10 Equity Holdings

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Past performance is no guarantee of future results. 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 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.

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. Fixed-income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. The lower-rated securities in which the Fund may invest may carry greater risk of nonpayment of interest or principal then higher-rated bonds. In addition to the risks typically associated with fixed-income securities, loan participations in which the Fund may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund typically holds a limited number of stocks (generally 45 to 55). As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a large number of securities. The value of a security believed by the Fund’s managers to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. 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 S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.

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Matthew A. Hekman
Mark Beischel
Susan K. Regan

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Q2 Outlook<br> Global economy is slow out of the gates

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The market fluctuations over the past two quarters are unsettling, but part of a new reality. The Ivy Balanced Fund seeks to build a portfolio with equilibrium to withstand a highly volatile environment.

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- Volatility is likely to persist throughout 2019.
- The Fund looks to optimize the equilibrium of risk and reward while seeking to manage volatility.
- Our strategy is predicated on investing in companies that exhibit durable quality.

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Wednesday, October 16, 2019 - 02:00

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Risks vs. Reality: Are the markets out of step?

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Brexit, trade wars and geopolitical intrigue dominate the headlines. Yet, U.S. business confidence remains high while stocks continue to climb and P/E levels suggest less global risk. We explore this Goldilocks scenario to determine investment opportunities, as well as bears to avoid.

SPEAKERS

Derek Hamilton
Global Economist
Ivy Investment Management Company
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Jonas Krumplys, CFA
Portfolio Manager
Ivy Investment Management Company
View Full Bio


Sarah Ross, CFA
Portfolio Manager
Ivy Investment Management Company
View Full Bio

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Brexit, trade wars and geopolitical intrigue dominate the headlines. Yet, U.S. business confidence remains high while stocks continue to climb and P/E levels suggest less global risk. We explore this Goldilocks scenario to determine investment opportunities, as well as bears to avoid.

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