An active, diversified approach for current income, capital appreciation

Two broad shifts increasing income demand

Globally, there are two fundamental shifts happening in the current environment that are increasing the need for income-producing products. First, as baby boomers continue to retire from their work lives, the demand for investment income is likely to grow. According to the 2019 BlackRock Defined Contribution Pulse Survey, “plan participants are sharpening focus on how to secure crucial, ongoing retirement income.” Second, interest rates have been in a downward trend and most recently have hit record lows. This means that total return from fixed-income assets will not help bridge the $1 trillion funding gap¹ that 76 million baby boomers² are likely to face in pensions, health care and other benefits.

STOCKS COULD OFFER A COMPETITIVE INCOME SOURCE (%)
Chart Showing STOCKS COULD OFFER A COMPETITIVE INCOME SOURCE
Chart Showing STOCKS COULD OFFER A COMPETITIVE INCOME SOURCE

Source: Evercore ISI (Data 01/31/1995 through 03/31/2020). Past performance is no guarantee of future results.

Mid-cap stocks may provide opportunity for capital appreciation, income

In an environment where bond yields are at a record lows, we believe that stocks in the mid-cap universe may be well positioned to fill the income gap and provide an opportunity for capital appreciation. Generally, investors think that dividend-paying companies mostly exist in the large-cap universe. However, as shown below, there are numerous companies in the mid-cap universe that pay dividends.

Many mid-cap companies pay dividends
  Total companies with a dividend yield Companies with dividend yield > 0.5%

Russell Midcap Index

547

93.4%

Russell 1000 Index

712

94.0%

S&P 500 Index

422

94.5%

Source: FactSet and Ivy Investments.

An active approach to income growth, capital appreciation

In today’s environment where stocks are supported by expansionary monetary policy and cheap money³, we believe investing in an actively managed dividend portfolio with the potential to generate income and provide attractive growth characteristics is a sound approach. This is where the Ivy Mid Cap Income Opportunities Fund can fit into an investor’s portfolio.

The Fund was created to achieve a dual mandate of investing in companies that have the potential to grow their dividends and provide an opportunity for capital appreciation across all market cycles. Focused on companies in the mid-cap space, we invest in core growers at a stage in their lifecycles where they have enough earnings growth and are generating cash in excess of what is needed to grow organically that they can offer return of capital to shareholders. Since the Fund’s inception in October 2014, portfolio investments have provided nearly a 3% gross yield and have generated high single-digit income growth annually.

Dividend growers in the past, future

As shown in the chart below, dividend growers have generally been rewarded by the markets. Historically, within the Russell Midcap Index, the Fund’s benchmark, divided payers have tended to perform better than the index. This chart also shows the importance of avoiding those companies that don’t pay or eliminate dividends.

Overall, as interest rates remain low, investor demand for yield and income have become elevated and should remain so. In such an environment, we expect dividendpaying companies to become increasingly valuable. In our view, companies with strong cash flows, low payout ratios, and durable business models are in a favorable position to increase dividends and grow over time.

DIVIDEND STOCK RETURNS ACCORDING TO DIVIDEND PAYMENT TRENDS (%)
Chart Showing DIVIDEND STOCK RETURNS ACCORDING TO DIVIDEND PAYMENT TRENDS
Chart Showing DIVIDEND STOCK RETURNS ACCORDING TO DIVIDEND PAYMENT TRENDS

Source: Evercore ISI (Data: 12/31/1999 through 03/31/2020). Past performance is no guarantee of future results.

An active approach providing diversification into dividend-yielding stocks with growth characteristics

We think the foundation of a successful actively managed strategy within the mid-cap universe is a focus on companies that offer capital appreciation and have as history of dividend increases. Yields are an unappreciated aspect of the universe.

Through the Fund’s bottom-up investment process, we seek companies that have a current yield above 0.5% (as of 03/31/2020 — the lowest yielding security in the Fund is at 1.6%) and a track record of yield growth and earnings growth that can allow for upside potential in stock prices. As of 03/31/2020, the Fund’s largest overweight positions were in materials and consumer discretionary because these sectors offered a combination of competitive yield and income growth supported by underlying earnings growth. In the generally low-yielding consumer discretionary sector, Fund holdings as of 03/31/2020 had an average yield of 4.4% versus the lower yield in the sector in the index (see chart below).

Fund offers income growth, stock price appreciation

With interest rates at record lows, stocks appear well positioned to fill the income gap. While investors generally believe income-generating stocks are found within large caps, data shows that the mid-cap universe not only has a competitive stream of income payers and potential for growth, but it is also considerably underutilized.⁴ With such a backdrop, we believe the Ivy Mid Cap Income Opportunities Fund’s bottom-up active approach and dual mandate of income growth and capital appreciation may fill the income gap created by record low interest rates and the income needs of an aging population.

RUSSELL MIDCAP INDEX: DIVIDEND YIELD AND GROWTH BY SECTOR (%)
Chart Showing RUSSELL MIDCAP INDEX: DIVIDEND YIELD AND GROWTH BY SECTOR
Chart Showing RUSSELL MIDCAP INDEX: DIVIDEND YIELD AND GROWTH BY SECTOR

Source: Evercore ISI; Data as of 03/31/2020. Past performance is no guarantee of future results.

Fund Performance

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MarketWatch: Ivy Mid Cap Growth Fund

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¹https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/...

²https://www.prb.org/justhowmanybabyboomersarethere/

³ To support economic growth impacted by the coronavirus outbreak, the U.S. Federal Reserve re-started quantitative easing on 03/15/2020.

⁴ Source: FTSE Russell and Strategic Insight Simfund as of 12/31/2019. Mid-cap stocks make up 25% of the U.S. equity space. This indicates that some value is being left on the table. Equity mutual fund assets represent open end mutual funds, domestic mid-cap categories vs. all domestic equity categories. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell 3000 Index measures tracks the performance of the 3,000 largest U.S.-traded stocks which represent about 98% of all U.S. incorporated equity securities. It is not possible to invest directly in an index.

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 current through March 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.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in mid-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. 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 35 to 50). 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. 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. 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.

Class I shares are only available to certain types of investors.

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell 1000 Index measures the performance of the large-capitalization segment of the U.S. equity universe. The S&P 500 Index measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.

Through July 31, 2021, IICO, IDI and/or WISC have contractually agreed to reimburse sufficient management fees, 12b-1 fees and/or shareholder servicing fees to cap the total annual ordinary fund operating expenses (which would exclude interest, taxes, brokerage commissions, acquired fund fees and expenses and extraordinary expenses, if any) as follows: Ivy Mid Cap Income Opportunities Fund Class I shares at 0.83%. Prior to that date, the expense limitation may not be terminated without the consent of the Board.

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Kimberly A. Scott, CFA

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CIO Insights - Ivy Roundtable Discussion
Focused on long-term business models

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Our active approach and dual mandate of income growth and capital appreciation may help fill the income gap created by record low interest rates and the monetary needs of an aging population.

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- With interest rates hitting record lows, stocks in the mid-cap universe could be well-positioned to fill the income gap.
- We believe an actively managed, diversified approach in the mid-cap universe has the potential to find attractive dividend-paying companies with growth potential.
- The Fund’s mandate is to invest in companies that have the potential to grow their dividends and provide an opportunity for capital appreciation across all market cycles.

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Ivy Insights – Central Bank Policy and Market Viewpoint

Ivy Insights – Central Bank Policy and Market Viewpoint

Commentary as of May 04, 2020

Dan Hanson, CFA
Mr. Hanson is Senior Vice President and Chief Investment Officer at Ivy Investments. He is responsible for leading the company's investment management division and has more than 25 years of investment and leadership experience.

Derek Hamilton
Mr. Hamilton is Senior Vice President and Global Economist at Ivy Investments. He has more than 23 years of investment experience.

Dan Hanson: We just experienced the best April since 1938. The market has rallied off the March 23 lows as a result of record stimulus. The depth and breadth of the U.S. Federal Reserve’s (Fed) policy action has led to a record amount of issuance in the investment-grade bond market. Companies have been able to refinance and shore up their balance sheets. Energy hit new lows in April and remains a very challenged sector. There's very little demand for oil right now, but there's plenty of supply. There's been a shift to a risk-on environment and that's caused small cap and value stocks to perform well. We think the market is behaving rationally in this risk-on environment.

Derek Hamilton: Broadly, the COVID-19 curves continue to flatten. New cases have continued to accelerate at a less rapid rate, and continue to slow in places like Europe and New York. While containment of the virus continues to be positive, we're still seeing relatively weak overall activity levels, but we are moving off the bottom. Data from Google shows increasing trips to places like restaurants and retail stores. Some of the data around small business is also relatively weak, but it's also moving off the bottom.

In China, we've begun to see a bit of a stall in the pace of recovery in aggregate. We're seeing overall activity levels stall out at about 90% of pre-virus levels. Last week was a holiday week which usually results in a jump in travel and shopping. Travel and consumer spending were down quite a bit but less so than pre-virus trends. In aggregate, the data is showing a move in the right direction. As we've been saying for a while now, second quarter data should be the weak point for the broad economy. From a policy standpoint, there have been some notable updates.

Fed Chairman Jerome Powell stated the Fed is willing to do more, and he's pushing hard for more fiscal stimulus. Negotiations on the next round of fiscal stimulus will begin soon. The second tranche of Paycheck Protection Program (PPP) loans for small businesses was released last week. In just five days, over half of the capital was committed. We think there will likely be a third round of stimulus that includes more funding for PPP loans and could make it easier for small businesses to take these loans.

We'll probably get some state and local aid. Given pushback from Republicans, there may be some restrictions on this. Basically, Republicans don't want to bail out pension plans that have been poorly managed.

There's talk of another stimulus for consumers. We're not sure if this will come in the form of a payroll tax cut, or if it will be another stimulus check. It's unclear what the amount of this stimulus might be.

In Europe, the European Central Bank (ECB) made some changes to liquidity provisions for banks. Banks can now borrow from the ECB at -100 basis points (bps). The ECB is essentially paying banks 1% to borrow money, making sure there's plenty of liquidity in the system. However, the ECB continues to lag what the Fed has done, and even though they've said they would do more, they do seem more hesitant and have a few more constraints than the Fed.

With regards to the U.S. and China, new export controls have been put in place. This means that more U.S. companies need a license to export goods to China. There's been an increase in U.S. naval activity in the South China Sea. China is using the virus as a reason to expand activity there, but the U.S. is pushing back. President Trump has threatened additional tariffs, and wants accountability for the spread of the virus. This could be the start of a prolonged escalation between the U.S. and China. Trump's goal for reelection was a strong economy, and that obviously hasn't been the case given the effect of COVID-19. Recent polls show all-time levels of skepticism regarding China. If Trump can't rely on the strength of the economy, then he may pivot to a more hawkish position against China.

Dan Hanson: The S&P 500 Index is just past the halfway mark in terms of numbers of constituents that have reported earnings for the first quarter of 2020. Relative to market cap, about 2/3 of the index has reported earnings. Broadly, we're seeing about one-fifth of companies missing earnings expectations, but we wouldn't want to make too much of that because forecasts are very cloudy right now. Big tech continues to lead and follow through. While it's a narrow market, we continue to observe the haves and have-nots. There continues to be plenty of uncertainty in this market, and it's important to have multiple shots on goal so to speak. We don't think it's time to overweight cyclicals and laggards right now. We think it's best to have balanced exposures in this environment.

With regards to infrastructure spending, how do you see this playing out in the current environment?

Derek Hamilton: It will be very difficult to get an infrastructure bill passed this year. Policymakers in Washington want to address the people and businesses impacted by the virus, and that includes the state and local governments mentioned earlier. With that said, infrastructure is likely going to stay on the back burner for now. Both Republicans and Democrats want infrastructure, but they don't agree on how to pay for it. Historically, infrastructure bills involve some coordination with state and local governments, and that's difficult given the current state. This will more likely be a 2021 issue.

Dan Hanson: A couple of the large cap names that would typically benefit from more spending like this are still down nearly 35%. They are in the category of very limited clarity around future earnings power.

What do you think aid to state and local governments will look like? Will it be in the form of direct aid, or will it be in the form of increased liquidity in the bond market?

Derek Hamilton: It will likely be both. Congress is focused on direct aid right now. The Fed just expanded their muni bond buying program by increasing the number of eligible cities and states, and they've increased duration limits as well. The Fed still has plenty to offer, but the focus right now is on direct aid from Congress.

What are your thoughts on the outlook for the oil market?

Derek Hamilton: Broadly, we have a pretty significant supply/demand imbalance. Looking at miles driven or jet fuel consumption, these things have been decimated as one would expect. However, if we do see a recovery in the back half of 2020, we expect to see more driving, but travel and tourism will continue to be pressured.

Dan Hanson: : If you look at long-term, multi-decade trends, $20-$30 per barrel of oil in real terms is pretty similar to where it's been priced over the last century. We think all commodities ought to ultimately trade at the marginal cost of production. The supply imbalance is exacerbated by the willful production of Saudi Arabia and Russia. They can change that on a dime if they choose to do so from a geopolitical standpoint. The demand side will come back more slowly whether it's with regards to jet fuel consumption, miles driven or just broader economic activity. That will take some time, and it would be imprudent to expect a bold, dramatic resurgence in oil.

Are there concerns of rising inflation given the large amount of stimulus?

Derek Hamilton: We've seen an extreme shock to the market, which is deflationary. That headwind will lessen, but it isn't likely to go away. The monetary stimulus is really just filling the hole left by businesses and households retrenching. I wouldn't get too concerned about inflation until we start to something like robust demand for credit, and we think that environment is still quite unlikely for the foreseeable future.


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 May 04, 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: Investing involves risk and the potential to lose principal. Fixed-income securities are subject to interest rate risk and, as such, the value of such securities may fall as interest rates rise. 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 S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy.

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.

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Ivy Accumulative Fund – Investment Update

Ivy Accumulative Fund – Investment Update

Commentary as of April 29, 2020

Gus, you’ve been leading the morning meetings for the Investment Management Division (IMD) for some time. How has the new regimen of working from home affected the day-to-day operations of IMD?

Gus Zinn: Aside from not being in the office and having face-to-face interactions or meetings, IMD has been operating remarkably well in this environment. There's still great access to the sell-side, as well as company management. We have numerous tools that helped us to work more collaboratively, such as a shared calendar for any company calls that are taking place. It makes it very easy to stay up to date.

What opportunities are you seeing among the market-cap spectrum?

Within equities, there are generally five companies that make up a 20-35% weight depending on the index. These are strong companies with solid business models, but it also makes many of the large-cap indices top heavy. Granted, large caps have outperformed small caps by a record amount over the past few years. However, the current market disparity could open opportunities for small caps to gain ground, or even outperform large caps again.

Last year, we expanded our thesis on Ivy Accumulative Fund, applying a growth-oriented philosophy across all market capitalizations. John Bichelmeyer, the co-portfolio manager, and I believe our all-cap strategy gives us tremendous flexibility to identify opportunity among high-quality companies across the market spectrum, especially in this current environment.

Over the next couple of weeks, a number of states plan to lift their shelter-in-place orders. Do you think some of the behavioral changes adopted during the COVID-19 pandemic will remain in place for some time?

Frankly, we believe people may be overestimating many of the shifts made in reaction to the virus to becoming permanent change. We think people are dying to eat a meal outside of their homes, but may not be in a rush to be in a crowded restaurant. We believe places “close to home” could benefit once local ordinances are lifted.

However, larger crowd events like concerts or sport venues seem to be more uncertain. This football season could be up in the air, but we think the crowds eventually will return. There's also been speculation of workplaces going to a permanent work from home structure once we come out of this. This may be a bit overplayed because of the inherent benefits from working in the same location, such as face-to-face meetings. We don’t see that much of a drastic change in workplace practices.

Are there trends that were in place before the pandemic you believe will accelerate?

E-commerce is an area that we believe will only get stronger going forward. Most e-commerce companies have had trouble penetrating the elderly demographic because of perceived technological hurdles with this population. This environment has forced many elderly citizens to overcome those tendencies and adopt e-commerce services, which is causing a ripple effect. Toiletries and consumer products initially were slow to move online, but have started to pick up now.

Zoom Video is another example of a company benefitting from the current environment. Its business model likely would have been adopted in time. However, Zoom was able to grab market share much more quickly – several days versus three-five years – than it would have had there not been a pandemic.

Technology spending could also stay very strong, especially for companies looking into future business contingency planning. A potential negative trend could be an added layer of costs for most companies. Supply chains will most likely be changed to help disruption, COVID-19 insurance for employees, and testing for employees are all cost pressures we will most likely see shift in these companies. These will be long-term issues and will force companies to look for ways to improve productivity to offset these costs.

We are in the midst of earnings season. What are your thoughts on a possible scenario where large companies with high price-to-earnings (P/E) multiples go without earnings while the actual impact of value are not that big?

The P/E for 2020 earnings is going up because the earnings are going down and prices aren't moving at the same magnitude. These companies are still feeling the pain, but the stocks are more interested in earnings prospects in 2021 than in this year. If these larger stocks end the year flat, that's really a victory given the environment we've faced so far in 2020.

We are more concerned with the longer-term view. The important question for most companies isn’t how do we do in 2020. It’s whether 2021 will be better than 2019.


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 subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This informa¬tion 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. The views are current through April 29, 2020, and are subject to change at any time based on market or other conditions.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Large-capitalization companies may go in and out of favor based on market and economic conditions. Prices of growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. The Fund typically holds a limited number of stocks (generally 35 to 50). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund's net asset value than it would if the Fund invested in a larger number of securities. 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.

Top 10 equity holdings as a % of net assets as of 3/31/2020: Microsoft Corp. 9.0, Amazon.com, Inc. 7.7, Fiserv, Inc. 5.1, Mastercard, Inc. – Class A 5.0, Five9, Inc. 3.6, Facebook, Inc. 3.6, Dexcom, Inc. 3.1, Ingersoll-Rand, Inc. 3.1, LiveNation, Inc. 3.0, Adidas AG 2.7.

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.

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The COVID-19 pandemic has forced people to change many of their typical routines. How are these behavioral changes translating to what we seeing in the markets or our own business practices?

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Ivy Insights - Earnings season overview

IVY INSIGHTS – EARNINGS SEASON OVERVIEW

Commentary as of April 27, 2020

Dan Hanson: We are in the midst of earnings season with Amazon, Alphabet and Microsoft among the companies reporting this week. These companies all feature a mix of enterprise, cloud and consumer-facing business models. While we expect the biggest uncertainties to be on the consumer-business side, we look forward to their insights for the second half of the year.

Within the financial markets, we have seen a bifurcation of winners and losers that we believe is a great set-up for active managers. Supported by fiscal and monetary stimulus, financial markets rebounded from the March 23 trough. Broadly, fixed-income markets have rallied with a flight to safety. For example, the 10-year U.S. Treasury is up 13% year-to-date. There are many winners and losers: small caps and value stocks have underperformed, while large cap – and large cap-growth stocks in particular – have outperformed, reflecting the strong fundamentals of mega-cap companies.

Furthermore, U.S. markets supported by the Big Tech companies have generally recovered more quickly versus the global markets. We believe this is based on two key factors: 1) the nature of the businesses where large asset-light internet companies are mostly domiciled in the U.S., and 2) the magnitude of fiscal and monetary measures have been more forceful than in many other global markets.

Today’s financial markets have seen one of the worst drawdowns compared to the past recessions over the past century. In this type of environment, we seek to be balanced in our portfolio exposure, especially since we anticipate high volatility is likely to continue.

How do these re-opening plans and the possibility of additional global policy factor into our economic view?

Derek Hamilton: As we have previously discussed, the focus is still on the world re-opening and relaxing lockdown measures. We believe countries around the world are moving in the right direction. In the U.S., several states opened in the last few days, with varying degrees. New York Governor Andrew Cuomo mentioned the state may be able to start reopening after May 15, with New York City (NYC) following sometime afterwards.

In terms of economic activity, while not at pre-virus levels, activity is bottoming. We have access to data points from companies such as Alphabet that share Google maps data about how much people are going out. The company breaks the data down by type of activity – such as visits to grocery stores, and the data has shown the pace of decline has flattened.

Furthermore, we believe the COVID-19 testing regime, including antibody tests, will be important to determine where we go in the future. More recently, antibody tests have suggested that COVID-19 infection rates could be much higher than initially recorded.

In New York State, it is suggested that 14% of residents could have had the virus at some point, and over 20% of NYC residents. These are very small sample sizes, but if those numbers are accurate, it means the mortality rate could be as low as 0.5%. A much lower mortality rate has significant ramifications for when we think about a potential second outbreak and shutdown, which would need to be much less severe because of the low mortality rate.

Furthermore, Sweden has adopted a different approach to navigating the coronavirus crisis and could eventually offer a more accurate mortality rate. It implemented very limited restrictions in an attempt to reach herd immunity at a rapid pace. Swedish health experts believe that herd immunity in the capital city of Stockholm could be reached in the next few weeks.

Regarding global policy, we are likely to see continuous fiscal and monetary stimulus from global central banks and governments. U.S. Congress passed another stimulus bill last week for lending to small businesses and the healthcare system. Also, Congress will reconvene on May 4 and we expect discussions around another package for supporting small businesses, as well as help for state and local governments.

On the monetary policy front, central banks globally continue to ease aggressively. We expect central banks to continue to take appropriate action in order to ensure financial stability and try to stimulate economic activity. Specifically, the U.S. Federal Reserve (Fed) has reacted in a faster and more aggressive manner than during the global financial crisis. The Fed could ease more if needed, but will likely continue to amend current policies and introduce new programs to ensure the financial system is operating properly.

We could see additional easing from the European Central Bank (ECB). The European Union has been discussing additional fiscal spending plans and how that burden should be shared amongst the fiscally weak economies, such as Italy and Spain. Until a conclusion is reached on these discussions, we believe the ECB will do everything within its means to keep the government bond spreads from blowing out. We might also see some upsizing in the Pandemic Emergency Purchase Plan – a plan implemented to support countries during the COVID-19 crisis by buying government bonds.

How does this translate to the financial markets?

Dan: We believe businesses whose customers are hampered by economic conditions will likely suffer. Businesses that don’t have a strong value proposition are being challenged. We are seeing growth outperform and cyclical companies underperform. We believe that this diversification and bifurcation between winners and losers speak to the investment opportunity of active management in high-quality franchise businesses.


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AUDIO INSIGHTS / 04.29.2020

Earnings seasons overview

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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 April 27, 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: Investing involves risk and the potential to lose principal. Fixed-income securities are subject to interest rate risk and, as such, the value of such securities may fall as interest rates rise. 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 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.

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Dan Hanson, CFA
Derek Hamilton

Article Short Summary: 

With earnings season underway, we see a bifurcation emerging in the financial markets, which could present opportunities for active managers. We also discuss the phased re-opening plans among U.S. states.

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Focused on long-term business models

An updated 2020 outlook

As each year ends, we spend time thinking about what events will most likely shape the months and quarters ahead. Coming into 2020, we thought another minicycle was likely to begin, potentially creating a favorable backdrop for value investors. Quality growth companies had performed well throughout most of 2018 and the first three quarters of 2019, then the narrative changed. The Federal Reserve began lowering the Federal Funds target rate as downside risks in the U.S. economy grew, and more accommodative monetary policy improved investor confidence as stronger economic growth seemed likely. Against that backdrop, the market started to reward cheaper, lower-quality businesses — those that would typically lead in the early stages of an economic recovery as they are most dependent on strong economic growth.

The COVID-19 pandemic has made us re-evaluate our views, and two possible outcomes seem most likely for 2020:

  • This is a short-term supply disruption and a temporary pause in demand. Markets recover as the impact from COVID-19 wanes and economic growth returns in the second half of 2020. Supportive monetary and fiscal policy around the globe suggests yet another mini-cycle of economic growth.
  • Public and private reaction to the pandemic creates a meaningful and sustained drop in consumer demand, thus pressuring businesses to lay off workers and cut wages. Gross domestic product (GDP) growth remains low or negative for multiple quarters as unemployment rises and remains high for an extended period of time.

The broad scenarios we’ve outlined could have substantially different implications for investors, both in absolute and relative terms. In the first, we would expect value-oriented businesses to lead and higher-quality companies to lag, at least in the early stages. The second scenario would likely favor higher quality businesses with less potential for downside revisions. In our view, it’s still too early to know exactly how the situation will unfold. We should start gaining a better understanding of how this pandemic will impact the health of the U.S. economy, our citizens and investors in the weeks and months ahead.

Managing risk amidst uncertainty

We often speak about the risks inherent in large-cap growth investing, namely the possibility of business model failure risk and significant downside risk. Many large-cap growth companies have attractive characteristics — high margins, growing end markets, and attractive returns on their assets and capital, to name a few. These characteristics invite competition and disruption, as others want a piece of the pie. At the same time, investors historically pay a premium for these businesses in the form of higher price multiples. These lofty growth expectations are often unmet, leading to multiple compression and meaningful losses in investor capital. In other words, significant downside risk is always a concern. These risks represent an opportunity for the Fund’s fundamental, long-term approach.

Our goal is to own enduring, competitively advantaged business models that we believe are capable of withstanding disruption. We think owning these businesses helps give the Fund the best opportunity to outperform over the long term.

This philosophy also allows us to remain invested during short-term market disruptions. Owning high-quality businesses is an outcome of our fundamental research, and these companies should typically outperform in challenging environments. It’s important to note that this should not come at the expense of participating in the eventual recovery, whenever that occurs. We need to be exposed to risk in order to deliver performance, all the while being measured in our approach and believing that we’re appropriately compensated for accepting those risks over a long investment horizon.

We approach risk in a few ways, and environments like this where volatility and uncertainty seem higher than normal present an opportunity to revisit these principles:

  • Competition for capital: Regardless of the macro environment, we continually evaluate each of the companies within the portfolio and those we’re considering for new investment. We want to be adequately compensated for the risks we take, and this exercise helps us tilt the portfolio toward companies with better expected upside potential and lower expected downside potential as the environment changes, sometimes rapidly.
  • Sources of risk: We intend to let stock selection drive risk, not industry or factor exposure. We entered this environment, even before the COVID-19 outbreak, with a more balanced approach to risk, not wanting individual factors like momentum, beta, value, etc. to drive portfolio positioning and overwhelm our fundamental research. We continue to monitor these exposures regularly, being intentional with where those exposures lie.
  • Focus on business models: Our expertise lies in deep, ongoing fundamental research on individual businesses. We don’t have an edge on market timing, so we remain invested and don’t typically adjust sector weights in order to express a macro view.

Late summer of 2019 is a recent example of the first two principles listed above — competition for capital and active risk management. Our portfolio performed well from the beginning of 2018 through August 2019, returning nearly 30% compared to 21.4% for the Russell 1000 Growth Index, the Fund’s benchmark. Valuations for some of our holdings were becoming stretched and, in our view, no longer offered adequate long-term return potential, and the portfolio was becoming tilted toward momentum. Stocks with positive momentum are those that have performed well relative to their peers in the recent past, and higher-quality businesses had certainly been in favor. We took that opportunity to rebalance away from some of the more expensive businesses and recent outperformers in favor of companies with better potential future returns.

An example of the first and third principles is Estee Lauder. We invested in Estee Lauder during a period when it was underperforming in the fourth quarter of 2018. The company performed extremely well through the first half of 2019. At that point, we determined upside, both near and long term, appeared limited. So, we dramatically reduced the position size despite still believing the company’s business model was very attractive. The fundamentals remained strong, but expectations had risen to a point where valuations were stretched. Potential for meaningful downside grew, and the upside seemed minimal, but we didn’t know what the trigger would be. Going through this exercise helps us minimize potentially negative consequences and we’re comfortable waiting for a more attractive time to make incremental investments.

ESTEE LAUDER COMPANIES INC. CLASS A — Total Return Relative to Russell 1000 Growth Index (%)
Chart Showing ESTEE LAUDER COMPANIES INC. CLASS A
Chart Showing ESTEE LAUDER COMPANIES INC. CLASS A

Source: Factset -- Data 06/29/2018 to 03/31/2020. Past performance is no guarantee of future results.

Looking beyond the noise

When the market is focused on the very short term, we try to take the opposite approach by looking for opportunities to re-position the portfolio into companies where we have high conviction in the long-term ability of these holdings to execute and withstand market disruptions.

We continue to focus on underlying business models, not emotions or the news of the day. Some of the highest quality businesses in the Fund’s portfolio are being priced in a way that would have a person believe the next six months are all that matters, when that’s clearly not the case. While we think there will be disruption in the short term, our focus will be on executing the Fund’s investment process of emphasizing fundamental research and multi-year time horizons to help us remain focused on the most important issues for our long-term shareholders.

We believe COVID-19 will impact the global consumer over the next quarter. However, will this event really change the amount of discretionary dollars flowing into the retail footwear and athletic wear industry over the next three to four years? Is this pause in activity going to significantly impair long-term contact lens consumption and growth? Is the near-term disruption going to derail multi-year upgrades and replacements to public safety communication and surveillance networks? We hold a view that with this nearterm pause, in terms of consumption and economic growth around the coronavirus, is not going to change the long-term value of companies like Nike, Inc., Cooper Companies or Motorola Solutions. If the market starts discounting these types of companies over the long term, we are more than willing to increase our positions in order to realize those expected potential compounded annual returns.

Travel and tourism will be impacted, without question. Some airlines and cruise lines have seen their stock prices fall between 50–80% since the beginning of the year. While these companies typically lack the traits we look for in more durable businesses, there may be opportunities in related areas. Booking Holdings is likely to be materially impacted by the stall in travel demand. However, we believe this shortterm disruption is going to solidify the value the company can bring both to consumers, through convenient trip planning, and to the travel industry, by allowing hotels and rental cars fleets to gain access to high conversion consumer demand in one location. As investors react to significant near-term negative revisions, we will watch patiently and work diligently to make sure Booking Holdings is managing its business in a manner that drives an even stronger competitive moat looking out past the rubble.

In a market drawdown, we look for opportunities to reallocate to stocks where we have higher conviction. We also look at stocks within the Fund’s portfolio that have held up well in the downturn and reallocate to holdings that appear to offer better upside potential. We tend to be more thoughtful and patient in drawdowns and try to avoid being reactive. We choose to stay focused on business models with strong three- to four-year prospects, rather than worry about short-term estimate revisions. If we’re seeing that the market is discounting a business model to a point where we’re getting very attractive long-term compounded annual returns, then we’ll consider stepping into that short-term risk. It may not be the right answer for the next quarter ahead, but we believe it will be the right thing to do for our shareholders over the long term.

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Past performance is no guarantee of future results. The opinions expressed are those of the Fund’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through April 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.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with greater diversification. The Fund typically holds a limited number of stocks (generally 40 to 60), and the Fund’s portfolio manager also tends to invest a significant portion of the Fund’s total assets in a limited number of stocks. 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 the Fund invested in a larger number of securities or if the Fund’s portfolio manager invested a greater portion of the Fund’s total assets in a larger number of stocks. 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. 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.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Class I shares are only available to certain types of investors.

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Bradley Klapmeyer

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CIO Insights - Ivy Roundtable Discussion
Coronavirus outbreak and the retail and hospitality sectors

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When the market is focused on the short term, we try to take the opposite approach. We look for opportunities to re-position the portfolio into companies where we have high conviction, those names we believe have the long-term ability to withstand market disruptions.

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- The spread of the coronavirus and its potential impact on the global economy has shifted our outlook for 2020.
- The Fund’s disciplined approach to risk management and commitment to fundamental research are critical during periods of extreme volatility.
- Our research remains focused on three- and four-year investment horizons, not short-term market movements. In our view, recent events have created significant opportunities for long-term investors.

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Ivy Pictet Targeted Return Bond Fund

Ivy Pictet Targeted Return Bond Fund

Commentary as of April 22, 2020

You previously stated that March was the month that changed the world and markets. Could you provide some context on how you're viewing the current environment?

The main thing that sets this environment apart from previous crises is that our lives are at risk here, too. So it's quite understandable that we're seeing this sort of volatility in the markets over the course of the last several weeks. What we've seen is the acceleration of trends that have been in place for several years now if not decades. We're looking at the spectrum of growth falling in the U.S. by as much as 5- 7%. We're not in the business of trying to predict exactly how large the impact to gross domestic product (GDP) will be. We know how we entered this crisis, but little can be said on how we come out of it.

Most fixed-income assets have performed poorly, with the exception of very high quality assets like U.S. Treasuries and a few other sovereign bonds. Anything with a spread has had a negative return, ranging from -5% to -18%. If we look at currency markets, it's a pretty dire picture there as well. The U.S. dollar is king, and some commodity and emerging-market currencies have seen declines in value anywhere from 10-23%. If you think about corporates, we've seen funding stress in markets as demand for U.S. dollars and cash remained elevated. The market has seen hefty outflows as investors collectively hit the sell button. At one point, every major asset class we track was experiencing outflows.

With regards to policy response in the U.S., the U.S. Federal Reserve (Fed) is trying to minimize the liquidity risk and the U.S. Treasury is focused on minimizing solvency risk emanating from this crisis. They're also working to improve liquidity in the market. We've seen unprecedented policy moves, not just in the U.S. but across the world. Fiscal responses have been fairly large. In some countries, the amount of fiscal expansion equates to somewhere around 7%-10% of GDP. Depending on how much longer this crisis lasts, those figures could continue to grow. On monetary policy response, we have seen strong response and expect $5.5 trillion in balance sheet expansion across the world in 2020 alone. That equates to about 9.5% of GDP, so these are very big numbers we're dealing with. If we look at the Fund, performance has been down, but we've been able to claw back some of that underperformance through the first few weeks of April and trail our cash benchmark by about 1.5%. As far as what's been driving performance, rates have been a strong performer, while spreads have been the main detractor of performance year-to-date. Currency has been slightly positive.

From a qualitative standpoint, and relative to expectations, how would you characterize performance?

When we think about allocating risk, we look at potential shocks to the downside. If we look at what happened in March, our stress tests based on half of 2008 drawdowns and risk, we would have expected a loss of around 400 basis points. The portfolio has behaved as expected given that we've been confronted with as large a risk event as the 2008 financial crisis. With regards to things that didn't behave as expected, we would have expected a larger contribution from currency. Although contribution from currency was positive, it wasn't as large as we had expected if faced with such a hit in markets.

Could you provide your thoughts on the portfolio's current positioning?

We have increased exposure to longer-term U.S. Treasuries, mainly because we think we're going to be in the crisis for a while. We don't expect a quick recovery, so we like having an allocation to quality sovereign debt. We've also taken profits from some Norwegian bonds reallocated to more liquid parts of the market. We also like the opportunity in BBB-rated corporate bonds in the U.S. We find the opportunity in European investment-grade bonds to be less attractive than those in the U.S although some value remains. In currencies, we've increased short positions in emerging-market countries and increased exposures to higher quality currencies such as the U.S. dollar.

How has the recent increase in oil market volatility impacted currency markets?

We've seen a continuation of the weakening of the Canadian dollar, Australian dollar and Norwegian krona in developed markets. Broadly, all the commodity exporters in emerging markets have been weaker after seeing a bit of a bounce in late March/early April. It will be difficult for emerging-market currencies to stabilize without oil prices hitting a floor or dollar funding needs dissipating – neither seems to be the case right now. In terms of our allocations, we haven't changed any of our short positions to commodity exporters.


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 April 22, 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. 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. 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. 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, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds.

The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund's performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/ or less stringent financial reporting standards.

Mortgage-backed and asset-backed securities in which the Fund may invest are subject to prepayment risk and extension risk.

The Fund employs investment management techniques that differ from those often used by traditional bond funds, including a targeted return strategy, and may not always perform in line with the performance of the bond markets. The Fund is also non-diversified and may hold fewer securities than other funds and a decline in the value of these holdings would cause the Fund's overall value to decline to a greater degree than a more diversified fund. The Fund expects to use derivatives in pursuing its investment objective. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative's value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. 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.

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Article Related Management: 

Ella Hoxa, CFA

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Ivy Pictet Targeted Return Bond Fund

Article Short Summary: 

Pictet Asset Management doesn’t expect a quick economic recovery. Take a look at their recent views on the economic environment and subsequent Fund positioning.

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