Ivy Sector Insights – Consumer Discretionary & Consumer Staples

Ivy Sector Insights – Consumer Discretionary & Consumer Staples

Commentary as of April 2, 2020

The COVID-19 pandemic has impacted retail in many unique ways. There are several online, low-touch merchants that are benefitting from the current environment, though non-essential, brick-in-mortar counterparts are facing large headwinds as imposed lockdowns are adversely impacting consumption in the traditional sense. It’s safe to say, the current market environment is unprecedented.

How are you grappling with the current retail environment?
This is a truly unprecedented situation. On one end, we’re seeing long lines form at places like Costco and Walmart. On the other end, department stores are literally shutting down, and furloughing employees. No one was prepared for a zero-revenue scenario, which is now the reality that many are facing. While there are many losers to talk about, as a long-only investor, I’ll try to focus on the perceived winners and frame it as near-term beneficiaries and long-term beneficiaries.

Near-term beneficiaries
I think there are two direct beneficiaries in the near-term, the essential brick’n mortar retailers like Walmart, Costco, Kroger and E-commerce players like Amazon.

While the increased online shopping is obvious due to the lockdowns, I think it’s worth digging a bit deeper on the tailwind the essential retailers are seeing. While there is clearly some panic buying (or stockpiling) going on right now that will likely be short-lived, there is also a legitimate increase in demand for grocery spending as well, for several reasons: 1) schools are closed so parents need to feed their children at home, 2) restaurants are closed or have limited options, and 3) more individuals are staying home due to fears of contracting the virus. While the first two factors will likely go away once the lockdowns are lifted, the fear factor will likely linger a bit longer, so I would expect to see elevated grocery demand for at least for a few more quarters.

However, we’re not necessarily recommending adding more to these essential retail stocks right now as we believe the tailwind is transitory. Also, stocks like Walmart, Costco and Kroger have all held up very well in the current market sell-off, as this is exactly the time when these kinds of defensive stocks typically perform well. If we see a market recovery, I think alpha will be found elsewhere.

Long-term beneficiaries
To frame the long-term beneficiaries, I think it is important to focus on the behavioral changes that will likely persist among consumers, and think through the structural changes the retail landscape will go through.

In terms of behavioral change, these are exactly the times that consumers are more willing to change their behaviors, and I believe some of those behaviors will stick with them even after the pandemic is behind us. From that perspective, I believe online grocery is worth paying attention to, as we are seeing huge surge in demand for Amazon Fresh, Walmart grocery pickup, Instacart, etc. There is always friction in trying out a new type of service. In this case, you have to download the app, set up an account, select the items that you want to order, and get it delivered or drive by for a pick-up. Assuming the customer is happy with her/his experience, there is much less friction in re-ordering their regular pantry items with a few clicks, and I believe many will continue to do so going forward. As a result, I believe we’ll see a step-change in online grocery penetration this year, and further see adoption accelerate in the coming years.

While traditional grocers will also participate in this arena, I believe the biggest winners will be the larger players that also carry non-grocery goods, such as Amazon and Walmart. Grocery is a high frequency, but low margin category. So it’s not that attractive from a profitability stand point, but very attractive from a frequency and customer engagement stand point. By upselling higher margin goods along with the grocery basket, I believe Amazon and Walmart are best positioned to capitalize on the online grocery opportunity compared to traditional grocers.

In terms of structural changes in retail, the U.S. was already chronically over-stored with too many malls and too many specialty stores. As more people shop online, department stores and mall-based specialty retailers were already struggling heading into this crisis, and now they are literally in survival mode. This pandemic may very well be the nail in the coffin for many of them. I would expect more bankruptcies and store closures in the coming months. For instance, retailers like Neiman Marcus, Lord & Taylor are either in talks to file for bankruptcy or considering to liquidate their business. As we see such supply rationalization, I believe off-price retailers like TJ Maxx, Ross, and Burlington are poised to gain share by capitalizing on the unsold inventories and selling them at a discount.

It sounds like the strong are getting stronger, and the weak are getting weaker. Do you see opportunities from an investment standpoint, or is most of this already reflected in market prices?

I don't see a huge dislocation in the more defensive names like Costco and Walmart, but I do believe there are some dislocations among the off-price retailers relative to the opportunity that lies ahead. They also had to shut down their stores recently, which resulted in a panic sell-off of their stocks, but I believe they are well positioned to capitalize on the glut of apparel inventory, and gain more market share, which will likely be reflected in their valuation in the coming quarters.

Some of the larger retailers like Amazon have announced hiring a large number of associates. Do you think this level of hiring will help offset the growing number of job cuts?

It likely won’t be enough to offset the job losses we are about to see. I believe the passage of the CARES Act helps. Small businesses will take advantage of the forgivable loans which are meant to be used as a bridge. I don’t think it will solve everything, but it will help soften the blow. Assuming majority of these small businesses do survive, many folks will likely go back to their prior jobs. However, inevitably, there will be some business failures, and portion of the job losses will be permanent. Also, keep in mind that while retailers such as Amazon (100,000) and Walmart (150,000) are hiring many workers, most of those are temporary positions so it won’t be able to replace the full-time jobs that will be lost.


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 2, 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.

The CARES Act is the Coronavirus Aid, Relief, and Economic Security Act, a law meant to address the economic fallout of the 2020 coronavirus pandemic in the United States.

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.

Alpha is a measure of a security's actual returns and expected performance, given its level of risk.

Risk factors: Investment return and principal will fluctuate, and it is possible to lose money by investing. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market.

Category: 

Article Related Management: 

Victor Lee, CFA

Article Short Summary: 

The COVID-19 pandemic is impacting retail in many unique ways. What does the future of retail hold?

Article Type: 

Normal Article

Show video On Home Page: 

0

Expiration Date: 

Friday, October 16, 2020 - 01:45

Lock this content.: 

Ivy Sector Insights – Energy

Ivy Sector Insights – Energy

Commentary as of April 1, 2020

Let’s start by outlining the current state of the oil markets. For those not paying attention, the world is drowning in oil. We are facing a situation where West Texas Intermediate crude is at $20 per barrel, down 65% year to date. Wholesale gasoline prices are at about 50 cents per gallon, and we may soon see prices at the pump below $1 per gallon in certain parts of the U.S.

How did we get here? Both oil supply and demand are in really difficult trends.

On the supply side: The world is drowning in oil right now. OPEC and Russia are in nothing short of a feud. The roots of this are understood by looking at the different interests of each entity, which are widely divergent: The ruble and tax regime in Russia and the fiscal breakeven points for the two are quite different. During the last production cuts announced by Saudi Arabia, the Russians were reluctant participants. When Saudi Arabia went back to Russia asking for more cuts, Russia just got up and walked away from the table. So, it feels like you have children in charge of this process who are more concerned with saving face and power than a functioning market. The cash cost to currently produce oil is in the mid-single digits in Saudi Arabia, so OPEC can produce it very quickly and at a very low cost.

On the demand side: The globe is experiencing COVID-19, which has destroyed the demand side. It’s hard to overstate the impact of this situation on global energy markets. Estimates are for demand to decline 25-30 million barrels per day, which equates to about a 25-30% demand drop. Jet travel, motor travel … it is all down.

Unconventional drilling, also known as shale drilling, has been the foundational pillar of the U.S. oil resurgence and it is now completely uneconomic. This has been a cataclysmic shift in the dynamics regarding how oil is produced.

Keep in mind that this is a cyclical industry. The current situation is the culmination of a very deflationary cycle, which started in the oil markets about five years ago. These can be long cycles, but COVID-19 has really accelerated this cycle to the downside. The real question is, “how long do we stay here because oil prices cannot stay this low forever?”

With every commodity downcycle, we sow the seeds for the potential of an inflationary cycle on the other side. In the U.S., we need a massive cleansing. We have too many producers and capital has been too plentiful. This morning (April 1), we saw the first high-profile bankruptcy – Whiting Petroleum Corp. We are going to experience many more bankruptcies in the oil patch in the U.S. At these prices, drilling in North America has to completely stop for the time being. There is also a good amount of production that isn’t profitable on a cash basis, which means we need to not only stop drilling, but also turn off some existing wells. This may sound scary, but we think it is necessary to set the stage for the next cycle. It will take time and capital to bring that productive capacity back online.

The key takeaway: We are in the later innings of a long and painful deflationary cycle in the oil space. But this is not a monolithic space – there are options that have less sensitivity to oil prices like refiners and midstream companies. These cycles are as old as oil production itself. Some companies with fully integrated business models have been around for more than 100 years. Some oil and gas producers have come and gone during this same time frame. To survive these cycles, a company needs to have other assets that can help it weather the worst of the storm. So, we are focused on the integrated companies that we think have sustainable business models even at the lowest possible oil prices.

We have spent a lot of time thinking about how we should be positioned for the other side of this situation. We still think it is too early to be buying exposure to the commodity price so we might characterize this as the beginning of the end of the down cycle. We believe when the dust settles, there will be a lot of opportunity across the spectrum, and not just in oil and gas but also in renewable energy, electric vehicles, etc. We are working to position ourselves for a good up cycle but we think we will be in a bit of a minefield until we reach the bottom of the down cycle.

Ivy had been looking at high-quality business models versus pure commodity driven resource extractors, and that was well before the most recent downturn. Given recent events, is this still Ivy’s view?

Absolutely, we are not just stuck with companies within the energy space. We seek companies within other sectors, like materials. We have made recent recommendations or are looking at opportunities related to companies outside of energy like firms that specialize in coatings. We think these are good, non-commodity businesses with very sustainable business models.

Do you think there will be a storage issue with all of the oil being produced?

Yes, Canadian oil in some cases is selling for $5 per barrel. There is storage available, but it is limited. We could carry on at this rate for months, but not years. The really concerning part is that once these facilities are at capacity, the discussion turns into oil being a waste product and producers will have to pay others to take the surplus.

The Trump Administration is calling for rollback of efficiency. How are alternative energy companies faring in the current environment?

We are still in early days for this space. We are going to find out if alternative energy and electric vehicles are viewed as a bull market luxury or if they are more secular trends that will persist longer term. In our opinion, these are durable trends. For example, as battery costs decline, there will be greater adoption of electric vehicles. If the current administration decides to pump the breaks on some of these issues, we think it would be temporary. This could unveil an opportunity to take advantage of weakness and look at parts of the energy sector that have strong secular tailwinds. Renewable energy is not monolithic and there are very different business models from which to choose.

Regarding a V-shaped recovery versus U-shaped recovery, are there any types of businesses that tend to perform better in those two different environments?

We think the answer to that question is clear, but successful investment decisions depend on the risk assigned to each scenario. Our opinion is that this recession will be longer and more durable than a lot of folks anticipate. If a V-shaped recovery occurs, we think the companies with the most financial leverage and most exposed to commodity prices should do relatively well. But those are the same companies that could go bankrupt if the recovery is L or U shaped. So success here will depend on risk tolerance and portfolio construction.


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 1, 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.

Several technical terms and acronyms were used throughout this commentary. West Texas Intermediate crude is a grade of crude oil used as a benchmark in oil pricing. OPEC is the Organization of the Petroleum Exporting Countries, an intergovernmental organization with the stated mission of coordinating and unifying the petroleum prices of its member countries and ensuring the stabilization of oil markets. In a V-shaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. A U-shaped recession is longer than a V-shaped recession, and has a less-clearly defined trough. An L-shaped recession or depression occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever.

Ivy Energy Fund – Top 10 equity holdings (%) as of 12/31/2019: Concho Resources, Inc. 4.97, Phillips 66 4.92, Valero Energy Corp. 4.66, Pioneer Natural Resources Co. 4.62, Marathon Petroleum Corp. 4.15, WPX Energy, Inc. 3.90, Cactus, Inc. Class A 3.68, Parsley Energy, Inc. 3.61, Diamondback Energy, Inc. 3.5, and Continental Resources, Inc. 3.56.

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 energy related industry, the Fund may be more susceptible to a single economic, regulatory, or technological occurrence than a fund that does not concentrate its investments in this industry. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in natural resources can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments; and the cost assumed by natural resource companies in complying with environmental and safety regulations. Investing in physical commodities, such as gold, exposes the fund to other risk considerations such as potentially severe price fluctuations over short periods of time. The Fund may use a range of derivative instruments in seeking to hedge market risk on equity securities, increase exposure to specific sectors or companies, and manage exposure to various foreign currencies and precious metals. Such hedging involves additional risks, as the fluctuations 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. 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.

Category: 

Article Related Management: 

Bernie Colson, CFA

Article Short Summary: 

The world is drowning in oil. How did we get here and where are we headed?

Article Type: 

Normal Article

Show video On Home Page: 

0

Associated Funds: 

Lock this content.: 

Ivy Sector Insights – Health Care

Ivy Sector Insights – Health Care

Commentary as of March 31, 2020

What are your latest views on the health impact of the coronavirus?

It might be helpful to frame the impact of COVID-19 relative to the seasonal flu. With influenza people have immunity from either catching it previously or getting vaccinated. With COVID-19, it is a novel virus: we don’t have any immunity, which makes everyone initially vulnerable. In addition, the case fatality rate is higher than the seasonal flu. We don't really know how high it is yet due to limited testing. We will need to study the population after the first wave of the virus has made its way through the population and administer tests to determine who was exposed and who was not. However, we do know based on confirmed cases, that the case fatality rate is higher for COVID-19 than the seasonal flu.

A grave concern is the sheer volume of confirmed patients in specific geographies possibly overwhelming their local health care systems. Hospitals are not adequately prepared. They don’t have enough tests or equipment such as masks, gowns, ventilators, beds, and unfortunately, there is also shortage of healthcare providers in some geographies. Before we can ease social distancing, we must have adequate supplies and equipment.

The social distancing efforts underway to flatten the disease curve in the U.S. are somewhat encouraging. In New York, cases are still increasing, but at a slower rate. And many other areas of the country are also still increasing, but in one of the first hit areas, Washington state, the daily new cases are no longer increasing, and it appears social distancing is having an impact. The goal is to see new cases diminish to the point there are nearly no new cases. We believe it could take the U.S. about six to eight weeks to get there, and our success depends on our compliance with social distancing and testing capacity. Now we are mostly just testing moderately and severely symptomatic patients. I think we need to also test mildly symptomatic patients to get the daily new case numbers down to very low levels.

We have been analyzing data from a medical device company that tracks the temperature of its 1 million customers through its smart digital thermometer. Based on their data over the past week, the percent of people with a fever due to an upper respiratory infection has plummeted. Innovations like this are going to help us keep the virus in check once we ease the social distancing. This data will be at the leading edge alerting our providers of an outbreak.

What's your take on the testing landscape?

In the first wave of a pandemic we use testing technology that is very accurate in detecting early infection based on the RNA of the virus. The sample is collected from the nose and mouth. Just a couple weeks ago, the U.S. only had capacity to test up to 5,000 people per day primarily performed by the Public Health Service, but the demand for testing was much greater than the supply. As more and more private companies got approval for their test, some of which are run on high throughput instruments, we have been able to grow our capacity to about 120,000 tests per day. But still we are not testing all the patients with symptoms, just the people who are more severe. As capacity continues to expand, we will at some point soon be able to test all patients with symptoms. And I think at that point the rapid point of care testing will become more important, these tests can give a result in 5-15 minutes, and mild patients who are getting tested can know their status before they leave the doctor’s office. Rapid tests will also be useful in screening asymptomatic people which becomes critical once social distancing is eased. So lots of testing capacity is needed to eventually contain this virus. At that point, the point of containment, we will be ahead of the virus. But staying ahead of the virus will require a comprehensive plan encompassing testing, technology and dedicated health care professionals.

Once we get ahead of the virus we can focus on the next phase of testing, which is antibody testing. Each individual might want this testing to know whether he/she is immune. If you had a mild infection and were never tested and recovered, you will not be positive any longer for the RNA of the virus. In that situation to figure out if you are immune you do antibody testing which turns positive days to weeks after the infection. Basically, this test measures the antibodies you developed to the virus. But more than just each individual knowing his or her antibody status, the public health systems wants to understand what the immunity of the population is. The greater the immunity of the population the lower the risk going forward. Finally, this antibody testing will also provide the data to calculate the actual mortality rate from this virus.

While the global response to the COVID-19 outbreak is paramount, what are your longer-term views for the health care sector?

Within the health care sector, one of the hardest hit areas has been medical device and equipment companies that are exposed to more discretionary procedures. Many elective surgeries have been cancelled in response to the outbreak, as hospitals shifted care to coronavirus patients. As a result, some medical device companies have seen their stock prices fall 30-50%. It will take time for some of these surgeries, such as ophthalmology, orthopedic or dental procedures to return to surgery suite, but we believe they will. The only issue preventing these companies from realizing their earnings potential is coronavirus and once it is behind us their earnings power should be restored and their stocks should recover.

Longer term, as we consider how the world will be different after this pandemic, we see several opportunities. The use of technology, particularly connected technology, will gain even greater appreciation as a means of managing the health of the population. Also, we believe this pandemic will drive investments in life sciences research and pandemic preparedness, which will be a tailwind for the life science tools and services industry.


FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

Past performance is not a guarantee of future results. The opinions expressed are those of Ivy Investments 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: Investing involves risk and the potential to lose principal. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. Healthcare companies are subject to extensive government regulation and can be significantly affected by government reimbursement for medical expenses, rising costs of medical products and services, and pricing pressure, in addition to other factors.

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.

Category: 

Article Related Management: 

Elizabeth Jones, MD, <br>CFA

Article Short Summary: 

As the medical response to the COVID-19 outbreak continues to progress, we believe opportunities within the health care sector could emerge over the long term.

Article Type: 

Normal Article

Show video On Home Page: 

0

Expiration Date: 

Friday, October 16, 2020 - 01:45

Lock this content.: 

Ivy Securian Core Bond Fund

Market Sector Update

  • Last quarter, we wondered whether the market had gotten ahead of itself. While we knew that good times were destined to end, we couldn’t identify the catalyst. It’s now clear that the COVID-19 pandemic will end the record U.S. economic expansion. Draconian public health measures focused on social distancing are bringing the economy to a standstill. The U.S. is not alone, and we are entering a synchronized, global downturn. The decline looks big, uncertain and skewed to the downside, prompting an epic policy response.
  • Policymakers recognize that this is a multi-pronged challenge – a correction in valuations, a liquidity squeeze, a collapse in energy prices, and an upturn in defaults stemming from cyclically high corporate leverage and COVIDspecific shocks. The Federal Reserve (Fed) pulled out all the stops, cutting the federal funds target by 50 basis points (bps) in early March and then, in a 100 bps move, all the way to 0% on March 15. The Fed then resurrected many of the programs from the great financial crisis, including a new, unlimited quantitative easing program focused on treasuries and mortgage-backed securities, short-term funding support (repurchase agreements, commercial paper and assetbacked securities), easier terms for banks and dealers (discount window terms), and dollar liquidity for foreign central banks (dollar swap liens).
  • Congress is doing its part, too. After passing legislation to fund COVID-19 vaccine research and an additional $104 billion in increased state aid, it passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, an unprecedented $2 trillion bill of support, targeting hard hit segments of the economy. The bill includes $1.2 trillion in direct support for consumers and small businesses, and $500 billion in first loss capital and direct lending to affected industries (including airlines), health care funding, and increased unemployment benefits, including broadened access.
  • Economists are struggling to get a handle on the length and depth of a recession during a pandemic, as well as the impact of a forceful policy response. Projections for gross domestic product (GDP) are all over the board with second quarter 2020 estimates ranging from -9% annualized growth to -40%, and full-year estimates of -1% to -6%. The problem is that no one really knows how the practices for managing the virus will unfold over the coming months.

Portfolio Strategy

  • The Fund delivered a negative return and underperformed its benchmark for the quarter.
  • Weak security selection results accounted for almost 80% of the underperformance with the Fund’s positions in the securitized sectors accounting for over half of the results. Investors’ concerns about homeowners’ and renters’ ability to continue to make timely payments of their monthly obligations in particular caused substantial weakness in the Fund’s positions in agency credit, non-agency credit and other housing-related securities. In addition several leveraged mortgage-related funds were forced to liquidate substantial holdings of non-agency securities to meet margin calls towards the end of the quarter, putting further pressure on the market.
  • Poor results from positions in the industrial sector accounted for most of the rest of the poor security selection results for the quarter. The Fund’s positions in energy in particular underperformed the sector, accounting for about 60% of the negative results in industrials. Weakness in autos and the Fund’s secured airline positions also added to the negative results. The Fund’s overweight allocation to the corporate and structured credit markets also had a negative impact on its performance relative to its benchmark. The Fund’s overweight allocation to financials, utilities and the overall structured market contributed to about 25% of the Fund’s overall underperformance relative to its index. The Fund benefited slightly from the relatively shorter duration nature of its industrial positions. The Fund’s interest rate exposure and yield curve positioning had a slightly negative impact on relative performance during the quarter.
  • Exposure to corporate bonds fell during the quarter as the portfolio management team sold positions in energy, autos and rails. Some of the sales were made proactively as the COVID crisis started to unfold, and some were made to reduce exposures to credits that have exited (or likely to exit) the investment grade space and are unlikely to return any time soon, such as Occidental Petroleum, Ford and General Motors. We added several positions towards the end of the quarter at attractive new issue spreads as the new issue market for corporate bonds opened up in a big way. We also added to positions in several utilities, healthcare, food and auto parts retailing in names we feel are likely to navigate this difficult environment better than others.
  • The Fund’s largest overweight positions in terms or market weight in the corporate bond sector are utilities, transportation, banking, consumer cyclicals and energy. The Fund’s energy exposure remains predominantly in midstream pipeline companies and refiners. The largest underweights from a market weight perspective in the corporate space are in consumer non-cyclicals, technology, real estate investment trusts (REITs), basic industry and capital goods. We feel the Fund’s overweight position in corporate credit is prudent given the Fed’s various liquidity programs, but the Fund’s more off-index positions may lag the recovery in the more liquid sectors of the corporate market.
  • Structured exposure fell as a percentage of the Fund’s net asset value during the first quarter. The team reduced exposure to agency mortgage-backed securities (MBS) on concerns that the rapid drop in interest rates would increase prepayment speeds significantly. Proceeds were invested in Treasuries. The portfolio remains overweight assetbacked securities (ABS), commercial mortgage-backed securities (CMBS) and non-agency MBS and underweight agency MBS. The team remains comfortable with its overweight positions in the consumer-facing sectors of ABS and non-agency MBS. We believe these structures have sufficient cushion to withstand substantial stress on the underlying borrowers. However, the Fund’s positions in agency and non-agency credit may also lag the recovery in the more liquid segments of the residential-facing securitized market.
  • The team added to the Fund’s overall duration during the quarter

Outlook

  • At this time, investors don’t have enough information to accurately estimate the length and severity of the pandemic response. The longer economic growth is constrained by social distancing, the deeper and more long lasting the impact. Households and small businesses entered this crisis with limited reserves, increasing the risk of breaching a tipping point that accelerates the downturn. The effectiveness of the policy response is a key question and will be an important factor this downturn.
  • Our view is that the Fed has the necessary tools to improve market liquidity, and that liquidity concerns should dissipate for high quality borrowers. Monetary policy is likely to have a limited effect. Lower rates may eventually work their way into borrowers’ pockets, but they’re unlikely to stimulate demand during a lock down. On the other hand, no one really knows how effective the CARES Act will be though $2 trillion represents an impressive 9.5% of GDP. The legislation appears to do a good job of targeting shocked segments, such as small businesses and households. However, no one really knows how soon the money will reach its targets.

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 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

The Bloomberg Barclays U.S. Aggregate Bond Index is market capitalization weighted index, representing most U.S. traded investment grade bonds. It is not possible to invest directly in an index.

Duration is a measure of a security's price sensitivity to changes in interest rates. A fund with a longer average duration generally can be expected to be more sensitive to interest rate changes than a fund with a shorter average duration.

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.

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. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. 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.

Category: 

Article Related Articles: 

Ivy Securian Core Bond Fund

Article Type: 

Quarterly Fund Commentary

Show video On Home Page: 

0

Associated Funds: 

Shortened URL: 

{ "kind": "urlshortener#url", "id": "https://goo.gl/8Jqsp7", "longUrl": "http://ivyinvestments.com/perspectives/ivy-securian-core-bond-fund"}

Lock this content.: 

Ivy International Small Cap Fund

Market Sector Update

  • International small-cap equities experienced an extremly negative return during the first quarter, following a strong positive return during the fourth quarter. Equity markets globally were extremely weak over the first quarter, driven by increasing concerns about the COVID-19 pandemic which has grown at a very rapid rate. The epicenter of the pandemic moved from China and Asia early in the first quarter, to Europe toward the middle of the quarter, and then to North America. Successive governments have responded by shutting down vast parts of their economies in an effort to slow the rapid spread of the virus. Equity markets have taken fright at the scale of the forecasted economic weakness, which has resulted in massive job losses globally and the closure of many businesses. As a result, a lot of companies have announced massive cancellations and/or cuts to dividends as well as withdrawing their forecasts for 2020 earnings.
  • All sectors were negative for the quarter with the worst performing sectors being energy, consumer discretionary, utilities and financials.

Portfolio Strategy

  • The Fund produced negative performance but outperformed its benchmark for the period. At the country level, stock selection in France, Ireland and the U.K. were the top contributors to relative performance, while stock selection in Belgium, Germany and Japan were the top detractors to relative performance.
  • Top relative individual contributors to performance for the period included Arteria Networks, a Japan-based telecommunications company; Kobe Bussan, a Japan-based discount grocery store chain and SG Holdings, a Japanbased delivery and logistics company.
  • Top relative individual detractors to performance for the period included Ardent Leisure Group, an Australian-based hotel and leisure company; National Express Group, a U.K.-based public transportation company; and Sixt Fe, a Germany-based rental car company.
  • Portfolio changes within the Asia-Pacific region over the quarter included the addition of Australian gold miner Evolution Mining, which has very competitive production costs and a disciplined management team that we feel excels at acquiring, developing and disposing of gold mining assets to generate shareholder value. While we added this position to the portfolio before COVID-19 emerged as a threat to global growth, we continue to like gold given our view that interest rates should remain low and fiscal deficits should remain high for the foreseeable future. Within Japan, the portfolio added a position in Sansan, the largest cloud-based customer relationship management (CRM) in the country. Capcom, a Japanese video game developer, was also added as we think the company will benefit from its strong catalog of hit game titles which may draw new, long-term fans during periods of COVID-19 related social distancing. The Fund’s position in BOC Aviation, an aircraft lessor, was sold in mid-January as we felt valuation no longer justified owning the position.
  • Portfolio changes in Europe over the quarter included the initiation of a position in Cranswick, a U.K.-based vertically integrated pork and poultry processor. We believe the company has a strong reputation for both quality and innovation, making it a supplier of choice for the large U.K. retailers who primarily use the company to produce in their private label offering. The firm has been a strong beneficiary of the current lock-down arrangements in the U.K., as it boosts at home consumption. Cranswick is also the U.K.’s primary exporter of pork, making it a prime beneficiary of increased Chinese demand, driven by a sharp reduction in domestic supply due to African Swine Flu. The group also have a nascent but high potential opportunity in U.K. poultry, which could be a significant contributor to earnings in time if it can emulate the success it has achieved in the pork segment.
  • We also added Patrizia AG, a German-based real estate company, whose market valuation we believe fails to reflect the geographical and segmental diversity of the group’s income stream or the fact its business model has gradually transitioned from that of an asset heavy to a more capital light operation where over 50% of earnings are generated from recurring asset management fees.

Outlook

  • Our current outlook is set against the backdrop of a likely significant decline in economic growth and corporate profits over the next few months in particular due largely to the COVID-19 pandemic and numerous countries largely closing down their economies. As a result, we expect fiscal and monetary policy to remain highly accommodative in all the geographies in which we invest. We believe developed economies are relatively better positioned to provide aggressive fiscal and monetary stimulus to support their economies as unemployment rises, while this is not the case for many emerging economies.

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 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.Past performance is not a guarantee of future results.

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

Top 10 equity holdings as a percent of net assets as of 03/31/2020: ARTERIA Networks Corp. 2.6%, Uniphar plc 2.6%, Kobe Bussan Co. Ltd. 2.3%, Future plc 2.2%, SCSK Corp. 2.2%, Matsumotokiyoshi Holdings Co. Ltd. 2.2%, Logitech International S.A., Registered Shares 2.2%, Rubis Group 2.1%, SG Holdings Co. Ltd. 2.0% and Alstom 2.0%.

All information is based on Class I shares.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in small-cap stocks may carry more risk than investing in stocks of larger more well-established companies. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

Category: 

Article Type: 

Quarterly Fund Commentary

Show video On Home Page: 

0

Associated Funds: 

Shortened URL: 

Not Found

Lock this content.: 

Ivy Global Equity Income Fund

Market Sector Update

  • The quarter saw a sharp decrease in optimism due to the COVID-19 pandemic and resulted in one of the fastest market corrections on record along with projections of a sharp U.S. and global recession. Global purchasing managers (factory) indices and consumer confidence are expected to crash as well as those surveys are released.
  • The manufacturing part of the world’s economy had already dramatically slowed but this had been more than offset by a solid services economy. With the COVID-19 pandemic certain, service industries are now hard hit and manufacturing will further fall such as orders for cars, planes and other durable goods, resulting in falling capital expenditure budgets for new equipment. Additionally, several segments within the service and industrial economies of the U.S. and Europe will experience sharp declines in activity due to various stay-in-place and social distancing measures designed to flatten the curve of COVID-19 cases.
  • The Fund’s benchmark index was down strongly (-26%) during the quarter and U.S. equity markets collapsed from all-time highs. While all sectors were down, the best performing sectors were the defensive sectors – health care, consumer staples, utilities and communication services. While the poorest performing were energy, consumer discretionary, financials and materials.

Portfolio Strategy

  • The Fund posted negative performance but outperformed its benchmark. Both stock selection and sector allocation aided performance relative to the benchmark, while country allocation hurt relative performance during the period. Currency effects benefitted performance for the period.
  • From a sector allocation perspective, the Fund’s overweight position in health care and underweight allocations in consumer discretionary and financials aided relative performance. On the other hand, an overweight allocation in energy and underweight in communication services hurt relative performance. Stock selection was most positive in energy, information technology, industrials, utilities, consumer discretionary and health care while selections in financials and materials and were a drag on relative performance. Geographically, stock selection was positive in Europe and in the U.S., while negative in China.
  • From an individual security perspective, the greatest relative contributors to performance were AstraZeneca PLC, Enel SpA, Roche Holdings AG, Genusscheine, Verizon Communications, Inc. and Cisco Systems, Inc. The greatest individual relative detractors from performance were Citigroup Inc., ING Groep N.V., Certicaaten Van Aandelen, BNP Paribas S.A., PT Bank Mandiri (Persero) Tbk and Suncor Energy, Inc.
  • We are currently overweight health care, information technology, industrials, and utilities, while underweight financials, energy, consumer discretionary and communication services. During the quarter, we shifted our overweight in energy to underweight as we believe valuations of a few names relative to fundamentals were no longer favorable due to the notable deterioration in the supply-demand outlook for crude oil. We continued to add to health care as we believe several stocks were mispriced/undervalued due to an overreaction of negative sentiment surrounding health care/drug price reform and would not see dramatic earnings downgrades and structural damage from the sharp economy recession. While U.S drug pricing is facing downward pressure, reform will depend on the political outcome post the November Presidential election. We also went from overweight to benchmark weight in consumer staples as we believe absolute and relative valuations will not match longer term fundamentals.
  • Our investment approach remains steadfastly focused on investing in what we believe are quality businesses with favorable near and intermediate fundamentals, generally rising dividends and attractive valuations. This approach is consistent across sectors and geographies. The core of our approach is based on stock selection as the key driver of portfolio inclusion and construction. As such, we do not significantly adjust portfolio positioning based on our shortterm economic (six months) outlook or other factors that could impact a company’s earnings outlook over the short run. However, a core part of our focus is on finding quality businesses that we believe are mispriced due to these shorterterm market dislocations or other factors that the market has underappreciated.

Outlook

  • 2020 will be a year we remember as a time of quarantines, lockdowns, social distancing, working from home, digital learning and so many other new experiences. Undoubtedly this unusual moment will drive new areas of opportunity for well positioned businesses. One could see COVID-19 as a key moment impacting the trajectory of business travel, commercial real estate and many legacy models of behavior that will need to adopt and re-calibrate to a new world.
  • From a broader geopolitical point of view, the willingness and ability to respond to the COVID-19 induced economic infarction has been quite uneven. On one end of the spectrum, the U.S., China and the U.K. (to name a few) have taken aggressive action in responds to the pandemic. We anticipate these areas will experience less severe intermediateterm pressure on growth and output. Other countries or economic blocs, such as the EU and many emerging-market nations, lack the mechanisms, cohesion and/or sheer monetary and fiscal brute force needed to manage current downside risks. We anticipate the recovery in some of these areas to be more sluggish in scale and scope.
  • Our broad view is for a sharp decline in near-term economic activity and corporate earnings, followed by a steep (though partial) snapback. From that point, we expect a moderate pace of recovery as is typical following most downturns. As is also typical, the pacing of growth will be quite heterogeneous across companies, sectors and regions as adjustments occur to new realities, opportunities and uncertainties. Such an environment may offer substantial attractive investment opportunities for well-positioned businesses that can be acquired at valuations that may fail to reflect either new opportunities or excessively discount short-term uncertainties.

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 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Top 10 equity holdings as a percent of net assets as of 03/31/2020: Verizon Communications, Inc. 3.8%, Taiwan Semiconductor Manufacturing Co. Ltd. 3.6%, AstraZeneca plc 3.4%, Nestle S.A., Registered Shares 3.3%, Roche Holdings AG, Genusscheine 3.3%, Procter & Gamble Co. 3.1%, Cisco Systems, Inc. 3.1%, Philip Morris International, Inc. 2.9%, ENEL S.p.A. 2.9% and Samsung Electronics Co. Ltd. 2.9%

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. 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. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected.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.

Category: 

Article Related Management: 

Robert Nightingale
Christopher J. Parker

Article Type: 

Quarterly Fund Commentary

Show video On Home Page: 

0

Associated Funds: 

Shortened URL: 

{ "kind": "urlshortener#url", "id": "https://goo.gl/gRdznv", "longUrl": "http://ivyinvestments.com/perspectives/ivy-global-equity-income-fund"}

Lock this content.: 

Ivy Apollo Multi-Asset Income Fund

Market Sector Update

  • The first two months of quarter were strong as the U.S.–China trade deal was finally signed in January. Business confidence was improving and optimistic. Job growth was solid; beating expectations and the unemployment rate was at a historical low. The stock market reached new records with consumer confidence elevated. The outlook for 2020 was for stable global growth.
  • Unfortunately, the rise of COVID-19, which began in late-November 2019 and spread throughout China, Asia, Europe and ultimately the U.S. in early-March, has dramatically impacted the overall picture for global growth, capital markets and financial stability. This macro-environment led to an immediate decline in global gross domestic product (GDP) output, massive job losses and enormous reductions of wealth.
  • The fiscal and monetary responses have been massive with the Federal Reserve (Fed) cutting rates to zero, and providing U.S. dollar liquidity to other central banks, money market funds and corporate credit. It also started unlimited quantitative easing with large purchases of U.S. Treasuries and mortgage-backed securities. Most central banks have indicated they will respond as needed to maintain operations and avoid dysfunctional financial markets during this crisis and it is clear that they will keep policy extremely accommodative as their economies recover. The monetary response has been just as impressive. The $2 trillion spending bill passed the Senate and House of Representatives and should help bridge the effects of “social distancing.”
  • The sharp contraction in economic activity stemming from COVID-19 and the related shutdown is assumed to be temporary. Uncertainties dominate, but the baseline assessment is the acute stage of the health crisis has largely ended in China and will begin to ease in advanced countries by late- April to early-June. Recoveries in different nations will depend mainly on their performances prior to the pandemic and whether factors that supported or detracted from economic performance will change. The downside risk is that the pandemic extends longer and there is an extended period of getting back to normal activities, which lowers the overall economic activity and GDP drifts sideways from depressed second-quarter levels rather than a “V” shaped recovery.
  • Real estate securities have not outperformed the broader equity market as would typically be expected in such periods of disruption, given the defensive nature of real estate’s contractual revenue and the sector’s attractive dividend yield. These defensive characteristics were more than offset by the tightening of financial conditions.

Portfolio Strategy

  • The Fund underperformed its benchmark and Morningstar peer group for the quarter. Most of the underperformance was attributable to the Fund’s exposure to credit. The Fund’s exposure to lower quality CCC credits, as well a securities priced off of LIBOR, had a negative impact on the Fund. CCC credits underperformed due to their significant reliance on a strong U.S. economy. Securities that are priced off short-term interest rates underperformed as the Fed cut its policy rates by 125 basis points in order to ease funding pressures. Concerns of a global recession due to the COVID- 19 pandemic have led to a dramatic decrease in confidence, consumption and business investment. These concerns spilled into the credit markets, which witnessed large spikes in credit spreads to levels not seen since the 2008 global financial crisis.
  • Roughly 49% of the Fund was allocated to equity at the end of the quarter. The Fund’s equity positions contributed to performance relative to its benchmark with stock selection most positive in energy, information technology, industrials, materials and consumer discretionary.
  • With concern of a global recession, the U.S. dollar strengthened over the quarter against developed market currencies as the pound and euro gained 6.3% and 1.6%, respectively. The Fund’s U.S. dollar exposure of approximately 71% contributed to relative performance.
  • We continue to seek opportunities to reduce volatility in the Fund. Additionally, we are maintaining a low-duration strategy for the Fund as we feel it allows us a higher degree of certainty involving those companies in which we can invest. With the dramatic increase in credit spreads, we are taking this dislocation to allocate our portfolio out of higher quality U.S. Treasuries and credit into higher yielding credit.
  • We continue to focus on maintaining proper diversification for the Fund. We continue to hold a higher level of liquidity (patient capital) because of structural changes in the capital markets. We will be opportunistic in allocating that capital when we believe dislocations in the market arise.

Outlook

  • The U.S.’s sizable fiscal packages provide much needed income support for sidelined workers and financial support for businesses facing interrupted product demand and cash flows. However, the packages are not fiscal stimulus that will generate stronger growth.
  • China was weak going into the crisis; its domestic demand had slowed sharply. Business fixed investments had decelerated materially, while growth in gross capital formation had been propped up by government infrastructure investment. Consumer and business debt levels were very high, which reduced the government’s flexibility to stimulate more.
  • Most emerging markets were not well positioned going into the pandemic. In some Latin American countries, misguided policies and poor leadership have created turmoil that had contributed to capital flight. Debt levels are relatively high, and in special cases like Turkey, are burdened by large amounts of U.S. dollar-denominated debt levels that are costly to service as their currencies weaken versus the dollar. The other concern with emerging markets is the dramatic decline in the price of oil. This impact has dramatically reduced budgets in OPEC, Russia, Nigeria, Brazil, Mexico and other nations.
  • The tilt away from globalization that has been underway for about half of the decade is likely to be reinforced. We believe new factors stemming from COVID-19 will fuel the move further away globalization, which will change complex international supply chains, higher tariffs and potentially increased barriers to immigration.
  • The majority of listed real estate companies enter this recession with strong balance sheets and ample liquidity. Moreover, companies have reacted swiftly to the seismic shift in economic conditions and moved to augment and preserve liquidity. Strong capital foundations position these companies to weather the storm.

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 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

The Fund is managed by Ivy Investment Management Company. The total return strategy is sub-advised by Apollo Credit Management, LLC and the global real estate strategy is sub-advised by LaSalle Investment Management Securities, LLC.

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.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. Although asset allocation among different sleeves and asset categories generally tends to limit risk and exposure to any one sleeve, the risk remains that the allocation of assets may skew toward a sleeve that performs poorly relative to the Fund's other sleeves, or to the market as a whole, which would result in the Fund performing poorly. While Ivy Investment Management Company (IICO) monitors the investments of Apollo Credit Management (Apollo) in addition to the overall management of the Fund, including rebalancing the Fund's target allocations, IICO and Apollo make investment decisions for their investment sleeves independently from one another. It is possible that the investment styles used by IICO or Apollo will not always complement each other, which could adversely affect the performance of the Fund. As a result, the Fund's aggregate exposure to a particular industry or group of industries, or to a single issuer, could unintentionally be larger or smaller than intended. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. 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. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. 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.

Category: 

Article Related Management: 

Dan Hanson, CFA
Mark Beischel
Chad Gunther
Robert Nightingale
Christopher J. Parker

Article Type: 

Quarterly Fund Commentary

Show video On Home Page: 

0

Associated Funds: 

Shortened URL: 

{ "kind": "urlshortener#url", "id": "http://goo.gl/FPzcLb", "longUrl": "http://ivyinvestments.com/perspectives/ivy-apollo-multi-asset-income-fund"}

Lock this content.: 

Ivy Crossover Credit Fund

Market Sector Update

  • The first quarter saw a dramatic sell-off in risk assets due to the COVID-19 pandemic, which caused domestic equities to decline by nearly 20%.
  • The evolving COVID-19 pandemic has been met with unprecedented fiscal and monetary stimulus. During the quarter, the government responded with several stimulus measures including the $2.2 trillion CARES Act, similar to the stimulus passed during the 2008-2009 crisis. In addition to cutting rates 150bps, the Federal Reserve (Fed) also launched QE4, which was subsequently termed “unlimited” in size. It will purchase both U.S. Treasuries and agency mortgage-backed securities. It is going to be purchasing investment-grade corporate bonds with maturities of four years and less in the primary (new issue) market, while it has a separate program to purchase investment grade corporate bonds with maturities of five years and less in the secondary market. Additionally, it will also begin buying highly rated commercial paper. The launch of the investment-grade corporate bond purchase program by the Fed has thus far marked the high point investment-grade spreads, which rapidly compressed in the days subsequent to the program’s announcement.
  • U.S. Treasuries rallied sharply in the quarter with the yield on the 10-year U.S. Treasury falling 125 basis points (bps) from 1.92% to 0.67%. The yield on the 2-year U.S. Treasury fell 132 bps from 1.57% to 0.25% as the Fed cut rates twice, by 50 bps in early-March then again by 100bps in mid-March, ending the quarter with a target range of 0%-0.25%.
  • During the quarter, the yield curve steepened slightly as the difference between the 10-year U.S. Treasury and the 2-year U.S. Treasury rose 8 bps to 42 bps.
  • The spread on the Fund’s benchmark, the Bloomberg Barclays U.S. Corporate Bond Index, widened massively from 93 bps to 272 bps, a level not seen since the 2008-2009 financial crisis and above the prior recession level in 2002. Intra-quarter, the index reached 373 bps before rallying into quarter end. High yield lost 12.68% in the quarter as the spread on the high yield index rose from 336 bps to 880bps, while loans fared even worse, losing 13.19% in the quarter.
  • Despite the substantial increase in volatility in the quarter, investment-grade bond supply increased dramatically in the days after the Fed announced it would begin purchases. During the period, investment-grade bond issuance totaled $480 billion, up 49% from the $321 billion issued in the first quarter of 2019. The month of March accounted for $262 billion of issuance by itself, up 129% year over year. This surpassed the prior monthly issuance record of $178 billion in May 2016. Given the spread widening, issuance was dominated by higher quality issuers. For the quarter, AA, A and BBB rated issuance increased 193%, 89% and 4% year over year, respectively. The duration of issuance during the quarter rose with average time to maturity at 13.3 years, above the 11.7 years average for new issuance over the past four years.
  • Ratings action this quarter had a severe negative trend with the two-week rolling net ratings change hitting -$673 billion in March, the highest in at least 20 years. The market saw a large uptick in fallen angels, those issuers downgraded from investment grade into the high-yield market. The first quarter had $149 billion of fallen angels, and we believe more will come as $243 billion of BBB rated investment-grade bonds have spreads wider than the BB index. This compares with the approximately $60 billion of fallen angels in the first quarter of 2016 during the energy crisis, $80 billion in the second quarter of 2009, and less than $20 billion through all of 2019. In high yield, downgrades exceeded upgrades by 6-times and 5-times for Moody’s and Standard & Poor’s, respectively, levels last seen in the first quarter of 2016.

Portfolio Strategy

  • The Fund had a negative return and underperformed its benchmark, mainly driven by the Fund’s more aggressive positioning relative to the benchmark. Return was primarily driven by a fall in interest rates and coupon income, more than offset by widening of the benchmark spreads by 179 bps.
  • The Fund’s duration fell slightly during the quarter and remains under the benchmark’s duration of 7.81 years. Higher duration means higher price volatility for a given change in spreads as well as interest rates.
  • The Fund increased its allocation to BB rated credits, at the expense of the Fund’s exposure primarily to BBB rated credits. The largest changes in sector positioning were increases in the financial and consumer cyclical sectors and decreases in the consumer non-cyclical and industrial sectors.

Outlook

  • The markets have been derailed by the COVID-19 pandemic. We believe markets will find difficulty pricing in the vast uncertainty and the impact on macroeconomic variables and asset classes. A year ago it would have been impossible to predict the events of 2020 thus far, but what was seemingly predictable was that eventually a negative economic shock would occur and expose the excesses built in the corporate credit markets, a process now unfolding.
  • While we have long been cautious on the corporate credit market due to our view that excesses had built up, we now believe the combination of the valuations and stimulus programs, most principally the program to purchase investment-grade bonds by the Fed, has created an attractive environment to take risk in the asset class and are positioning the portfolio accordingly.
  • For the last 20 years, spreads in the investment-grade market have averaged 146 bps, and now stand at 255 bps. The yield on the 10-year U.S. Treasury has averaged 335 bps over the same 20 year period and ended the quarter at 67 bps. The ratio of investment-grade spreads to the 10-yr Treasury yield currently sits at 3.81-times versus the average of around 0.5-times over the last 20-years – this exceeds the prior peak of approximately 2.5-times during the 2008- 2009 recession. Coupled with the $10.5 trillion of negative-yield debt instruments globally, we believe there is a powerful technical supporting the investment-grade market.
  • While we believe the high point in spreads has been reached for this cycle, the path will be bumpy given the unprecedented scenario that occurred in the first quarter. We believe the various investment-grade issuers will see a wide dispersion in returns as various businesses are impacted in dramatically different ways by the COVID-19 pandemic. We believe this year will have the largest number of fallen angels ever with greater than $500 billion of investment grade issuers falling in 2020. This amount is roughly 50% of the entire high-yield market, which we believe will be difficult to absorb. Based on this view, combined with the Fed’s support of the investment-grade market, we believe superior risk-reward exists in investment grade relative to the high-yield market. We think the dispersion and fallen angel activity we expect this year favors an active approach to investing in this market.

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 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

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.

The Bloomberg Barclays U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market and includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility and financial issuers. It is not possible to invest directly in an index.

All information is based on Class I shares.

Risk factors: The value of the Fund's shares will change and you could lose money on your investment. Fixed income securities in which the Fund may invest are subject to credit risk, such that an issuer may not make payments when due or default or that the risk that an issuer could suffer adverse changes in its financial condition that could lower the credit quality of a security that could affect the Fund’s performance. A rise in interest rates may cause a decline in the value of the Fund’s securities, 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. Investing in foreign securities involves a number of economic, financial, legal, and political considerations that are not associated with the U.S. markets and that could affect the Fund’s performance unfavorably, depending upon the prevailing conditions at any given time. Mortgage-backed and asset-backed securities in which the Fund may invest are subject to prepayment risk and extension risk. The Fund typically holds a limited number of fixed income securities (generally 40 to 70). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund’s NAV than it would if the Fund invested in a larger number of securities. Fund performance is primarily dependent on the management company’s skill in evaluating and managing the Fund’s portfolio. There can be no guarantee that its decisions will produce the desired results. 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.

Category: 

Article Related Management: 

Mark Beischel
Benjamin Esty
Susan K. Regan

Article Type: 

Quarterly Fund Commentary

Show video On Home Page: 

0

Associated Funds: 

Shortened URL: 

{ "kind": "urlshortener#url", "id": "https://goo.gl/wZ6yhZ", "longUrl": "http://ivyinvestments.com/perspectives/ivy-crossover-credit-fund"}

Lock this content.: 

Pages

Subscribe to Ivy Investments RSS