Amid the noise, will tech's run continue?

Ivy Science and Technology Fund
07.11.19

Strong start, but unknowns persist

The rebound in equities in 2019 has been led by the information technology sector, similar to the past few years. The bounce-back within technology has been widespread, regardless of market capitalization or subsector. However, recent turmoil surrounding U.S.- China trade relations, as well as reported antitrust investigations into four of the largest tech companies have led to an uptick in volatility.

Despite the ebb and flow of U.S and China trade discussions, we remain optimistic of an eventual agreement in the second half of 2019. This action is in the long-term best interests of both countries and we believe that progress towards an agreement would be supportive of financial markets.

The technology sector is also facing implications from the U.S. government’s alleged antitrust investigation into four of the largest technology companies – Apple, Amazon, Facebook and Alphabet. The results of this action won’t be known for months, if not years, so we are assessing the situation in a long-term context. Our belief is that the underlying reason these companies have been successful is because they create products and services people demand. While short-term noise may increase, we believe the long-term secular opportunities created by these companies continue to be attractive.

Seeking innovation beyond tech

We pursue an actively managed, risk-controlled portfolio of investments in what we deem attractive companies: Those with innovation-driven differentiation and sustainable levels of profitability and growth that operate within three key sectors of the economy, including technology, health care and applied science and technology. Our approach of focusing on technology companies as well as those that use science and technology as agents of change is a key differentiator of the Fund versus its peers.

While trade tension and government investigations may create unknowns, the secular drivers of technology and health care are diverse and growing. We believe we are at a unique crossroads as innovation in science and technology converge at an unprecedented pace. In fact, wide-ranging innovation is enabling and impacting nearly every industry across the globe. We view this innovation-driven disruption as a positive in the fact that it is helping create new industries and investable opportunities.

With that in mind, the following analysis highlights key growth drivers for technology and health care, how the Fund is positioned to take advantage of these opportunities, and our outlook moving forward.

Sector Fund Benchmark Ivy’s Analysis

Information Technology

61%

73%

Semiconductors
Semiconductors have long been a key allocation within the Fund as we believe the emergence of new secular growth opportunities should continue to support above-market returns for the space. We believe semiconductors should be driven by emerging growth areas, such as the Internet of Things (IoT), autos, machine learning, 5G, industrial and data centers. The IoT is one growth driver expected to have meaningful impact in the coming years. In fact, Intel estimates that roughly 200 billion “smart devices” will make up the IoT by 2020, up from 15 billion in 2015. Data expected to be generated from these devices is reflected in Graph 1 below.

Financial Technology
The proliferation of mobile payments and widespread use of card-based payments are promising secular trends for processors of payment transactions. Business Insider Intelligence estimates mobile payment growth to reach $357 billion by 2021, accounting for 45% of e-commerce sales. We continue to be optimistic on the future of this space.

Health Care

16%

0%

In our view, health care, notably biotechnology and pharmaceuticals, is among the greatest innovators and early adopters of new science and technology. We believe the next few years should be particularly constructive for biotechnology stocks and we have added several names in this area, as we expect significant innovation and economic returns.

Gene Therapy
In particular, we are monitoring revolutionary advances in gene therapy, a cutting-edge technique to create and administer medicine. Much of it started with mapping the human genome 18 years ago, which was a seminal event. While it was exciting, no one could afford gene sequencing due to computing power limitations – the cost exceeded $1,000,000 roughly 10 years ago. With the technology and vast quantity of information now available, it can be done more cheaply and accurately, as shown in Graph 2 below.

Inexpensive gene sequencing allows companies to dig deeper into genetics and find ways to treat patients based on their individual genomes. Gene therapy involves administering a medicine that has been pre-engineered to selectively impact particular cellular genetics in a single dose to patients. By influencing specific genes, cells may be “reprogrammed” to recognize particular cancers or other damaging diseases. Despite the inherent risks of gene therapy, we believe there is upside for leading companies to offer significant returns.

As a percent of the Fund’s equity assets as of 06/30/2019 vs. S&P North American Technology Index.

Graph 1. Data demand means opportunity for semis

The Fund’s overweight position in semiconductors is supported by secular growth drivers, including future data creation.

Chart Showing DATA DEMAND MEANS OPPORTUNITY FOR SEMIS
Graph 2. Innovation transforming gene therapy

Gene therapy has benefited from rapid innovation, which has driven the cost of gene sequencing to roughly $1,000 per sequenced genome.

Chart Showing INNOVATION TRANSFORMING GENE THERAPY

Source: National Human Genome Research Institute (NHGRI)

Cautious optimism going forward

While we are highly cognizant of moves in the market, our three- to five-year timeline for investing allows us to take a longer term approach. We believe many stocks in the information technology space remain relatively wellpositioned going forward. We are constantly evaluating the technology supply chain and demand signals coming from key technology end-markets. We believe the rebound within the sector should continue for the remainder of 2019.

On the health care front, we believe the demand for quality health care should drive growth within biotechnology, health care information technology systems and pharmaceuticals. We think the next few years should be particularly constructive for biotechnology stocks. We believe there will be improvement in capital spending trends, and we are looking for a continuation of an active mergers-and-acquisition environment.

As always, we continue to monitor the macroeconomic environment, but our focus remains primarily on securityspecific fundamental research. We believe this attention to bottom-up research, coupled with the innovation and transformation under way across the globe, should continue to provide investment opportunities for the Fund.


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

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund invests more than 25% of its total assets in the science and technology industry, the Fund’s performance may be more susceptible to a single economic, regulatory or technological occurrence than a fund that does not concentrate its investments in this industry. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. In addition, the Fund’s performance may be more volatile than an investment in a portfolio of broad market securities and may underperform the market as a whole, due to the relatively limited number of issuers of science and technology related securities. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers. Holdings information is not intended to represent any past or future investment recommendations. Holdings and allocations can and do change frequently.