Market Sector Update

• 2020 will go down as one year we all want to forget, but unfortunately one we won’t. The year definitely highlighted the often-painful divergences in our society regarding politics, wealth, employment and health. These growing gaps will be key challenges for our economy and country overall in the years ahead. The stock market continues to contribute to these divergences, as it posted strong gains in the prior quarter despite a worldwide economy that remains very weak due to the pandemic. Although many market pundits contend that the stock market is disconnected from reality, a more accurate description is that markets look forward, and several recent events brighten the future for the consumer and overall economy.
• The combination of positive vaccine news and prospects for additional pandemic-related government stimulus were two factors driving both the S&P 500 Index and Russell 3000 Index, the Fund’s benchmark, up over 12% in the fourth quarter. In addition, an extremely contentious election cycle is finally over, and while President-elect Joseph Biden’s agenda is still being disclosed, the short-term focus is around more stimulus and fewer tweets. These dynamics contributed to a shift in leadership, as some value and smaller cap indexes rose over 20% in the quarter. Growthier areas of the market were still up double digits, making it a strong finish to the year for almost all areas of the equity market.

Portfolio Strategy

• The Fund outperformed its benchmark for the quarter almost entirely due to strong stock selection. The industrials and information technology sectors were positive standouts in the period. Within industrials, Uber was a standout performer. Uber is a great example of a stock where the positive vaccine data from Pfizer and Moderna released in November was taken as a material positive for future business. We think the ridesharing portion of its business should significantly benefit as consumers feel more confident to move around more in the year ahead.
• A number of other stocks in the portfolio fared similarly, benefitting from perceived upside due to vaccine development. A number of software holdings, including Five9 and Twilio, continued to benefit from business trends accelerated because of the pandemic. These companies benefitted from the race to digitize businesses and enable companies to connect with customers over new formats. Not only have these trends accelerated during the pandemic, but their outlook for 2021 remains healthy.
• Of course, there were several big winners in the quarter we didn’t own. Most notably was Tesla, which rose substantially in the quarter. Indeed, Tesla continues to be the prime example cited by those who believe market valuations in some areas have become excessive.
• Overall, the portfolio has benefitted from a barbell approach, balancing companies that have posted strong growth throughout the pandemic with companies that should see a clear inflection higher in 2021 as the U.S. economy normalizes. In addition, our intended overweight position of the sub-$10 billion market cap area of the market versus our benchmark also helped performance in the quarter. This was a welcome change, as small caps have underperformed large caps in recent years. We would expect a continued tailwind from small-cap exposure in 2021 if U.S. economic growth surprises to the upside.

Outlook

• We think an above-consensus rebound in U.S. economic activity is likely, but there are a number of risks worth attention to valuation, as there are clear pockets of the market that have become extremely expensive. When you combine speculation, large addressable markets and low interest rates, excessive valuations are often the result. Themes such as electric vehicle adoption, which is connected to alternative energy, have sent certain stocks soaring, and in our opinion, are based on assumptions of electric vehicle penetration that are likely over 10 years away. This type of long duration assumption-making makes for exciting spreadsheets but rarely goes as planned. While many factors could derail these assumptions, rising inflation is a likely candidate to spoil the party for the more speculative areas of the market. Past and current monetary and fiscal stimulus has been expected to eventually make its way into rising inflation and in turn higher interest rates, which would take away a key equity tailwind of the past decade. The Biden administration isn’t likely to pull back on spending, and we expect additional stimulus for consumers and small businesses in the first half of 2021. While this is initially viewed as a positive and is likely partially responsible for the strong fourth quarter returns, the prospects for rising inflation and interest rates are also increasing. This is an important medium-term debate, as a stronger economy may lead to higher inflation and a potential turning point in monetary policy. The Federal Reserve (Fed) has been clear that it would remain accommodative for years to come, and any reversal on this would be important for equity markets. Should the Fed’s accommodation end, it would likely cause a significant rotation into more value areas of the market and a headwind for both growth areas of the market and overall market returns. Still, we expect a stronger economy in 2021 and are positioned in stocks that should lead this inflection in business and consumer activity. We are mindful of inflation prospects over the longer term, but inflation considerations are not influencing our portfolio construction at this point. Ivy’s investment team will pay close attention to inflation over the next few years, and we will engage with the team to inform our thinking. An additional shorter-term focus is the pace of the vaccine rollout. While this will be a daily talking point in the months ahead, we would argue this won’t be an issue for the markets by the middle of 2021. Continued strong efficacy and safety of the approved vaccines is expected but still represents a key tail risk. Looking forward, our 2021 focus is on identifying two different groups of companies: first, those that benefitted during the pandemic and can continue strong growth in 2021, and second, industry leading market share gainers whose businesses are likely to see a material inflection as the economy and consumer behavior normalizes in the coming year. Recent additions to the portfolio of Southwest Airlines, Vroom and Pinterest represent a combination of these two areas of the market, and we expect improved revenue and profitability performance in 2021. We remain steadfast in our belief that companies with the following characteristics are well suited to create value for shareholders over a multi-year timeframe: superior revenue growth compounders with profitable business models whose management teams are focused on long-term performance and shareholder value. We know 2020 was a difficult year for many and we are hopeful 2021 can be a return to normalcy. Thank you for your support and stay safe.

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 Dec. 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.

Top 10 holdings as a % of net assets as of 12/31/2020: Apple, Inc. 7.9, Amazon.com, Inc. 6.8, Microsoft Corp. 6.5, Mastercard, Inc. 4.0, Facebook, Inc. 4.0, Five9, Inc. 3.9, PayPal Holdings, Inc. 3.4, Twilio, Inc. 3.0, Universal Display Corp. 3.0 and Kornit Digital Ltd. 2.9.

The Russell 3000 Growth Index measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. It is not possible to invest directly in an index.

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. 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 30 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.