Ivy Accumulative Fund – Investment Update
Commentary as of April 29, 2020
Gus, you’ve been leading the morning meetings for the Investment Management Division (IMD) for some time. How has the new regimen of working from home affected the day-to-day operations of IMD?
Gus Zinn: Aside from not being in the office and having face-to-face interactions or meetings, IMD has been operating remarkably well in this environment. There's still great access to the sell-side, as well as company management. We have numerous tools that helped us to work more collaboratively, such as a shared calendar for any company calls that are taking place. It makes it very easy to stay up to date.
What opportunities are you seeing among the market-cap spectrum?
Within equities, there are generally five companies that make up a 20-35% weight depending on the index. These are strong companies with solid business models, but it also makes many of the large-cap indices top heavy. Granted, large caps have outperformed small caps by a record amount over the past few years. However, the current market disparity could open opportunities for small caps to gain ground, or even outperform large caps again.
Last year, we expanded our thesis on Ivy Accumulative Fund, applying a growth-oriented philosophy across all market capitalizations. John Bichelmeyer, the co-portfolio manager, and I believe our all-cap strategy gives us tremendous flexibility to identify opportunity among high-quality companies across the market spectrum, especially in this current environment.
Over the next couple of weeks, a number of states plan to lift their shelter-in-place orders. Do you think some of the behavioral changes adopted during the COVID-19 pandemic will remain in place for some time?
Frankly, we believe people may be overestimating many of the shifts made in reaction to the virus to becoming permanent change. We think people are dying to eat a meal outside of their homes, but may not be in a rush to be in a crowded restaurant. We believe places “close to home” could benefit once local ordinances are lifted.
However, larger crowd events like concerts or sport venues seem to be more uncertain. This football season could be up in the air, but we think the crowds eventually will return. There's also been speculation of workplaces going to a permanent work from home structure once we come out of this. This may be a bit overplayed because of the inherent benefits from working in the same location, such as face-to-face meetings. We don’t see that much of a drastic change in workplace practices.
Are there trends that were in place before the pandemic you believe will accelerate?
E-commerce is an area that we believe will only get stronger going forward. Most e-commerce companies have had trouble penetrating the elderly demographic because of perceived technological hurdles with this population. This environment has forced many elderly citizens to overcome those tendencies and adopt e-commerce services, which is causing a ripple effect. Toiletries and consumer products initially were slow to move online, but have started to pick up now.
Zoom Video is another example of a company benefitting from the current environment. Its business model likely would have been adopted in time. However, Zoom was able to grab market share much more quickly – several days versus three-five years – than it would have had there not been a pandemic.
Technology spending could also stay very strong, especially for companies looking into future business contingency planning. A potential negative trend could be an added layer of costs for most companies. Supply chains will most likely be changed to help disruption, COVID-19 insurance for employees, and testing for employees are all cost pressures we will most likely see shift in these companies. These will be long-term issues and will force companies to look for ways to improve productivity to offset these costs.
We are in the midst of earnings season. What are your thoughts on a possible scenario where large companies with high price-to-earnings (P/E) multiples go without earnings while the actual impact of value are not that big?
The P/E for 2020 earnings is going up because the earnings are going down and prices aren't moving at the same magnitude. These companies are still feeling the pain, but the stocks are more interested in earnings prospects in 2021 than in this year. If these larger stocks end the year flat, that's really a victory given the environment we've faced so far in 2020.
We are more concerned with the longer-term view. The important question for most companies isn’t how do we do in 2020. It’s whether 2021 will be better than 2019.
Past performance is not a guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This informa¬tion is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. The views are current through April 29, 2020, and are subject to change at any time based on market or other conditions.
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Large-capitalization companies may go in and out of favor based on market and economic conditions. Prices of growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. The Fund typically holds a limited number of stocks (generally 35 to 50). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund's net asset value than it would if the Fund invested in a larger number of securities. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.
Top 10 equity holdings as a % of net assets as of 3/31/2020: Microsoft Corp. 9.0, Amazon.com, Inc. 7.7, Fiserv, Inc. 5.1, Mastercard, Inc. – Class A 5.0, Five9, Inc. 3.6, Facebook, Inc. 3.6, Dexcom, Inc. 3.1, Ingersoll-Rand, Inc. 3.1, LiveNation, Inc. 3.0, Adidas AG 2.7.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.