Ivy Asset Strategy Fund

Ivy Asset Strategy Fund

Market Sector Update

  • With few exceptions, global equity markets powered higher in the quarter, capping off a strong year for the asset class. Emerging markets led most broad indexes. In the U.S., sentiment was buoyed by completion of tax legislation. Japan was the standout among developed markets as an October snap election produced a clear majority for Prime Minister Shinzo Abe’s ruling coalition.
  • Investor sentiment rose with further evidence of broad-based global growth, solid earnings momentum and continued accommodative monetary policies. The majority of jobless rates across the world were in decline. Japan’s report on large manufacturing accelerated and eurozone composite purchasing manager indexes were near all-time highs.
  • In the U.S., economic activity in the manufacturing sector continued to beat expectations, with new orders reaching a 14-year high in December. Housing remained on solid footing as low inventory and steady demand pushed home prices up 6.2% by year-end, as measured by S&P Case Schiller Index. Retail sales during the important 2017 holiday selling period rose nearly 5%, the fastest pace since 2011.
  • Returns in the quarter were led by the consumer discretionary, technology and financials sectors. While all sectors had positive returns, those with minimal exposure to the economic cycle experienced the lowest returns, including telecommunications, healthcare and utilities.
  • As expected, the U.S. Federal Reserve (Fed) made the fifth rate hike of this tightening cycle in December. The target increased to 1.25-1.50% and reaffirmed the potential for three more hikes in 2018 and two more in 2019. While the Fed will have raised interest rates by 125 basis points (bps) since December 2015, the long-end of the yield curve (10 years and longer) has risen less, causing the curve to flatten – meaning there is little difference in yield between bonds with short maturities and those with longer maturities. Treasury markets are trading off the fact that inflation has failed to materialize as the Fed has been increasing interest rates in line with projections for rising inflation. Credit spreads in general continued to tighten across the risk curve, domestically and abroad.
  • Gold finished the quarter close to its 52-week high and up just over 13% for the year. Crude oil prices continued to rally off the June 2017 lows as the Organization of Petroleum Exporting Countries extended production cuts through 2018, and ended at just over $60 per barrel.

Portfolio Strategy

  • The Fund had a positive return for the quarter (before the effect of sales charges), driven primarily by solid performance from the equity sleeve of the portfolio in both domestic and foreign stock positions.
  • While long-dated Treasuries and Treasury Inflation Protected Securities (TIPS) had a positive contribution on performance, positions in Latin American sovereign debt were negatively impacted by currency changes. Politics in both Brazil and Mexico weighed on the currencies. Concerns about pension-fund reform contributed to a 4.5% drop in the Brazilian real while concerns over the potential for changes in the North American Free Trade Agreement and 2018 presidential elections in Mexico contributed to a 7.1% sell-off in the Mexico peso.
  • In contrast, interest rates had opposite effects in the two countries. Interest rates continued lower in Brazil, which supported bond prices, as tame inflation expectations allowed the central bank to drop short-term rates from 8.25% going into the fourth quarter to 7.00% at the close of 2017. In Mexico, however, stubbornly high inflation pushed interest rates higher and contributed to a further decrease in the price of government bonds as the central bank raised interest rates from 7.00% to start the quarter to 7.25% to end the year.
  • Gold had modest contribution to Fund performance, while cash detracted from performance.
  • We continue to prefer the risk/reward of equities, which represented about 75% of Fund assets at the quarter’s end. Within the equity portion of the portfolio, our highest absolute weights were in technology, financials and industrials.
  • Performance drivers in the quarter were about what we owned and what we didn’t own. Key drivers of what we owned were Adobe Systems, AIA Group Ltd. and FleetCor Technologies. What we didn’t own were some of the major drawdowns in healthcare and the steep decline in General Electric, an index heavyweight that was not in the Fund’s portfolio.
  • Adobe Systems is the leading vendor of software used by publishers, developers, and other creative professionals to create, manage, measure and monetize digital content. Recent quarterly results reveal that demand for Adobe across products and geographies remained healthy. The company continues to execute, resulting in strong profitability trends.
  • We believe AIA Group, a long-term holding, remains well positioned to capture the substantial potential growth opportunities in Asia. The compounding effect of increasing affluence and changes in spending patterns highlights the opportunity for Asian life insurers, where AIA has considerable scale and breadth of product.
  • Within the fixed income holdings of the Fund, we initiated a number of small positions in credit (U.S. and foreign) to provide more diversity within the fixed income position. However, our largest exposure remained in sovereign debt of Latin American countries, TIPS and long-dated Treasuries.


  • We remain encouraged about unemployment at or below previous record lows in a number of countries. Global capital expenditures have improved and we think the level should improve further in 2018. With growth accelerating and inflation turning, central banks are likely to begin to remove accommodation policies. China may be a wild card as President Xi Jinping pushes his clean-up of the environment agenda by curtailing production as part of pollution controls. We think this may slow first-half economic growth, but the amount is unclear.
  • U.S. tax reform legislation was enacted late in 2017 and we think the winners are high-tax companies (such as small caps, retail and financials) and companies with large capital expenditures. On the other hand, we think the losers are low-tax companies (such as some multinationals), companies that significantly rely on debt and share buybacks, and those that are heavy spenders on research and development. It will be difficult to handicap how companies will position to take advantage of new opportunities or offset new challenges.

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 Dec. 31, 2017, 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 Equity Holdings as a percent of net assets as of 12/31/2017: Microsoft Corp., 3.52%; JPMorgan Chase & Co., 3.07%; AIA Group Ltd., 2.41%; Pfizer, Inc., 1.97%; Alphabet, Inc., Class A, 1.89%; Home Depot, Inc. (The), 1.84%; Amazon.com, Inc., 1.76%; Lockheed Martin Corp., 1.76%; Airbus SE, 1.73%; Coca-Cola Co. (The), 1.72%.

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. The Fund may allocate from 0 to 100% of its assets between stocks, bonds and short-term instruments of issuers around the globe, as well as investments in precious metals and investments with exposure to various foreign securities. 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. The Fund may focus its investments in certain regions or industries, thereby increasing its potential vulnerability to market volatility. The Fund may seek to hedge market risk on various securities, increase exposure to various markets, manage exposure to various foreign currencies, precious metals and various markets, and seek to hedge certain event risks on positions held by the Fund via the use of derivative instruments. Such investments involve 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. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Markets for commodities are likely to be volatile and the Fund may pay more to store and accurately value its commodity holdings than it does with the Fund’s other holdings. 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.