Ivy Balanced Fund

12.31.19

Market Sector Update

  • Domestic equity markets posted a significant advance in the fourth quarter of 2019 as a resilient U.S. economy withstood a weakening global economic backdrop and the political drama of the impeachment proceedings in the U.S. House of Representatives. Equities advanced in part due to growing optimism of a phase one trade deal between the U.S. and China, as well as persistently strong employment outlook and consumer confidence and spending data.
  • The S&P 500 Index, the Fund’s equity benchmark, advanced 9% with information technology, health care and financials leading the way. Performance in two traditionally defensive sectors, real estate and utilities, were a drag on the overall returns of the benchmark for the period.
  • Given the uncertain global economic climate, the U.S. Federal Reserve (Fed) reduced the federal funds rate once during the quarter, bringing the federal funds target range to 1.50% – 1.75%.
  • The 10-year Treasury yield declined around 25 basis points (bps) to 1.92%. The Treasury curve showed meaningful improvement, with nearly all of the inversion removed from the short end and an encouraging steepening in the spread relationship between the 2-year and the 10-year Treasury bonds, which ended the quarter at approximately 35 bps, up from 10 bps at the start of the quarter.
  • The Fund’s fixed income benchmark, the Bloomberg Barclays U.S .Government/Credit Index, was essentially unchanged from the previous quarter as interest rates rose and credit spreads narrowed.
  • Investment grade credit spreads tightened 19 bps the quarter.

Portfolio Strategy

  • The Fund produced a positive return and outperformed its benchmarks and peers for the quarter.
  • Within the Fund’s equity portfolio, positive stock selection in the consumer discretionary, information technology and financials sectors and underweight positions in the real estate and utilities sectors positively impacted relative performance.
  • Positions in Apple, Inc., Autodesk, Inc., Micron Technology, Inc., Las Vegas Sands Corp. and JPMorgan Chase & Co. exhibited particularly positive results. Offsetting this was performance from The Boeing Co., Constellation Brands, Inc., Arista Networks and General Mills, Inc., which were notable detractors for the quarter.
  • Within the fixed income portion of the Fund, positive security selection in the energy sector positively impacted performance for the quarter. The Fund’s duration now stands at approximately 106% of the benchmark.

Outlook

  • As we look ahead, global economic growth is likely to improve over the next several quarters as central banks have reduced rates in response to slowing growth and trade frictions have eased between the U.S. and China.
  • However, the uncertainties around political and trade policies are likely to linger. While we believe domestic economic growth will continue, the lagged effects of tariffs and ongoing uncertainty over future trade policy coupled with a volatile presidential election cycle represent a headwind to confidence and the growth outlook.
  • As a result, we are closely watching inflation rates and inflation expectations which have been modest, and must remain so, in order to allow our central bank to respond to slower growth. We have been encouraged by the Fed’s recent accommodative monetary policy and the ongoing strength exhibited by the U.S. consumer.
  • While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding high quality, growing companies whose securities are trading at a reasonable valuation with visible catalysts to drive relative outperformance over the next 12 months. This approach has served investors well over time, and our confidence in it has not waned.

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, 2019, 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 S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. It is not possible to invest directly in an index.

The Bloomberg Barclays U.S. Government/Credit Index measures the performance of U.S. dollar-denominated United States Treasuries, government-related, and investment-grade U.S. corporate securities that have a remaining maturity of greater than or equal to one year. In addition, the securities have $250 million or more of outstanding face value and are fixed-rate and non-convertible securities. It is not possible to invest directly in an index.

Top 10 Equity Holdings as a % of net assets as of 12/31/2019: Microsoft Corp. 2.1, Apple, Inc. 2.1, Autodesk, Inc. 2.0, Union Pacific Corp. 2.0, Las Vegas Sands, Inc. 2.0, Zimmer Holdings, Inc. 2.0, Qualcomm, Inc. 1.9, Philip Morris International, Inc. 1.8, Lowe’s Co., Inc. 1.8, Alphabet, Inc. Class A 1.7.

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. The lower-rated securities in which the Fund may invest may carry greater risk of nonpayment of interest or principal then higher-rated bonds. In addition to the risks typically associated with fixed-income securities, loan participations in which the Fund may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund typically holds a limited number of stocks (generally 45 to 55). As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a large number of securities. 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.