Ivy Balanced Fund

Ivy Balanced Fund

Market Sector Update

  • Domestic markets were under pressure in the fourth quarter of 2018 as elevated periods of volatility for the period erased the gains experienced in the first three quarters of the year.
  • The S&P 500 Index, the Fund’s equity benchmark, declined 13.5% for the quarter. This underperformance was led by the energy sector (down 24%) followed by information technology and industrials (both down nearly 17%) and consumer discretionary (down 16%). The solitary positive sector for the equity index was utilities, which was up 1.4% for the period.
  • Given the risk-off nature of trading and growing evidence that the pace of global economic growth is decelerating, the 10-year U.S. Treasury yield experienced its first sequential quarterly decline of 2018, falling 36 basis points (bps) over the course of the quarter to 2.69%. The Treasury curve flattened, with the spread relationship between the twoyear and 10-year U.S. Treasuries ending the quarter at 19 bps, down from 52 bps at the start of the year.
  • The Fund’s fixed income benchmark, the Bloomberg Barclays U.S. Government/Credit Index, increased 1.46% during the quarter as the Treasury market rallied due to falling interest rates and the duration benefit from curve flattening.

Portfolio Strategy

  • The Fund underperformed the Morningstar U.S. Fund Allocation 50%-70% Equity category average. Performance negatively impacted by an overweight of equities, which underperformed fixed income during the quarter, and an underweight to Treasury bonds relative to the benchmark.
  • The Fund’s equity portfolio delivered a negative return for the period, but was roughly in line with the benchmark. An underweight of the utilities, real estate and consumer staples sectors negatively impacted relative performance. In addition, poor stock selection in health care was a headwind. Positions in Apple, Hess Corp. 8% Mandatory Convert, Lowes Corp., Goldman Sachs, Cimarex Energy and Jazz Pharmaceuticals exhibited particularly disappointing results.
  • Partially offsetting this weakness was strong stock selection in the consumer discretionary and information technology sectors, with positions in Broadcom Ltd. and Yum! Brands being notable contributors. In addition, positions in Procter and Gamble and Intercontinental Exchange posted strong results in a weak market environment.
  • The fixed income portion of the Fund declined slightly, underperforming the benchmark return. The portfolio’s relative underweight of Treasuries negatively impacted performance in the quarter as interest rates declined and credit spreads widened. In addition, the portfolio’s long-standing short duration position relative to the benchmark was a detriment to relative performance. As indicated in previous quarterly commentaries, we have been gradually reducing both credit and duration risk in the fixed income portfolio. The portfolio’s duration has lengthened and now stands at approximately 93% of the benchmark. The portfolio’s Treasury position has increased and now stands at 83% of the benchmark.


  • Global economic growth is very likely to decelerate over the next 12 months but we expect it to remain positive. As we have previously highlighted, tax reform was a meaningful positive for the domestic economy which, along with lighter regulation and a generally more business-friendly political climate, was supportive for growth.
  • However, the uncertainties around political, monetary and trade policies have been stubbornly persistent and are likely to linger for most of this year. While we believe domestic economic growth will continue, the lagged effects of tighter monetary policy and waning benefits from fiscal stimulus will be a headwind.
  • 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 and adjust the pace of monetary policy normalization. As the domestic economy grows, we expect the Federal Reserve to raise interest rates at a very modest pace and continue the process of winding down its balance sheet.
  • 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 at Class I shares 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, 2018, 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.

Rick Perry served as a portfolio manager on the Fund until April 12, 2018.

Top 10 Equity Holdings as a percent of net assets as of 12/31/2018: Lowe’s Co., Inc. 2.0, Broadcom Corp., Class A 1.9, Union Pacific Corp. 1.9, Chevron Corp. 1.9, Microsoft Corp. 1.8, Autodesk, Inc. 1.8, UnitedHealth Group, Inc. 1.8, Las Vegas Sands, Inc. 1.8, PNC Financial Services Group, Inc. 1.8, Northern Trust Corp. 1.8.

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.

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 managers to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.