Ivy Balanced Fund

03.31.20

Market Sector Update

  • Markets exhibited historic levels of volatility with equity markets posting dramatic declines in the first quarter of 2020, as the COVID-19 pandemic spread across the globe and countries adopted increasingly stringent policies to slow the rate of infection. As the quarter progressed, we witnessed a dizzying array of unprecedented market, economic and societal events. In the realm of economics, the March initial jobless claims data was a stark indicator of the challenge faced by the domestic economy with more than 3 million claims filed, a level that was four times the previous record high.
  • As the economic ramifications of the virus and its remediation became apparent, markets declined and policy-makers responded. Global central banks dramatically reduced interest rates with the Federal Reserve (Fed) cutting its target range by 100 basis points (bps) over a two-week time period to 0.00% – 0.25%. In addition, the Fed launched a series of monetary and regulatory measures to ease the hit to the U.S. economy including unlimited purchases of Treasury and agency mortgages; various loan facilities; and foreign exchange swap lines with global central banks to name a few.
  • The U.S. Congress also moved quickly to pass legislation. The most significant being the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, which was signed into law late in the quarter. Unfortunately, the number of cases and deaths resulting from the COVID-19 virus continued to grow, which is first and foremost a tragic human loss and secondarily, a growing threat to the global economy.
  • The S&P 500 Index, the Fund’s equity benchmark, declined 19.6% for the period, with the energy, financials, industrials and real estate sectors leading the decline. While every sector posted negative returns for the quarter, information technology, health care, consumer staples and utilities sectors declined the least.
  • The Fund’s fixed income benchmark, the Bloomberg Barclays U.S. Government/Credit Index rose 3.4% for the quarter, as interest rates declined and U.S. Treasuries rallied. The 10-year Treasury yield collapsed by approximately 125 bps to 0.67%. The Treasury curve steepened modestly with the spread relationship between the 2-year and the 10-year Treasury bond at 40 bps, up from 35 bps at the start of the quarter. Investment grade credit spreads widened significantly during the quarter to 272 bps, a level historically coincident with economic recessions.

Portfolio Strategy

  • The Fund delivered a negative return and underperformed its benchmark for the quarter.
  • The Fund’s underperformance was driven by poor security selection in the equity and fixed income sleeves and a modest overweight of equity. For the quarter, the equity weight of the Fund averaged 63%, the fixed income averaging 34% and the balance in cash.
  • Within the Fund’s equity sleeve, an overweight of pro-cyclical sectors and, in particular, the Industrial sector hampered relative performance. Poor stock selection was also a meaningful detractor. The drivers of underperformance at a security level were idiosyncratic in nature but broadly were a result of a value bias in the equity sleeve. Stock selection detracted the most in the health care, information technology and industrials sectors.
  • Within the fixed income sleeve, our allocation to Treasury inflation protected securities produced a positive return for the quarter, but underperformed nominal Treasuries which negatively impacted relative performance. In addition, poor security selection in the energy sector was a significant detractor. At the end of the quarter, the fixed income sleeve had duration around seven years, which is approximately in-line with the benchmark.

Outlook

  • As we look ahead, global economic growth is likely to contract meaningfully in the near term as governments, businesses and individuals adjust to the necessary realities of combating a global pandemic. Our thoughts and prayers go out to the growing number of people tragically impacted by this virus as well as to those working tirelessly to contain it. As stewards of your capital, it is our responsibility to perform the seemingly cold-hearted, but necessary analysis of the financial impacts of this pandemic on markets and individual securities.
  • To that end, we made two significant changes over the course of the quarter. In January, we reduced the Fund's equity exposure by 5%, the proceeds of which were invested in U.S. Treasuries. In March, we began reducing our substantial position in Treasuries to fund purchases of predominately Investment Grade rated fixed income instruments. As of quarter end, the Fund’s allocation to equity was 58%, fixed income was 40% with a cash balance of 2%.
  • The economic impacts of COVID-19 are likely to be significantly negative with unprecedented declines in economic activity as measured by GDP very likely in the near term. The resulting surge in unemployment as well as likely credit losses will dampen the outlook for growth. However, the experience of other countries provides some hope, and increasingly evidence, that a sharp rebound in economic activity can commence once the spread of the virus slows. While we believe domestic economic contraction is all-but-certain in the near term, the lagged effects of fiscal and monetary stimulus put in place over the last several weeks is likely to bring some stability to financial markets and eventually aid the economic recovery.
  • 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 March 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.

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.

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.

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.