Ivy Cundill Global Value Fund

Ivy Cundill Global Value Fund
06.30.17

Market Sector Update

  • The global economy continues to accelerate and we see fundamental macro improvements in all the major regions. The re-emergence of inflation is also taking place. That is an environment where value stocks could extend their gains.
  • The global financial system is strengthening. We believe we will see global central banks continue on a path of interest rate normalization, and monetary stimulus will play less of a role going forward. There will be more discussions about fiscal stimulus.

Portfolio Strategy

  • The Fund lagged the benchmark for the quarter due to security selection in the energy and consumer discretionary sectors. Citigroup, Inc., SoftBank Group Corp. and Wabtec were the largest contributors.
  • We believe our investment thesis in U.S. banks has been confirmed by the U.S. Federal Reserve (Fed) Comprehensive Capital Analysis and Review (CCAR) results in June. All of our holdings pass this year’s test, both quantitatively and qualitatively. Citigroup announced it will double its dividend and approved a massive share buyback program of $15.6 billion. In our recent meeting with Citigroup, we sensed the fundamentals of its businesses are improving. In addition, economies around the world are accelerating.
  • Bank of America Corp. increased its dividend by 60% while authorizing $12 billion in stock repurchases. Warren Buffett announced that Berkshire Hathaway will switch out of the preferred shares they own and exercise their option to buy $700 million shares of Bank of America, becoming the top holder of the stock. We agree with the bullish sentiment Buffett expressed over the prospects of Bank of America.
  • Wells Fargo & Co.’s capital plan was also approved by the Fed, which included up to $11.5 billion of common stock repurchases. This is especially good news in light of recent negative press regarding sales practices at this bank. We believe Wells Fargo is a solid franchise and the current issues are short term in nature and very fixable.
  • To summarize, key reasons we like the above U.S. banks are: improved earnings outlook, very low valuation, solid capital positions and increased payouts to shareholders. If there are any positive developments in tax reform, industry deregulation, or more interest rate hikes in the U.S., we believe the banks will stand to benefit further.
  • Security selection in energy and consumer discretionary were detractors during the period. Offshore energy helicopter service provider Bristow Group, Inc. missed earnings expectations and reset forward looking guidance. We believe the market’s reaction is irrational and considerably overblown. We are undeterred as our thesis is largely predicated on the company’s tangible asset backing (NAV) and our substantial margin of safety. At current prices, we believe that Bristow trades well below its liquidation value.

Outlook

  • We are confident that we are in the early stages of a long-run, multi-year resurgence of value investing. Since 2009, the markets have rewarded growth stocks during the period of muted economic growth, and bond proxies as conservative investors searched for safety and yield. While we expect to see months and quarters where these types of names will outperform value-oriented stocks, we believe that the tide has turned and the current backdrop is very constructive for value investors.
  • We are witnessing an environment of synchronized growth around the world. Despite a typically weaker first quarter in the U.S., data is pointing to accelerated growth into the second half. Economic activities in Europe continue to improve and is surprising to the upside for the European Central Bank (ECB) and the investment community. Now that the French election is behind us and was won overwhelmingly by Emmanuel Macron and his party En Marche, we believe the risk of dissolution in the Eurozone has substantially disappeared. There are in fact encouraging signs that the new French government will be more business friendly than in the recent past. The ruling party’s majority position may give them the political capital to tackle economic reforms. The path to seeing reforms in France will likely still be long and bumpy, but nonetheless it should be heading in the right direction.
  • The loss of a majority government by Theresa May in the U.K. election appears to be negative on the surface. However, a weakened position for her may in fact mean that her “hard Brexit” stance will now be diluted, which could be quite positive for businesses. In addition, an improving economic picture in Europe is a positive for the U.K. and the subsequent negotiations, as rational discussions are more likely. We continue to believe that Brexit negotiations will focus on maintaining important trade relations, as both sides understand the importance of their economic connectedness to each other.
  • The Fed hiked rates during the quarter and expanded discussions on how to manage down the size of its balance sheet. We believe normalizing monetary policy reflects the improving fundamentals of the economy. Even in the eurozone, we believe ECB President Mario Draghi will likely start to shift central bank policies toward a tapering or reduction of quantitative easing later this year and into next year. Increases in long-dated government bond yields in the U.S. and Europe reflect better economic growth and some mild reflation at the moment.
  • We believe the rescue of Banco Popular by Santander in Spain, and the absorption of two regional banks in Italy by Intesa Sanpaolo with state support, are further signs that the financial conditions in Europe continue to heal. Investor confidence in the banking sector improved after these deals were announced.
  • Trade in Asia appears to be picking up, lifting exports of Korea and China. Despite some monetary tightening in China recently, the economy on balance is doing well as the shift to domestic services and consumption continues. Excess capacity in industries such as steel has started to come down gradually. One regional risk we are monitoring closely is the political and military developments in North Korea. Our portfolio’s exposure to Japan, China and Korea together is not excessive given the mandate.
  • In conclusion, we believe we will see more evidence of accelerated economic growth in the large developed economies of the world in the second half of this year. Central banks in those regions will likely start to or further normalize interest rates. We believe that should be a good environment for our portfolio of value equities trading at lower valuation than the market.

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 June 30, 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.

Class R6 shares were renamed Class N on March 3, 2017.

Top 10 equity holdings as a percent of net assets: Citigroup, Inc. 5.0%, Wells Fargo & Co. 4.5%, Bank of America Corp. 4.5%, American International Group, Inc. 4.2%, Liberty Global, Inc., Series A 3.3%, Chesapeake Energy Corp., 5.750%, Series A Cumulative 3.1%, Novartis AG, Registered Shares 3.1%, Samsung Electronics Co. Ltd. 2.9%, Twenty-First Century Fox, Inc., Class A 2.9% and International Business Machines Corp. 2.8%.

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. 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. 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. 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.

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Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.