Ivy Energy Fund

Ivy Energy Fund
03.31.18

Market Sector Update

  • Global equity markets declined slightly in the quarter as volatility increased. Energy and materials underperformed the broader equity market as growth concerns weighed on returns.
  • Oil prices moved higher in the quarter while base metals moved lower, based on fears of slowing demand from China. Supply trends remained generally favorable across commodity industries, as producers showed better capital discipline.
  • Global trade and economic activity continued to be strong but markets reflected increasing geopolitical concerns, including the potential for a trade war between the U.S. and China following the imposition of tariffs between the two countries.
  • Investment in U.S. oil supply continued to ramp higher as evidenced by increasing capital spending and a rising rig count. The majority of the investment continued to be directed at the Permian Basin, where oil supply is ample and breakeven prices are low on the cost curve.
  • As a result, supply is accelerating rapidly in the U.S. while most other parts of the world are seeing supply declines. The overall oil market remained slightly undersupplied as of the end of the quarter and global inventories continued to trend lower.
  • As expected, the U.S. Federal Reserve in March again increased its base interest rate to a target range of 1.50-1.75% and indicated it plans to continue raising rates this year.

Portfolio Strategy

  • The Fund posted a negative return for the quarter that was in line with the negative return of its benchmark index (before the effect of sales charges).
  • The Fund’s focus remains on owning companies that can create value over the full course of the energy cycle. We target companies that are low-cost operators, have strong balance sheets, have the ability to grow profitably and have strong return on capital.
  • The five greatest contributors to the Fund’s performance relative to its benchmark index in the quarter were Exxon Mobil Corp., Chevron Corp., Continental Resources, Inc., Whiting Petroleum Corp. and RSP Permian, Inc.
  • The five greatest detractors to relative performance were RPC Inc., Forum Energy Technologies, Patterson-UTI Energy, Inc., U.S. Silica Holdings, Inc., and C&J Energy Services, Inc.

Outlook

  • Our outlook has not changed in the quarter, as we believe we are in the early stages of a cyclical recovery. Demand surprised us the most in the quarter, led by improving emerging markets, and we expect global economic growth to continue in 2018.
  • We expect U.S. oil production will continue ramping higher and lead the U.S. to have the strongest supply growth of any country in the world. We believe this supply will satisfy the majority of world demand for oil.
  • Early signs have emerged that the Permian Basin is dealing with logistical bottlenecks and production capacity constraints, which could create pricing issues in that region. We will watch closely for more indicators and details.
  • Worldwide oil inventories continue to fall as demand has been better than expected, supply growth has been constrained by lower oil prices and the Organization of Petroleum Exporting Countries (OPEC) continues to constrain supply. We think global oil inventories will remain at or below the five-year average if OPEC supply is capped. This would be supportive for world oil prices.
  • Geopolitical issues from OPEC compliance, risks from the war in Syria, new sanctions on Iran and Venezuela, and potential tariffs and trade wars have become more of a concern as supply and demand are in a deficit.
  • Despite strong oil supply growth in the U.S., producers are signaling their intent to be more capital disciplined in the coming years and returning more free cash flow to shareholders. This behavior would support oil prices, and we are watching to see if this becomes reality.
  • We believe U.S. shale oil continues to offer opportunities. Companies continue to improve efficiency and productivity, and manage costs effectively. The Fund is positioned based on our expectation for a long-term rise in oil prices. In general, we think the Fund can perform well relative to its peers when oil prices rise.

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, 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.

Top 10 Equity Holdings as a percent of net assets as of 03/31/2018: Continental Resources, Inc., 5.71%; Halliburton Co., 4.99%; EOG Resources, Inc., 4.49%; Schlumberger Ltd., 4.23%; Parsley Energy, Inc., Class A, 4.12%; Diamondback Energy, Inc., 3.91%; Pioneer Natural Resources Co., 3.89%; RSP Permian, Inc., 3.70%; Concho Resources, Inc., 3.65%; WPX Energy, Inc., 3.33%.

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. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. 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.