Ivy Energy Fund

09.30.19

Market Sector Update

  • Global equity markets were broadly flat in the quarter, while the energy and materials sectors posted slightly negative returns resulting in modest underperformance versus the broader market.
  • Oil prices were down around 8% for the quarter despite an attack on a major Saudi Arabia oil-production facility that caused oil to spike up 15%. Oil prices gave it all back in the following two weeks as Saudi Arabia drew down its inventories, cut domestic refinery throughput and delayed loadings to keep oil flowing to the markets. Oil markets are more concerned about weak economic growth and the U.S.-China trade war tensions reducing demand growth.
  • U.S. production growth started to slow as companies began showing discipline to operate within their cash flow, generate free cash flow and return capital to shareholders. The U.S. rig count is down roughly 20% this year as companies try to spend within that cash flow, which we think is likely to lead to slower production growth.
  • The group now referred to as “OPEC+” – the original OPEC nations plus ten more oil-producing countries, the largest of which are Russia, Kazakhstan and Mexico – is talking about better compliance from countries producing above their production targets. OPEC needs to extend its production cuts through 2020 and could cut additional production to support the market at its next meeting, scheduled in early December.

Portfolio Strategy

  • The Fund had a negative return for the quarter that exceeded the negative return of its benchmark.
  • Key detractors to the Fund’s performance relative to its benchmark included holdings in ProPetro Holding Corp., Concho Resources, Inc., Continental Resources, Inc., Whiting Petroleum Corp. and Chevron Corp.
  • Key contributors to the Fund’s relative performance included holdings in Dril-Quip, Inc., Suncor Energy, Inc., Phillips 66, WEX, Inc., and Enterprise Products Partners.
  • About 36% of the equity holdings in the Fund were allocated to the Oil & Gas Exploration & Production industry segment, followed by about 27% to Oil & Gas Equipment & Services and about 16% to Oil & Gas Refining & Marketing. These allocations were similar to the levels in the second quarter.
  • The Fund’s allocation to U.S. equity was steady from the prior quarter at about 90% of equity assets.
  • The focus of the energy strategy remains on investing in companies that can create value over the full course of the energy cycle. We identify those as companies that are low-cost operators, have strong balance sheets, have the ability to grow profitably and have strong return on capital.

Outlook

  • We think the oil markets will continue to be tight through the remainder of this year before returning to an oversupplied condition in 2020. Oil production, led by the U.S. shale oil output, is expected to be higher than demand next year.
  • We think the growth rate in U.S. shale oil production will start to fall because of a slowdown in capital flows into U.S. shale projects as companies spend within their cash flow levels.
  • The worldwide demand growth rate for oil continues to be the greatest risk to oil prices. We believe worldwide demand growth will slow in 2020 because of recession fears and the U.S.-China trade dispute.
  • Geopolitical risks remain high following the attack on the Saudi oil facility. The market response indicated Saudi Arabia did a good job of stabilizing global oil markets and kept oil flowing after the attack. The remaining questions relate to the overall security of the global energy infrastructure. In addition, the market remains concerned about the Middle East because of the Saudi oil facility attack and the increased tensions between the U.S. and Iran.

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 Sept. 30, 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.

Top 10 equity holdings as a percent of net assets as of 09/30/2019: Phillips 66, 4.79%; Valero Energy Corp., 4.50%; Marathon Petroleum Corp., 4.22%; Concho Resources, Inc., 4.09%; Pioneer Natural Resources Co., 4.07%; Diamondback Energy, Inc., 3.96%; WEX, Inc., 3.72%; Continental Resources, Inc., 3.62%; Dril-Quip, Inc., 3.51%; Parsley Energy, Inc., 3.40%.

All information is based on Class I shares.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund invests more than 25% of its total assets in the science and technology industry, the Fund’s performance may be more susceptible to a single economic, regulatory or technological occurrence than a fund that does not concentrate its investments in this industry. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. In addition, the Fund’s performance may be more volatile than an investment in a portfolio of broad market securities and may underperform the market as a whole, due to the relatively limited number of issuers of science and technology related securities. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. 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.