Ivy Focused Growth NextShares

Ivy Focused Growth NextShares

Market Sector Update

  • Equities again outperformed most asset classes during the fourth quarter of 2017 as a number of positive catalysts coalesced to cap a very strong year. Growth styles of all capitalization ranges led the market for the year but trailed value styles in the quarter. The style change was abrupt particularly after Thanksgiving, when many laggard stocks became leaders and vice versa.
  • During most of 2017, the lack of legislative policy progress out of Washington, D.C. was a factor in the positive tailwinds to growth stocks. The sudden Republican success at passing tax reform catalyzed a belief that economic growth may accelerate, generated a strong positive response to stocks and industries that are more domestic in their profit pool, and provided a headwind to our performance during the last few weeks of the quarter. Similar to the many quick and violent rotations we have seen in the past few years, we expect a moderation in this rotation because faster economic growth should be a positive across most stocks and investment styles.
  • The global economic backdrop remains strong and stable. Gross domestic product growth continues to hover around 3%, with most economies around the world accelerating or improving. Most exciting is the resurgence in business sentiment for manufacturing industries and signs of capital spending acceleration, as many of these industries have been constrained by a long period of slow growth. Most if not all industries are now participating in one of the longest economic recoveries on record. In short, the global economic picture appears better today than it has in many years.

Portfolio Strategy

  • Ivy Focused Growth NextShares underperformed the Russell 1000 Growth Index, its benchmark, for the quarter, in a very strong period of absolute performance for most areas of the market. The Fund’s 2017 yearly performance was roughly in line with its benchmark.
  • We were disappointed in another sharp factor and style reversal that favored value over growth and detracted from our performance, but we were pleased by the Fund’s strong absolute performance for the year.
  • Within the quarter, technology produced the majority of the underperformance, as there was a dramatic shift from leaders to laggards. Our technology returns suffered from an overweight in semiconductor capital equipment companies Lam Research and Applied Materials, which are benefiting from increasing capital intensity in the semiconductor industry. Other performance detractors included global payment stocks MasterCard, Visa and PayPal. These three companies were caught up in the above-mentioned rotation, with nothing fundamentally changing at the corporate level.
  • Global names including Phillip Morris International and Ferrari were also headwinds to performance in the quarter, as they lacked any exposure to tax rate decreases. Celgene was particularly weak in the quarter due to a pipeline failure in one of the key emerging drugs.
  • On the positive side our consumer discretionary holdings benefited from the strong performance of Home Depot, where housing market strength and tax reduction benefits combined to generate strong performance. Our financials exposure continued to help overall performance, as names like Charles Schwab and CME Group benefited from both tax rate reductions and higher interest rates. Caterpillar was a very strong contributor during the quarter, as the company is finally emerging from one of the sharpest and deepest recessions in its history.


  • Investor consensus remains generally optimistic on U.S. and global economic growth, as excesses seem difficult to find. We believe U.S. economic growth will now likely accelerate and remain in the 3% range for the foreseeable future. Faster economic growth will eventually lead to higher interest rates, a tighter employment market and possibly higher inflation. While higher inflation may be welcomed, we are a bit unsure of how the equity markets may deal with it given the current state of fixed-income markets globally. Should bond prices fall marginally, this may be a positive for equity markets in 2018 and beyond. A sharp correction in the bond market, on the other hand, might have a ripple effect across equity markets.
  • Over the past several quarters our biggest concern has been an economic change that might dramatically accelerate the business cycle, leading to corporate enthusiasm, tighter labor markets and eventual recession as the cycle comes to an end. We now believe we are at the beginning of the next stage of the economic cycle. With more robust growth, most companies are poised to increase profits, and we would expect equity market performance that is broader and deeper.
  • We expect the recent rotation to subside and technology to reemerge, as these stocks are one of the more cyclical areas of the economy that should do well as the economy accelerates. Within the portfolio, our positions in technology remain a notable overweight, reflecting our belief that valuations, particularly based on cash flow generation, remain fairly reasonable. We continue to have a high exposure in financials as tax reform benefits, combined with higher interest rates, intersect to produce robust profit growth. We remain concerned and underweight the defensive areas of the market such as consumer staples and real estate investment trusts, as we still view valuations and profit outlooks as elevated and correlated to low bond yields globally. Thank you for your confidence and continued support.

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 Dec. 31, 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.

IVY000173 05/31/2018

Top 10 holdings (%) as of 12/31/2017: Home Depot, Inc. 6.6, Alphabet, Inc. 6.3, Microsoft Corp. 6.2, MasterCard, Inc. 6.0, Adobe Systems, Inc. 5.9, Apple, Inc. 5.9, Facebook 4.8, Amazon.com 4.6, salesforce.com, Inc. 4.6 and Charles Schwab Corp. 4.5.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. 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. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with greater diversification. 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. 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.

Ivy Nextshares are a new type of fund. NextShares funds have a limited operating history and may not be available at all broker/dealers. There is no guarantee that an active trading market for NextShares funds will develop or be maintained, or that their listings will continue or remain unchanged.

About NextShares: Shares of NextShares funds are normally bought and sold in the secondary market through a broker, and may not be individually purchased or redeemed from the fund. In the secondary market, buyers and sellers transact with each other, rather than with the fund. NextShares funds issue and redeem shares only in specified creation unit quantities in transactions by or through Authorized Participants. In such transactions, a fund issues and redeems shares in exchange for the basket of securities, other instruments and/or cash that the fund specifies each business day. By transacting in kind, a NextShares fund can lower its trading costs and enhance fund tax efficiency by avoiding forced sales of securities to meet redemptions. Redemptions may be effected partially or entirely in cash when in-kind delivery is not practicable or deemed not in the best interests of shareholders. A fund’s basket is not intended to be representative of the fund’s current portfolio positions and may vary significantly from current positions. As exchange-traded securities, NextShares can operate with low transfer agency expenses by utilizing the same highly efficient share processing system as used for exchange-listed stocks and ETFs. Trading prices are linked to the NextShares next-computed NAV and will vary by a market-determined premium or discount, which may be zero; may be above, at or below NAV; and may vary significantly from anticipated levels. Purchase and sale prices will not be known until the NextShares NAV is determined at the end of the trading day. NextShares do not offer the opportunity to transact intraday based on current (versus end-of-day) determinations of a fund’s value. Limit orders can be used to control differences in trade prices versus NAV (cost of trade execution), but cannot be used to control or limit execution price. Buying and selling NextShares may require payment of brokerage commissions and expose transacting shareholders to other trading costs. Frequent trading may detract from realized investment returns. The return on a shareholder’s NextShares investment will be reduced if the shareholder sells shares at a greater discount or narrower premium to NAV than he or she acquired the shares.

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Ivy NextShares funds are managed by Ivy Investment Management Company and are distributed by ALPS Distributors, Inc.

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