Market Sector Update

• The volatility of the first quarter was followed by relative order in the second, as markets rebounded slightly. Although the market cheered the tax reform, other worries began to crop up: foreign trade, rising inflation and rising interest rates. There is also a feeling that this may be as good as it gets, as many of the tailwinds propelling the market the past few years will have a difficult time continuing.
• There are positive signs, however. Employment and gross domestic product (GDP) numbers are strong. Interest rates, although they have risen, are still at historical low levels. Company margins are strong, and firms are raising dividends and repurchasing shares. While it may not get better, there is nothing to say it must get worse, either. From a macro standpoint, we are watching trade rhetoric (a full out trade war would not be good), the pace of interest rates and energy prices.

Portfolio Strategy

• In the second quarter, the Fund outperformed the Russell 1000 Value Index, its benchmark. The best relative sector was consumer discretionary, led by our investments in retail. Individual names that contributed notably were Foot Locker and Williams-Sonoma. The next best relative sector was energy, where we concentrated our investments in the refining sector, and were rewarded with the upward moves in Valero and PBFEnergy.
• Negative relative performance in the quarter was due largely to ownership in financials. Although our banking names were positive, Federated Investors and Principal Financial Group (an asset manager and insurance company, respectively) declined more than our contributors and led the sector to a negative impact on the portfolio.
• For the quarter, the portfolio’s biggest overweight positions were in consumer discretionary and basic materials. Sectors with significant underweight positions included health care, technology and energy. Individual stock selection within the Fund is comprised from a short list of eligible names that meet strict criteria on dividend yield, valuation, return on investment and financial flexibility. As such, sector weightings are a function of stock selection and no other considerations. The portfolio can have large underweight and overweight positions in sectors over time. As a concentrated Fund, these underweight and overweight positions can change quickly.

Outlook

• The rest of 2018 could be interesting for investors. The U.S. economy should continue to plug along, and other parts of the world, while slower, should also grow. Corporate profits are solid. Planned capital expenditures should continue through the year. The tightened job market appears to be stable, but consumers have yet to see real wage growth. On a macro level, we would like to see a supportive backdrop with continued GDP growth, rising corporate profits and a tightening job market. We would expect small positive returns from the overall stock market.
• While the economic forces listed above are clearly important factors, our first approach as a portfolio management team is at the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic value. Oftentimes this is due to short-term negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time, to potentially benefit clients over the long run.

The opinions expressed are those of the Fund’s manager 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, 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.

IVY000195 10/31/2018

Top 10 holdings (%) as of 06/30/2018: American Capital Agency Corp. 6.0, LyondellBasell Industries N.V. 5.8, Exelon Corp. 5.3, Pfizer, Inc. 5.1, CVS Caremark Corp. 4.9, Prudential Financial, Inc. 4.7, Interpublic Group of Cos., Inc. 4.2, Chevron Corp. 4.2, Gap, Inc. 4.1 and Valero Energy Corp. 4.1.

The Russell 1000 Value Index is an unmanaged index comprised of securities that represent the large cap sector of the stock market. It is not possible to invest directly in an index.

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