Market Sector Update

• The end of 2018 saw the return of stock volatility as equity markets took a sharp late year fall. This pullback, however, was followed immediately by a back and forth recovery to start 2019.
• The stocks that led the decline in December were the first to recover in January, providing a painful sting to investors who decided the selloff was a signal to position portfolios more defensively. Following a complacent 2017, large market swings have returned and have elevated fear amongst investors. Global growth has appeared to slow, and the Federal Reserve (Fed) has taken notice, halting further interest rate hikes for 2019.

Portfolio Strategy

• The Fund had a positive single-digit absolute return but underperformed the Russell 1000 Value Index (its benchmark) during the quarter, primarily due to individual stock selection.
• As a concentrated Fund, it exhibits higher volatility in returns over the short term, in pursuit of longer-term gains. The Fund also paid a quarterly dividend of 20 cents per share, which is a 3.96% annual dividend yield based on its quarterend net asset value of $20.18.
• Weakness in a varied selection of areas hurt overall performance. CVS Health Corp., the America’s largest drugstore chain, completed the acquisition of Aetna, and lowered its earnings outlook. Initial guidance after a merger is always risky, but we believe when the dust settles this stock could be notably higher and continue to hold. AbbVie stock performance fell during the quarter as investors continued to worry over whether or not, Humira, the company’s biggest selling drug, was going generic. We think the company’s pipeline of new drugs will provide a positive surprise. PBF Energy, Inc., an oil refiner, also hampered performance. On the positive side, The Chemours Company, a chemical company, rallied, followed closely by Synchrony Financial.
• We focus primarily on stock selection and avoid making sector calls. We overweight or underweight sectors based on individual stock opportunity, with some limits to control risk or volatility. We are overweight financials, consumer discretionary and materials, where we find both value and yield. In these areas, we have been able to find what we believe are good companies with repeatable business models generating high rates of free cash flow (the cash a company generates after cash outflows to support operations and maintain its capital assets), and low stock prices relative to our estimation of each company’s true intrinsic value.
• The Fund is underweight consumer staples, industrials and utilities. We simply do not find many attractive investments in these sectors at this time although we are constantly on the lookout for opportunities.

Outlook

• The U.S. economy has enjoyed a long successful run from the end of the 2008 recession. There was an additional boost with the tax cut in early 2018. We believe the recent economic data supports the idea of a slowing economy early in the year but a re-acceleration later. The Fed has indicated a pause in interest rate hikes, and many wonder if it is not just a pause, but a cessation. Other macro events to watch are the trade negotiations with China, the lapping of last year’s tax cut, job creation and inflation. We a cautiously optimistic that the Fed has done a good job with raising rates and believe the risk of a near-term recession is low.
• We think recent economic data supports the idea of a slowing economy but does not yet support the concept of a shrinking economy (recession). The current challenge will be for the Fed to tighten money policy back up, yet not slow the economy into contraction. The recent pause in interest rate hikes for 2019 indicates it is not an easy task – slowing the economy and inflation via rate hikes is a difficult job. We liken it to stepping on a rolling egg to stop it without breaking it. History shows a high probability of failure, if interest rates rise too much thus helping to create a recession. This is something we will watch carefully.

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 March 31, 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.

IVY000224 07/31/2019

Top 10 holdings (%) as of 03/31/2019: American Capital Agency Corp. 5.8, PBF Energy, Inc. 5.5, Phillips 66 5.1, Prudential Finanical, Inc. 5.0, MetLife, Inc. 4.9, Gilead Sciences, Inc. 4.2, Pfizer, Inc. 4.2, Gap, Inc. (The) 4.1, International Business Machines Corp. 4.1 and International Paper Co. 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.

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. 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. Investing in companies in anticipation of a catalyst carries the risk that certain of such catalysts may not happen or the market may react differently than expected to such catalysts, in which case the Fund may experience losses. The securities of many companies may have significant exposure to foreign markets as a result of the company’s operations, products or services in those foreign markets. As a result, a company’s domicile and/or the markets in which the company’s securities trade may not be fully reflective of its sources of revenue. Such securities would be subject to some of the same risks as an investment in foreign securities, including the risk that political and economic events unique to a country or region will adversely affect those markets in which the company’s products or services are sold. 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.

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