Market Sector Update

• Volatility re-emerged in the equity markets in the first quarter of 2018. After years of low volatility, this certainly felt uncomfortable and unwelcome, but is actually more of a return to normal. There were a number of contributing factors to this situation, including: the federal budget deal signed in February 2018, which we feel creates additional economic stimulus on top of the tax bill from December 2017; Jerome Powell taking over as new U.S. Federal Reserve (Fed) Chairman; and the Fed Open Market Committee’s seemingly hawkish pivot upon his appointment.
• We now expect a minimum of three rate hikes for 2018 and continued increases into 2019. This is in response to inflation data that has rebounded recently. We believe the core consumer price index will be north of 2% by April, a level we have not seen for a few years. Otherwise, it appears that the U.S. economy remains solid, with the labor market and consumer spending holding at good levels.

Portfolio Strategy

• In the first quarter, the Fund outperformed Russell 1000 Value Index, the Fund’s benchmark, before the effects of sales charges. Value investing, while still lagging, has begun performing better relative to the growth indices. As usual, we try to ignore short-term fluctuations and keep our focus longer-term.
• The portfolio did well versus its benchmark, helped by both the energy and consumer discretionary. Every sector in the index had negative performance except for technology, and this helped our stock picking during the period. As a concentrated fund, individual stock selection is more impactful to performance than sector weightings. Names that returned more than 12% to the portfolio included Interpublic Group (advertising), Abbvie (pharmaceuticals), Cisco (technology) and PBF Energy (refining).
• These strong performers easily outweighed some of the laggards, which included Principal Financial Group (insurance), General Mills (food) and Hanes Brands (apparel). The Fund is overweight in consumer discretionary and basic materials. Areas with little exposure include real estate and telecommunications. Our sector weightings are driven by bottom-up stock picking, not a macro view. For example, the consumer discretionary sector has increased as many retail stocks have declined, offering both value and yield. The market fears traditional retailers are being “Amazoned” out of business. While some retailers will shrink, some have defensible positions and are now trading below our estimate of intrinsic value (the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors).

Outlook

• Recent economic data has been encouraging with strong job growth and rising, but still historically low, interest rates. We believe the new tax bill should provide a stimulus to the economy, and an accelerating economy typically bodes well for value investors. Headwinds do exist, however, including the Fed’s difficult job of tightening monetary policy. The goal is to prevent inflation via higher short-term rates and a shrinking of the Fed balance sheet, and the market is expecting three to four rate hikes in 2018. History shows a high probability of central bank mistakes in this process, however, and the Fed risks contributing to a recession if rates rise too much too quickly. This is of course something we will watch carefully.
• While the economic forces listed above are clearly important factors, the portfolio management team’s first approach is from 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 term.

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, 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.

IVY000185 07/31/2018

Top 10 holdings (%) as of 03/31/2018: American Capital Agency Corp. 6.1, LyondellBasell Industries 5.8, Eaton Corp. 5.0, Principal Financial Group 5.0, Prudential Financial, Inc. 4.9, Pfizer, Inc. 4.9, PDF Energy, Inc. 4.6, Exelon Corp. 4.3, Old Republic International Corp. 4.2 and Federated Investors, Inc. 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. 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. 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. 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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