Ivy Global Equity Income Fund

Ivy Global Equity Income Fund
06.30.17

Market Sector Update

  • Across the globe, markets continued to perform surprisingly well despite the lack of U.S. legislation progress. European political uncertainty faded as a pro-business reformer Emmanuel Macron was elected President in France. In U.S. dollar terms, the U.S., Europe and Asia performed well.
  • The U.S. dollar continued to relinquish its past gains over the quarter, losing approximately 5% versus a basket of other currencies. The euro appreciated quite strongly as European political risk faded after the French elections.
  • As expected, the U.S. Federal Reserve (Fed) raised rates, and we believe has stayed on a path of one additional increase in 2017. The Fed has slowly begun to unwind its huge balance sheet. Both consumer and business confidence remained high during the quarter, with the U.S. economy expected to pick up in the second half.
  • The European Central Bank (ECB) does not plan to lower rates further, and has focused its attention on getting the banking system fit to handle any additional shocks. The ECB will begin to taper its bond purchases in early 2018. The ECB’s current focus is forcing more capital into weaker Italian, German and Spanish banks.
  • Global purchasing managers’ indices marginally improved during the quarter. Slower emerging-market growth has been a drag to global gross domestic product (GDP) growth as well as for multinational corporate sales and earnings growth. We believe this will continue to improve in 2017 and will aid in less deflationary forces for the overall economy.

Portfolio Strategy

  • The Fund outperformed the benchmark (before the effects of sales charges) driven primarily from strong stock selection in information technology and financials. On the other hand, currency hedges to the U.S. dollar detracted as the euro, British pound and yen strengthened. The Fund maintains hedges to a portion of the British pound and yen exposure, but removed the euro hedge to the U.S. dollar prior to the French presidential election.
  • As the quarter progressed, we increased exposure to consumer staples and healthcare, while decreasing exposure to energy and consumer discretionary. We have a more positive outlook regarding the healthcare sector, as we believe it is less likely the government will enact drug-pricing controls, and the sector seems ripe with attractive valuations and dividend payouts. In energy, we reduced our overweight allocation stemming from falling energy price concerns.
  • We anticipate moderate earnings growth, relatively high valuations and a market environment with political and macroeconomic uncertainty in the U.S., Europe and Asia. Nevertheless, bonds are becoming less attractive relative to equities and we believe this trend will continue if inflation reaccelerates and the Fed enacts additional rate increases and continues to shrink its balance sheet.
  • The Fund’s largest sector overweights include information technology where we are targeting higher growth; financials where we continue to find companies we believe provide good dividend yield, recovery potential (higher rates) and/or growth prospects; and energy where we believe dividend yields remain attractive despite the decline in oil prices. In our view, our underweight allocations to consumer staples and telecommunications tend to have either poor fundamentals or high relative valuations.
  • Over the quarter, the Fund increased exposure to U.S. (mainly information technology) at the expense of Europe. Despite the reduction, we have maintained the Fund’s overweight allocation to the region, as we believe European political fears will slowly subside over the next year, which should bode well for the region and possibly increase investor interest.

Outlook

  • We think global economic growth will remain slow but will pick up as we move through 2017. We expect the U.S., part of Europe, China and India to be the main engines of growth, and believe other emerging-market economies will continue to recover. We feel the U.K. faces additional headwinds stemming from Brexit, as unknowns and the likely volatility will hurt its economy.
  • Further U.S. political problems might hurt business, consumer and investor confidence. Further strength in the euro is a concern for European-based earning per share (EPS) growth. We believe monetary policy is likely to remain loose for the foreseeable future, but to a much lesser extent in the U.S. Uncertainty surrounding the new Trump administration and Congress will most likely cause market selloffs due to timing and high investor expectations.
  • We are still concerned about potential terrorist attacks in Europe, and the effects the large refugee influx will have on European politics via upcoming elections in Italy and Germany and the economy.
  • Currently, China is accelerating local and regional infrastructure spending and has allowed housing prices to increase in larger cities. We believe this can only be sustainable for a few years as debt will pile higher and housing prices will ultimately correct.

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, 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.

Class R6 shares were renamed Class N on March 3, 2017.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected.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.

IVY INVESTMENTS® refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS℠ , and the financial services offered by their affiliates.