Ivy IG International Small Cap Fund

Ivy IG International Small Cap Fund
09.30.17

Market Sector Update

  • International markets delivered positive returns over the quarter in U.S. dollar terms. The U.S. dollar continued to weaken over the quarter and in line with year-to-date trends. U.S. dollar weakness was most notable against the euro, which gained 3.4% over the period.
  • Across international equities, the outperformance of small caps has become more pronounced on a year-to-date basis, as small caps (particularly in Europe and Asia) have outperformed their large cap counterparts.
  • The strongest performing sectors over the quarter were energy, materials and information technology, while telecommunications, consumer staples and healthcare underperformed. The energy sector was supported by the rebound in oil prices.
  • Geopolitics was a key theme over the quarter as North Korea fired an intercontinental ballistic missile for the first time, and followed this action by firing a missile over Japan’s northern island of Hokkaido in late August. These actions saw fresh sanctions ordered by the U.S. against individuals, companies and banks doing business with North Korea, and hard-line rhetoric from both North Korea and President Trump.
  • Economic data from the eurozone remained strong over the quarter, and further supports the domestic recovery story where small cap companies have significant exposure.

Portfolio Strategy

  • The Fund delivered a positive return and outperformed the benchmark (before the effects of sales charges) for the quarter. Strong stock selection was the main driver of outperformance, led by relative gains in industrials, consumer staples and real estate.
  • Individual holdings which had the most positive effect on the quarter’s performance included the Japanese material handling and automation company Daifuku Co. Ltd, Irish hotel company Dalata Hotel Group Plc, and French software and gaming company Ubisoft Entertainment S.A.(1.6%, 2.0% and 1.8% of Fund net assets, respectively).
  • Top detractors to relative performance included the Fund’s cash allocation is a rising market, which averaged close to 6%, and poor stock selection in healthcare.

Outlook

  • We continue to believe the improved outlook for global growth is supportive for international equities, as historically both European and Japanese markets have tended to outperform during such periods. Within Europe, the Fund remains overweight growth areas within the technology and consumer space, while maintaining the pre-Brexit underweight to the U.K. We continue to see a number of improving factors in Europe such as a return to positive loan growth, falling unemployment and improving economic lead indicators. The Fund has significant country overweight’s in Germany, France and Ireland.
  • Within Asia, the Fund added to its strategic overweight in Japan. As this market has lagged over the last year, we are encouraged by sustained positive earnings momentum, robust macro data and overseas investor positioning. We used the period of weakness in September to add to our overweight, largely within consumer discretionary. The Japan ‘snap’ election, called for late September, represents a small tail risk to this position, but we see the balance of probability favoring an outcome of continued, if not intensified, growth-positive policy reforms and no material fiscal or monetary tightening.
  • The Fund remains underweight Australia, as we see numerous challenges facing the economy; some of this view relates to an easing of growth expectations for Chinese commodity demand, to which Australia remains quite exposed. Exposure to the Australian consumer discretionary has been reduced following a review of the retail sector. Our Hong Kong and China exposure remains export and consumer led, rather than dependent upon a continuation of Statefunded capital projects to drive gross domestic product (GDP) growth.
  • We will continue to search for opportunities at a company level where we believe the growth opportunity is not fully recognized by the market. Given the strong performance of markets on a year-to-date basis, the risk of short-term corrections is always present, however we believe the portfolio is well positioned across our holdings of well-managed companies with strong growth prospects that trade at attractive valuations.

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 September 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.

The Fund is sub-advised by I.G. International Management Limited, which delegates to its subsidiary, I.G. Investment Management (Hong Kong) Limited, for additional portfolio management responsibilities. References to I.G. International Management Limited include both entities.

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. Investing in small-cap stocks may carry more risk than investing in stocks of larger more well-established companies. 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. 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.