Ivy IG International Small Cap Fund

Ivy International Small Cap Fund
03.31.19

Market Sector Update

  • International small-cap equities rebounded strongly over the first quarter of 2019 following a very challenging end to 2018. The markets can thank a more dovish U.S. Federal Reserve (Fed) and optimism around the resumption of trade talks between the U.S. and China for much of the rebound. When combined with several positive economic data points out of China (particularly around improving Chinese credit growth), the Chinese market witnessed robust growth over the quarter.
  • The U.K. secured a short-term delay to the initial March Brexit deadline. However with the U.K. no closer to a resolution, a further delay is likely. This process will be further complicated by the European elections scheduled for late May.
  • The strongest performing sectors for the quarter were energy, information technology and communication services, while financials, consumer staples and utilities underperformed. Brent crude rose by 26% over the quarter, supporting the energy sector, while bond yields moved lower, weighing on the financial sector.

Portfolio Strategy

  • The Fund produced positive performance but underperformed its benchmark for the period. At the country level, stock selection in Australia and France detracted from relative performance, while stock selection in Japan and the Netherlands benefited relative performance. Despite the strong growth in Australia, the Fund maintains a relatively defensive position to the country due to macro headwind and high relative valuation concerns.
  • Top relative individual contributors to performance for the period included Technopro Holdings Inc., a Japanesebased professional services company; Future Plc, a U.K.-based media company; and SCSK Corp., an information technology services company based in Japan. Top relative individual detractors to performance for the period included Ardent Leisure Group Ltd., an Australian-based leisure and entertainment company; Okamura Corp., a Japanese office furniture manufacturer; and Nufarm Ltd., an agricultural chemical company.
  • Several new positions were added from the Asia-Pacific region over the quarter. A position in Macromill, Inc., a Japanese internet marketing research firm, was established based on its long-term growth prospects and key client relationships with advertising agencies in Japan and overseas. As marketing budgets continue to be under pressure, we believe the company is well positioned to benefit from companies tying marketing spending to measurable results. Takeuchi Manufacturing Co. Ltd., a small-size excavator manufacturer, was added to the portfolio for its perceived attractive valuation, growth prospects and unique product offering within its niche of the earth moving equipment market. Positions in Melco International Development Ltd., a Macau casino operator; Sembcorp Marine Ltd., a Singapore-based oil services company; and Tadano Ltd., a Japanese mobile crane manufacturer, were sold.
  • Within Europe, we added U.K. housebuilder Barratt Developments plc. We believe the company offers an attractive valuation and offers the potential for very good annualized earnings growth driven by margin improvement and volume growth. We also added Qiagen N.V., which is a leader in DNA-based technologies for the life science and diagnostic industries. Molecular diagnostics account for approximately half of the firm’s revenue, and we believe the company has a strong franchise in areas such as tuberculosis testing. The remaining 50% of the firm’s revenue is generated from life sciences, where it provides a range of tools and applications ranging from DNA fingerprinting technology to solutions for pharmaceutical companies to aid in drug discovery. With end markets growing 5-10%, we believe the company is well positioned for revenue growth.

Outlook

  • While equity markets have recovered strongly over the first quarter, further upside will likely require an improvement in the macro data, which from a European perspective, remains weak. Brexit remains a significant risk and continues to weigh on sentiment and investment across Europe. While any clarity may provide upside relief, the current political backdrop in the U.K. does not instill confidence.
  • What is more encouraging is that Chinese economic and credit data is showing signs of bottoming. This data has historically been a decent leading indicator of economic strength, particularly for Europe. Therefore, with the prospect of an improving macro backdrop in Europe (lead by a Chinese recovery as well as a Fed that has abandoned its tightening stance) there appears room for further re-rating of cyclical sectors given their relative underperformance since the middle of 2018. With growth in both the Asian and European markets, closely tied to global economic activity, we believe any economic improvement should prove favorable to international markets.

The opinions expressed are those of the Fund’s managers for Class I shares 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.

Effective Feb. 21, 2019, Ivy IG International Small Cap Fund was renamed Ivy International Small Cap Fund. Additionally, the name of the sub-adviser changed from I.G. International Management Limited to Mackenzie Investments Europe Limited. Mackenzie Investments Europe Limited delegates to its subsidiary, Mackenzie Investments Asia Limited, for additional portfolio management responsibilities. References to Mackenzie Investments Europe Limited include both entities.

Top 10 equity holdings as a percent of net assets as of 3/31/2019: SCSK Corp. 2.2%, TechnoPro Holdings, Inc. 2.0%, Matsumotokiyoshi Holdings Co. Ltd. 1.9%, Tsubaki Nakashima Co. Ltd. 1.9%, Kenedix Office Investment Corp. 1.8%, Komeda Holdings Co. Ltd. 1.8%, ARTERIA Networks Corp. 1.7%, Future plc 1.7%, Rubis Group 1.7% and Grand City Properties S.A. 1.7%.

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.