Ivy IG International Small Cap Fund

Ivy International Small Cap Fund
06.30.19

Market Sector Update

  • International small-cap equities delivered a positive return during the second quarter, building on the positive momentum from the first quarter. While initially softer due to global trade tensions, equity markets recovered through June following more dovish comments from the U.S. Federal Reserve (Fed) and the European Central Bank (ECB), further reinforcing the easing bias among global central banks.
  • Economic data was mixed over the quarter. While employment data remains encouraging, U.S. survey data indicates deterioration in business conditions and expected future activity. Data in the European Union showed some signs of improvement, albeit data from Germany remains generally weak.
  • Despite a lack of political progress in the U.K. and the resignation of Prime Minister Theresa May, U.K. equities were resilient and posted marginally positive returns for the quarter though lagged performance across other regions. Japanese equities underperformed over the quarter as trade tensions and a stronger yen weighed on performance.
  • The strongest performing sectors for the period were information technology, utilities and real estate, while energy, consumer staples and consumer discretionary underperformed. Oil markets were weaker over the quarter with Brent crude falling by 2.80%. Bond yields moved lower with the U.S. 10-year Treasury yield approaching 2.0%, while the benchmark German 10-year bund yield marked new lows at -0.33%.

Portfolio Strategy

  • The Fund produced positive performance and outperformed its benchmark for the period. At the country level, stock selection in the U.K., Japan and Ireland contributed to relative performance, while stock selection in Sweden, Germany and South Korea detracted from relative performance.
  • Top relative individual contributors to performance for the period included Games Workshop Group plc, a U.K.-based leisure products company; Future plc, a U.K.-based media company; and Taiyo Nippon Sanso Corp., an industrial gas company based in Japan. Top relative individual detractors to performance for the period included Ryohin Keikaku Co. Ltd., a Japanese-based multiline retail company; Premier Oil Plc, a U.K.-based oil, gas and consumable fuels company; and Hyundai Marine & Fire Insurance Co. Ltd., a Korean-based insurance company.
  • Several new positions were added in the Asia-Pacific region over the quarter. A position in Stanley Electric Co. Ltd., a manufacturer of automobile headlamps, was added for its perceived strong position as a producer of LED lighting. We believe the company will continue to generate growth as penetration of LED technology grows due to its improved visibility and lower power consumption. MISUMI Group, Inc. was also added, a maker of small-batch customized pressed die and plastic mold products. Combined with the company’s unique online retail offering, we believe MISUMI gives the Fund exposure to the early-stage recovery of the machine tool cycle and as a long-term structural growth business. Over the quarter, several positions were sold including Maxell Holdings Ltd., which announced a significant special dividend and share repurchase following a campaign of shareholder activism. However, we believe the future prospects for the operating business are less appealing. Long-held positions in Japan (Maruichi Steel Tube Ltd., NGK Spark Plug Co. Ltd. and Nifco, Inc.) and Australia (Spark Infrastructure Group and Carsales.com Ltd.) were also sold.
  • Within Europe, we initiated a position in Domino’s Pizza Group Plc. We believe this is a mispriced high-quality franchisee business. We believe the company is a market leader in the delivered food market, with strong brand awareness, high returns and cash generation.
  • We also added Barco N.V., which we feel is a market leader across the niche activities of cinema projection, wireless meeting rooms and health care display.

Outlook

  • While equity markets have recovered strongly in 2019, we believe corporate results and management commentary will be key as we enter the second half of the year. Given the strong performance to date in 2019, the market is unlikely to look through any disappointment or downward revisions of earnings expectations.
  • Japan remains intent on raising its consumption tax from 8% to 10% in October, and while we feel this is a policy error, consumption and consumption stocks in Japan have reacted negatively well in advance of the tax hike. As a result, we believe these domestic-demand sectors are now very attractive.
  • With a temporary trade war truce having been called at the June G20 meeting in Osaka, Japan, we believe attention will turn to what progress can be made in bilateral talks between the U.S. and China. Critical to this will be what concessions are made for China’s telecom equipment giant Huawei to purchase critical components from U.S. manufacturers and whether it remains on the so-called "entity list." While it is difficult to forecast this outcome, incentives remain for both sides to reach a deal, particularly as the November 2020 U.S. election draws nearer.
  • Central bank policy in most major economies is likely to remain supportive and with valuations of cyclical stocks attractive relative to their defensive, quality counterparts, we remain cyclically inclined in our positioning but flexible to change this view should conditions change.

  • 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 June 30, 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 06/30/2019: SCSK Corp. 2.5%, Teleperformance SE 2.0%, Sixt SE 1.9%, TechnoPro Holdings, Inc. 1.8%, ARTERIA Networks Corp. 1.8%, Matsumotokiyoshi Holdings Co. Ltd. 1.8%, Alstom 1.8%, Steadfast Group Ltd. 1.8%, Manulife U.S. REIT 1.8% and Zeon Corp. 1.8%.

    All information is based on Class I shares.

    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.