Ivy International Core Equity Fund

Ivy International Core Equity Fund

Market Sector Update

  • Broad international markets were up more than 4% in U.S. dollars. For the fifth consecutive quarter, the global economic recovery remained synchronized and strong. Europe and the U.S. solidly beat expectations; Japan posted slightly better-than-expected results; and China’s economic performance was mixed. In general, earnings were solid in the quarter with double-digit growth in most regions.
  • There are a number of geopolitical events we are actively monitoring such as tensions in the Middle East; the North Korean situation; Brexit negotiations; the rise of nationalism that recently manifested in the Catalan vote; and the increasingly aggressive trade rhetoric out of the U.S.
  • The U.S. Federal Reserve (Fed) raised rates in December and consensus estimates expect an additional 2-4 hikes in 2018. We anticipate 3-4 rate increases over the year. The vast majority of central banks seem to have a tapering tilt, despite rhetoric that may seem to contradict current policy action. That said, with Japan’s Prime Minister Abe solidly in control, we think Japanese monetary policy will remain at the extremes of easy until inflation exceeds 1%. Aggressive international monetary policy is resulting in much lower foreign ten-year rates than in the U.S. We believe there is an increasing fear U.S. rate hikes could lead to a curve inversion, which is often a precursor to a recession.
  • Overall, inflation remains benign and economists are rationalizing why inflation is not following the usual models. The stimulus from the approved U.S. tax cuts, and a potential ramping of infrastructure spending, may light the inflation fire in the U.S. Corporate tax cuts and infrastructure spending are also occurring in a number of foreign countries.

Portfolio Strategy

  • The Fund performed in line with the benchmark, with sector allocation driving performance. An overweight allocation to the strong-performing energy sector as well as an underweight allocation to the poor-performing healthcare sector were top relative contributors to performance. Additionally, the lack of exposure to the utilities sector (the worstperforming sector in the benchmark index) helped Fund performance.
  • Strong stock selection in consumer discretionary and consumer staples benefitted performance and more than offset poor selection in materials and energy. Top individual contributors to performance included Isuzu Motors Ltd., Wuliangye Yibin Co. Ltd. and Koninklijke Ahold Delhaize N.V. (2.5%, 1.5% and 2.4% of Fund net assets, respectively).
  • On a regional basis, exposure to emerging markets was a positive contributor as emerging-market equities typically outperformed their developed market peers. The Fund’s underweight allocation to Japan (a stand-out performer) was a detriment to performance for the quarter.
  • The Fund no longer has any currency hedges and currency effects were minimal to Fund performance. At quarter end, the Fund’s cash position was 2.5%.


  • We continue to believe real global economic growth is in a sweet spot today, supported by monetary and fiscal policy globally, which is positive for markets. That said, we are in the tenth year of the current economic cycle, which is long by any standard, and thus we are watching closely for signs of the end. The question remains how much longer will the cycle extend uninterrupted by looming risks. We continue to maintain the Fund’s positioning relatively balanced between cyclical/defensive, with a bias toward ensuring it is defensive enough to withstand an abrupt cycle end or change. We believe maintaining our exposure to developing markets makes sense, although valuations are becoming less compelling.
  • Global monetary policy remains at the extremes of easy and we do not see that changing materially unless inflation accelerates at a higher-than-expected rate. All major developed countries are at least tapering, including a decline in Japanese monthly asset purchases. Long term, virtually all countries are struggling with high levels of debt and we believe central banks will attempt to keep rates below nominal gross domestic product (GDP) growth in order to monetize the debt. As such, we believe there is a long-term cap on how high rates can go. Our base case is continued slow, deliberate exiting of quantitative easing and reversing of negative interest rate policy globally.
  • We believe corporate tax relief in a number of countries (the U.S., France and Japan) as well as infrastructure spending should help extend the current market cycle.
  • Over time, emerging-market countries will continue to try to improve their populations' standards of living, which will require solid real economic growth. Synchronized positive global growth, as is currently the case, is good for emerging markets. In most emerging-market countries, real economic growth should remain ahead of their developedmarket counterparts.
  • Relative valuation remains supportive for international equities, while absolute valuations are less attractive. Equities are trading at valuation levels above their historic averages (over the last 25 years), while bonds are trading at a dramatic historic premium to long-term averages.
  • In our opinion, current relative valuations in equity markets do not reflect much of the potential looming geopolitical, inflation and extended economic cycle risks.
  • We see relative value in emerging markets (especially China), energy, internet and increasingly in yield plays.

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 Dec. 31, 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.

Effective January 2017, Catherine L. Murray was named a portfolio manager to the Ivy International Core Equity Fund.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. 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. 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. 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.