Ivy International Core Equity Fund

Ivy International Core Equity Fund
06.30.17

Market Sector Update

  • Broad international markets were up about 6% in U.S. dollars, with the majority of the gain driven by currencies. Questions surrounding the Trump administration’s ability to enact agenda items, including fiscal stimulus, and mixed U.S. economic data drove the weaker U.S. dollar.
  • Geopolitical highlights remained center stage during the quarter – the victory of Emmanuel Macron in the French presidential election a notable highlight. He is pro-euro and wants to reform France in line with the German agenda. In Germany, the recent local election was soundly won by German Chancellor Angela Merkel’s party, with a poor showing from fringe parties. In the U.K., the snap election went poorly for Prime Minister Theresa May and the Conservative party. Rather than consolidating power (as anticipated) the Conservative party lost seats in Parliament and overall credibility. In Japan, Prime Minister Shinzo Abe is seeing his popularity decline and his party lost the Tokyo elections – something to monitor. North Korea and the Middle East continue to deteriorate, and risk remains in those markets.
  • The global economy remains synchronized, though U.S. economic data was slightly disappointing. Generally speaking, global economic expectations have caught up with reality. As in geopolitics, Europe stood out as a standout performer relative to expectations. This, and the elections, drove the euro stronger. In 2017, European earnings are expected to grow almost 20%, though our guess is aggregate revisions will struggle to keep rising from here and may turn slightly down with the stronger European currency and lower oil price. China slightly missed expectations in the quarter, but we believe the country should still see mid-single-digit real growth.
  • The U.S. Federal Reserve (Fed) raised rates in June and, at the end of the quarter, both the European Central Bank and the Bank of England suggested a turn to tightening. While rates remain extremely low, 10-year yields in Germany ended the quarter at 0.46%, up from 0.32% at the start of the quarter. We believe the tightening process will remain gradual as inflation remains benign – particularly with oil in the mid-$40s.

Portfolio Strategy

  • The Fund performed in line with the benchmark (before the effects of sales charges) for the quarter, with positive stock selection offsetting negative sector allocations and currency effects. From a geographic standpoint, strong emerging-market performance offset poor performance in the developed world – particularly Japan.
  • Our weighting in automotives and energy detracted to performance for the quarter, though our overweight allocation to internet-related names offset a portion of the underperformance.
  • Short term, given the move in oil and little wage inflation in the U.S. labor market (despite full employment), we expect benign inflation. However, over the medium term, we believe inflation will accelerate and benefit nominal growth.
  • In the quarter, we did not enact significant moves on either a sector or regional basis. With a bifurcated market, we generally sold/trimmed companies that experienced significantly better-than-market appreciation, while adding/building new positions in those that performed poorly.
  • The Fund maintained the forward currency contract (about 5%) to the Australian dollar, as we believe the currency is poised to strengthen. The Fund remains below benchmark weight in Australia as we are finding few attractively valued stocks.

Outlook

  • We believe real economic growth will remain muted longer term, but is in a sweet spot today. We do think tax relief in a number of countries (the U.S., France and Japan) as well as accelerating infrastructure spending globally will help to extend the cycle.
  • 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. That said, the U.S., Europe and the U.K. have clearly indicated they are tightening or have a tightening bias. Long term, virtually all countries are struggling with high levels of debt and we believe they will attempt to keep rates below their own nominal growth in order to monetize the debt. As such, we believe there is a long-term cap on how high rates can go.
  • We think relative valuation remains supportive for international equities, while absolute valuations are less attractive. Equities, outside emerging markets, 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. We believe emergingmarket equities trade at reasonable valuations.
  • Long term, we believe emerging-market countries will try to improve their populations’ standards of living. To accomplish this feat, the countries will require solid real economic growth. Synchronized positive global growth should be good for emerging-market stocks. In most cases, their growth remains ahead of their developed-market counterparts. In the end, we believe maintaining our exposure to developing markets makes sense and believe they have attractive valuations.
  • We continue to seek opportunities that are in line with the Fund’s current investment themes: disproportionate growth of emerging-market consumers; believable and sustainable dividend yield; companies benefiting from mergers and acquisitions; and infrastructure development – including the internet.

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, 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. Class T shares were introduced July 5, 2017.

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.

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Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.