Ivy International Small Cap Fund

03.31.20

Market Sector Update

  • International small-cap equities experienced an extremly negative return during the first quarter, following a strong positive return during the fourth quarter. Equity markets globally were extremely weak over the first quarter, driven by increasing concerns about the COVID-19 pandemic which has grown at a very rapid rate. The epicenter of the pandemic moved from China and Asia early in the first quarter, to Europe toward the middle of the quarter, and then to North America. Successive governments have responded by shutting down vast parts of their economies in an effort to slow the rapid spread of the virus. Equity markets have taken fright at the scale of the forecasted economic weakness, which has resulted in massive job losses globally and the closure of many businesses. As a result, a lot of companies have announced massive cancellations and/or cuts to dividends as well as withdrawing their forecasts for 2020 earnings.
  • All sectors were negative for the quarter with the worst performing sectors being energy, consumer discretionary, utilities and financials.

Portfolio Strategy

  • The Fund produced negative performance but outperformed its benchmark for the period. At the country level, stock selection in France, Ireland and the U.K. were the top contributors to relative performance, while stock selection in Belgium, Germany and Japan were the top detractors to relative performance.
  • Top relative individual contributors to performance for the period included Arteria Networks, a Japan-based telecommunications company; Kobe Bussan, a Japan-based discount grocery store chain and SG Holdings, a Japanbased delivery and logistics company.
  • Top relative individual detractors to performance for the period included Ardent Leisure Group, an Australian-based hotel and leisure company; National Express Group, a U.K.-based public transportation company; and Sixt Fe, a Germany-based rental car company.
  • Portfolio changes within the Asia-Pacific region over the quarter included the addition of Australian gold miner Evolution Mining, which has very competitive production costs and a disciplined management team that we feel excels at acquiring, developing and disposing of gold mining assets to generate shareholder value. While we added this position to the portfolio before COVID-19 emerged as a threat to global growth, we continue to like gold given our view that interest rates should remain low and fiscal deficits should remain high for the foreseeable future. Within Japan, the portfolio added a position in Sansan, the largest cloud-based customer relationship management (CRM) in the country. Capcom, a Japanese video game developer, was also added as we think the company will benefit from its strong catalog of hit game titles which may draw new, long-term fans during periods of COVID-19 related social distancing. The Fund’s position in BOC Aviation, an aircraft lessor, was sold in mid-January as we felt valuation no longer justified owning the position.
  • Portfolio changes in Europe over the quarter included the initiation of a position in Cranswick, a U.K.-based vertically integrated pork and poultry processor. We believe the company has a strong reputation for both quality and innovation, making it a supplier of choice for the large U.K. retailers who primarily use the company to produce in their private label offering. The firm has been a strong beneficiary of the current lock-down arrangements in the U.K., as it boosts at home consumption. Cranswick is also the U.K.’s primary exporter of pork, making it a prime beneficiary of increased Chinese demand, driven by a sharp reduction in domestic supply due to African Swine Flu. The group also have a nascent but high potential opportunity in U.K. poultry, which could be a significant contributor to earnings in time if it can emulate the success it has achieved in the pork segment.
  • We also added Patrizia AG, a German-based real estate company, whose market valuation we believe fails to reflect the geographical and segmental diversity of the group’s income stream or the fact its business model has gradually transitioned from that of an asset heavy to a more capital light operation where over 50% of earnings are generated from recurring asset management fees.

Outlook

  • Our current outlook is set against the backdrop of a likely significant decline in economic growth and corporate profits over the next few months in particular due largely to the COVID-19 pandemic and numerous countries largely closing down their economies. As a result, we expect fiscal and monetary policy to remain highly accommodative in all the geographies in which we invest. We believe developed economies are relatively better positioned to provide aggressive fiscal and monetary stimulus to support their economies as unemployment rises, while this is not the case for many emerging economies.

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 March 31, 2020, 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 03/31/2020: ARTERIA Networks Corp. 2.6%, Uniphar plc 2.6%, Kobe Bussan Co. Ltd. 2.3%, Future plc 2.2%, SCSK Corp. 2.2%, Matsumotokiyoshi Holdings Co. Ltd. 2.2%, Logitech International S.A., Registered Shares 2.2%, Rubis Group 2.1%, SG Holdings Co. Ltd. 2.0% and Alstom 2.0%.

All information is based on Class I shares.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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.