Ivy International Small Cap Fund

12.31.19

Market Sector Update

  • International small-cap equities delivered a strong positive return during the quarter. Equity market performance was driven by increasing optimism on U.S.-China trade, which culminated in an agreement on Phase 1 of the trade deal in late December. The U.K. election results were well received by the market, giving the ruling Conservative party a clear exit mandate and thereby removing some of the uncertainty tied to Brexit. However, negotiations on the future trading relationship with the European Union are likely to result in further volatility through 2020.
  • Christine Lagarde commenced her eight-year term as the president of the European Central Bank (ECB) during the quarter and has maintained the dovish rhetoric of her predecessor Mario Draghi. She has also been using her platform to push for a concerted fiscal stimulus in the euro area, which she believes would help speed up growth in the region. Achieving consensus on any such package is likely to be a challenging and lengthy process.
  • All sectors were positive for the quarter with the strongest performing sectors being information technology, consumer discretionary and industrials.

Portfolio Strategy

  • The Fund produced positive performance but underperformed its benchmark for the period. At the country level, stock selection in Australia, the U.K. and Ireland contributed to relative performance, while stock selection in Germany, Spain and France detracted from relative performance.
  • Top relative individual contributors to performance for the period included Games Workshop Group plc, a U.K.-based game and leisure products company; Kobe Bussan Co. Ltd., a Japan-based discount grocery store chain; and Future plc, a U.K.-based media company.
  • Top relative individual detractors to performance for the period included OSG Corp., a Japan-based machine-tool maker; SG Holdings Co. Ltd., a Japan-based delivery and logistics company; Sensyne Health plc, a U.K. health care company; and Almirall S.A., a Spanish-based health care company.
  • Portfolio changes within the Asia-Pacific region over the quarter included the addition of Japan karaoke equipment and venue operator Daiichikosho Co. Ltd. We like the company for its strong incumbent position in the karaoke industry with high barriers to entry. The company recently launched a new range of products which has been well received, and we believe the potential growth is not reflected in its valuation. In Hong Kong, HKBN Ltd., a provider of fixed broadband internet, was also added. We believe HKBN can continue to take market share from larger incumbents, particularly within the commercial market segment. We believe the stock provides a very attractive dividend and we look favorably on the incentives in place for management and employees to increase shareholder value. The Fund’s position in Taiyo Nippon Sanso Corp. was sold after a period of strong performance. We felt the company’s valuation left little room for outperformance.
  • Portfolio changes in Europe over the quarter included the initiation of a position in Breedon Group plc, the largest independent construction materials producer in the U.K. and Ireland. The company has displayed strong operational delivery over the last three years, despite a difficult market backdrop. With some of the uncertainty regarding Brexit removed, we believe corporations should be increasingly willing to increase capital investment, while the U.K. government’s commitment to substantially increase infrastructure spending may also be a tailwind for Breedon. In addition to organic progression, the group also has a robust balance sheet and a strong track record in mergers and acquisitions, leaving it well positioned to continue the consolidation of the U.K. aggregates market in our view.
  • We also added CD Projekt S.A., a video game developer and publisher, which we feel is well positioned to benefit from the continued secular growth of video gaming through strong franchises. Furthermore, we believe the market substantially underappreciates the potential unit sales of the upcoming release of CyberPunk 2077, and we also believe the market is conservative on the benefit from increased digital penetration.

Outlook

  • With the outcome of U.S.-China trade negotiations now largely known and discounted by markets, we look for macroeconomic data to improve as lower long-term interest rates and sentiment feed through to economic activity. However, given the strong performance of equity markets to this point, we see upside and downside risks over the near term as balanced.

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, 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 12/31/2019: Rubis Group 2.4%, Logitech International S.A., Registered Shares 2.3%, Future plc 2.3%, Teleperformance SE 2.1%, ARTERIA Networks Corp. 2.0%, TechnoPro Holdings, Inc. 2.0%, SCSK Corp. 1.9%, Manulife U.S. REIT 1.9%, Sixt SE 1.9% and Games Workshop Group plc 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.