Ivy International Small Cap Fund


Market Sector Update

  • International small-cap equities delivered a slight negative return during the quarter, following a strong first half in 2019. The quarter was quite volatile, with broad equity market weakness into mid-August as economic data continued to deteriorate, particularly in Germany and China. September saw a recovery in markets but just enough to recover from August weakness, leaving international equities at a similar level to where they started the quarter.
  • European Central Bank (ECB) President Mario Draghi announced further monetary policy measures, but placed great emphasis on the need for fiscal action from eurozone governments to revive growth and inflation. All eyes will be on the incoming ECB President Christine Lagarde and whether she can garner political support for such fiscal measures, which to date has been lacking in the eurozone.
  • Despite a change of leadership, the political situation in the U.K. remains in turmoil, with the potential for a no-deal Brexit at October’s end. Elsewhere, at a country level, Japan outperformed over the quarter while the Hong Kong market underperformed against the backdrop of ongoing social unrest.
  • The strongest performing sectors for the period were real estate, information technology and consumer staples, while health care, consumer discretionary and energy underperformed. Oil markets were significantly weaker over the quarter with Brent crude falling by 8.7%. Bond yields moved lower with the U.S. 10-year Treasury yield approaching 1.6%, while the benchmark German 10-year bund yield marked new lows, ending the quarter at -0.57%.

Portfolio Strategy

  • The Fund produced positive performance and outperformed its benchmark for the period. At the country level, stock selection in Japan, the Netherlands and Australia contributed to relative performance, while stock selection in Ireland and Belgium detracted from relative performance.
  • Top relative individual contributors to performance for the period included ASM International N.V., a Netherlandsbased IT company; Matsumotokiyoshi Holdings Co. Ltd., a Japanese-based consumer staples company; and Future plc, a U.K.-based media company. Top relative individual detractors to performance for the period included Macromill Inc., a Japanese-based marketing research company; Qiagen N.V., a German-based health care company; and Coats Group plc, a U.K.-based textiles apparel company.
  • Portfolio changes within the Asia-Pacific region over the quarter saw the re-addition of NGK SparkPlug Co. Ltd., a stock previously held by the Fund. With signs of an improvement in the auto cycle in several key geographies, we believe NGK’s valuation is attractive as well as its growth prospects within spark plugs, sensors and battery technology. We believe strong free cash flow generation should enable a greater level of shareholder returns. The funding of NGK was enabled by the sale of our long-held Australian gold miner, Evolution Mining Ltd., where we feel the valuation relative to spot gold prices could no longer be justified.
  • Within Europe, we initiated a position in Avast plc, a cyber security software company. We believe this is an underappreciated growth business which provides security solutions for both consumer and business customers.
  • We also added Uniphar plc, a health care services business. We believe the stock trades a substantial discount relative to peers and has a relatively high return on capital employed.


  • Equity markets will likely remain volatile against a challenging political and economic backdrop of Brexit, trade war and U.S. presidential impeachment concerns as well as social unrest in Hong Kong. With economic data on the manufacturing side weakening, all attention will be on third quarter corporate results and company guidance as investors will have an opportunity to gauge the real impact of how corporates are navigating the current environment.
  • In general, Japanese consumer stocks have been weak this year in anticipation of the consumer tax increase slated for October. This will mark the final scheduled consumption tax increase by Prime Minister Shinzo Abe’s government. After the take hike, we believe these stocks are likely to outperform.
  • We believe U.S.-China trade negotiations will be a key determinant of equity market performance for the remainder of the year. The nascent U.S. presidential impeachment inquiry could further complicate negotiations. Meanwhile, despite a steady three months of improving U.S. economic data through the end of September, U.S. manufacturing was a major negative surprise and we believe raises the risk of a recession in 2020.

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 Sept. 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 09/30/2019: Rubis Group 2.2%, Matsumotokiyoshi Holdings Co. Ltd. 2.2%, Teleperformance SE 2.1%, SCSK Corp. 2.1%, TechnoPro Holdings, Inc. 2.1%, DISCO Corp. 2.1%, Future plc 2.1%, Logitech International S.A., Registered Shares 2.0%, Alstom 2.0% and Kenedix Office Investment Corp. 1.9%.

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.