Ivy Large Cap Growth Fund

Ivy Large Cap Growth Fund
12.31.18

Market Sector Update

  • Fourth quarter performance for equities reversed course on what were strong year-to-date returns for market indices. Equities across all capitalization ranges and styles saw significant declines in the quarter. Growth styles underperformed value styles while large caps outperformed mid and small caps. The Russell 1000 Growth Index, the Fund’s benchmark, declined nearly 16% in the quarter.
  • The reasons for the increased volatility were plentiful and included: a temporary trade truce that was anything but clear; weakening U.S. economic data (soft housing and manufacturing data); weakening growth in the eurozone and continued weakness in China; Brexit risk moved back to a boil; a government shutdown on a border wall impasse; President Donald Trump’s attacks on the sitting Federal Reserve (Fed) chairman; and tightening financial conditions punctuated by belief that the Fed’s December rate hike was a policy mistake.
  • There were no sectors in the index that ended the quarter in positive territory. More defensive sectors, such as real estate and consumer staples outperformed, while energy, information technology and communication services struggled on a relative basis.
  • Safety, stability and quality factors, such as dividend yield and return on investment, outperformed risk and momentum factors, such as beta and relative strength. This is an expected rotation given the fears around economic growth.

Portfolio Strategy

  • The Fund outperformed the benchmark return during the period and further strengthened year-to-date relative outperformance (based on Class I shares). The relative outperformance during the quarter was driven by stock selection in information technology, financials and health care. The consumer discretionary and consumer staples sectors were relative drags on performance.
  • Information technology provided positive attribution as the Fund held underweight positions to several poor performers in the sector, such as Apple, Inc. and NVIDIA. The Fund also benefited from overweight exposure to payment stocks, Visa and PayPal.
  • The financials sector was a strong contributor to relative outperformance. CME Group, a significant overweight position, benefited from the increase in volatility during the quarter.
  • Performance in the quarter benefited from stock selection in health care. The sector historically has been viewed as more resilient during periods of slowing economic growth. Stocks in the portfolio, such as Pfizer, Zoetis and Danaher benefited from this rotation, but also have been posting strong fundamentals.
  • Stock selection in consumer discretionary was a detractor of performance. Investors who were worried about slowing U.S. growth sold consumer exposure, which negatively impacted the portfolio’s overweight exposure in VF Corp. Underweights in Tesla and Starbucks, both with stock-specific fundamental news that moved shares higher, also negatively impacted performance.
  • The consumer staples sector was another notable detractor to performance due to an underweight position versus the benchmark. This sector is typically viewed as more stable and thus defensive during periods of economic stress.

Outlook

  • Anxiety is high in the markets and we expect this to remain as investors bounce between freely optimistic about, albeit slower, U.S. economic growth in 2.0%-2.5% range for 2019, while also being cognizant that the cycle is growing gray.
  • Although the Fed should have held off, it is unlikely that the December interest rate hike was as disastrous as the market indicated. Financial conditions are tightening not due to the December hike alone but due to the other eight hikes put in place over the past several years. That move to neutral policy has already defined the course for 2019, which is likely further deceleration.
  • Although excesses are difficult to unearth prior to their reveal, it appears that the obvious concerns – consumer debt, surplus inventories, corporate debt, excess business investment – just aren’t in place this cycle. The implication could be a growth deceleration with no recession or a shallow recession looming on the horizon.
  • The trade war remains a wild card as it is putting a dent in business and consumer confidence. There is no reason for this trajectory to change, which bodes poorly for the durability of economic growth. The exception would be a reaction from the Trump Administration to the softening economic growth in the form of more progress on a trade war resolution.
  • Barring a full-on economic recession, the current modest growth environment remains supportive of durable, longterm growers. A slowdown in growth will narrow investors focus on stocks with strong growth characteristics, hopefully driving continued outperformance for growth styles.
  • During periods of volatility, growth stocks with durable, sustainable competitive position will present themselves as opportunities for long-term investors. We intend to build positions in these growers as the market throws them out with the bath water.

The opinions expressed are those of the Fund’s manager 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, 2018, 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.

Top 10 holdings (%) as of 12/31/2018: Microsoft Corp. 8.0, Amazon.com, Inc. 5.6, Apple, Inc. 4.6, Alphabet, Inc. 4.4, Visa, Inc. 4.4, CME Group, Inc. 4.3, MasterCard, Inc. 4.2, Verisk Analytics, Inc. 3.2, UnitedHealth Group, Inc. 3.1 and Adobe, Inc. 3.0.

Co-portfolio Manager Daniel P. Becker, CFA, left the firm effective April 12, 2018.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with greater diversification. 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. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.