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3.02.21
Invest in the future: Health care in emerging markets
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Our Company
Ivy Investments
We stand for a legacy of expertise, focused on delivering strong, long-term results. Our name reflects our progressive product offerings and growing global presence as we continue to adapt to the needs of investors.
Quarterly Commentary
Ivy Mid Cap Growth Fund
12.31.20
Market Sector Update
The Russell Midcap Growth Index (Fund’s benchmark) was up 19.0% for the quarter, capping off a wild 2020 with a
total index return for the year of 35.6%. Let’s not forget the first quarter of 2020 saw a -20.0% return for the index, so
the recovery rally in the second, third and fourth quarters was certainly significant. All sectors, except consumer
staples, posted positive gains in the fourth quarter, as the broad rally continued. For the year, energy was the only
sector in the index with negative performance, signaling broader demand issues from the COVID-19 shutdown as well
as the scaling up of electric vehicle substitutes into the mainstream. The quarter saw the third wave of COVID-19 hit
globally, a hotly contested U.S. presidential election and two vaccine candidates come to market in record time. With
such dramatic macro variables to digest, the market didn’t seem to experience any lasting mood changes. The path of
least resistance continued to be up, so any positive news helped push the market higher, while negative news only
served to pause the climb for short periods. The quarter continued the trend of lower levered, higher margin, faster
growing, more expensive stocks in the index continuing to outperform. While there were a couple of notable
performance head fakes from more cyclical names, no meaningful change in trend emerged.
Portfolio Strategy
The Fund outperformed its benchmark for the quarter. All sectors where we had exposure were additive to
performance relative to the benchmark for the quarter aside from health care and communication services. Stock
selection was the most significant contributor to outperformance. This is the focus of the strategy – buying profitable
companies with durable business models for the long term – so we are always pleased with strong, additive stock
selection. Sector allocation weights detracted slightly to the outperformance. Information technology was again the
largest allocation and the strongest relative contributor within the portfolio. As the sector outperformed within the
broad index, our underweight position detracted to relative outperformance while our stock selection more than offset
the underweight as the strongest returns to the portfolio. Off-benchmark position II-VI Inc. led all contributors as the
company posted a solid earnings per share beat with a strong market leadership position in the growing optical
components market. Sizable overweight position Teradyne posted a strong return after shrugging off the absence of
Huawei demand. An overweight position in Twilio and sector holding Square, Inc. posted strong gains, outpacing the
broader index as well as the overall sector. Health care, the Fund’s second largest sector allocation, was a significant
detractor for the quarter. While our slight underweight position helped incrementally, stock selection was the main drag
on performance. DexCom, Inc. came under pressure with pricing and competitor concerns. The company experienced
a negative return in the quarter while the broader sector was positive. Of the 17 health care holdings within the Fund,
all but four had positive returns. However, only four of the 17 Fund holdings outperformed the index. This resulted in
an overall detraction from relative performance for the quarter. Industrials, our largest sector overweight position,
detracted from performance, but was more than offset by stock selection. This resulted in an overall positive
contribution for the quarter. CoStar Group, Inc. posted positive returns, though underperformed relative to both the
industrials sector and broad index. Off benchmark holding Middleby Corp. more than made up for the relative
underperformance of CoStar, posting a positive return. Middleby, a designer and manufacturer of foodservice
equipment, benefitted from positive vaccine news, which provided restaurants using its products a glimmer of hope.
Consumer discretionary was a positive to the portfolio, with strong stock selection outweighing the slight negative
relative contribution of the overweight to the sector. Nordstrom, Inc. finally caught a significant rebound bid post the
initial pandemic drawdown, returning triple digits on the quarter. Ulta Beauty, Inc. also had a positive return as news of
a vaccine surged through some of the under loved, yet durable business models in the market. An overweight
exposure to financials had a small negative contribution to relative performance. Stock selection, however, more than
offset the negative allocation effect. The benchmark is comprised of 23 small allocations in this sector, yet our
exposure comes from two off-benchmark holdings and one significant overweight position. Off-benchmark holdings SVB Financial Group and First Republic Bank had positive returns, with both announcing better-than-expected
earnings in the middle of the quarter, in addition to the re-opening potential of the vaccine announcement. An
overweight position in MarketAxess Holdings Inc. returned double digits for the quarter, outpacing the overall sector
but underperforming the broader index. Communication services was again the largest relative detractor for the
quarter, more based on what we didn’t own relative to the index than what we did. Materials, cash and equity options
were also small detractors on the quarter. Our small underweight position to consumer staples was a positive
contributor on the quarter and we continue to have no exposure to real estate, utilities or energy sectors, which netted
no effect on overall relative performance.
Outlook
Outlooks are point-in-time assessments, a look at the future today, and as has been made abundantly clear over the
past year, they exist to be challenged, rethought and rewritten. Still, outlooks are a useful tool for organizing thoughts,
communicating expectations, and forcing a framework for actions should any need be taken. The abiding principles of
our outlook in all that we do all year, every year, and not just at the beginning of the year, are that “well-valued stocks
of companies with growing streams of cash flow derived from innovation and strong management execution are key
to wealth creation,” “markets go up more than they go down,” and, outside of stock picking, “the outlook that matters
most is the one that figures out when the broad corporate profit cycle is determinedly inflecting into or out of a
recession.” We witnessed a serious pandemic-wrought corporate profit recession in 2020, one that few would have
predicted as it was swiftly and steeply discounted by gob-smacked investors. The recovery, also not well predicted,
was almost as swiftly and steeply discounted to a market upside that has broken records, seemingly indicating
economic growth and prosperity beyond previous expectations as world economies emerge and heal from the impact
of the pandemic, but also carried along by government stimulus and interest rate maneuvering. At the same time,
impressive innovation in life sciences, business and consumer technology, green energy, and many other areas has
captured the imagination of professional and retail investors alike, driving the valuations of many companies to
dizzying levels. So where does this leave us? We offer a series of predictions: 1) World economies will continue to
recover and grow as vaccine distributions allow them to emerge from the pandemic lockdowns. 2) The strength of the
recovery is overestimated as the underlying economic damage may be deeper than we appreciate. 3) This will be a
year where the market takes a breather to digest the spectacular gains and sturdy valuations achieved over the last
half of 2020. 4) Return compositions will be such that some stocks perform quite well as many companies regain
earnings power in a broad economic recovery, while stocks of companies that over earned during the pandemic
struggle to appreciate further or even give up some value. 5) Many technology and health care companies will
experience a soft spot in demand in 2021 after a surprisingly robust 2020. Stock valuations could be at risk as a result.
6) Inflation and interest rate expectations will be too low as a result of persistent supply chain disruptions related to
the lockdowns and to a strong generational demand for housing in an under-inventoried market. 7) The Federal
Reserve will continue to be supportive, but could possibly lag in its response to demand, inflation and interest rate
pressures. While stock picking is always key to our process and performance, it will be paramount in this environment
as we seek to manage valuation risk in the portfolio, while investing in durable growers, both secularly and cyclically.
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,
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.
Top 10 holdings as a % of net assets as of 12/31/2020: CoStar Group, Inc. 3.4, Chipotle Mexican Grill, Inc. 3.3, MarketAxess Holdings, Inc. 2.9, Twilio, Inc. 2.8, Electronic Arts, Inc. 2.7, Monolithic Power Systems, Inc. 2.7,
Teradyne, Inc. 2.5, DocuSign, Inc. 2.5, DexCom, Inc. 2.3 and Fastenal Co. 2.2.
The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.
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. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more well-established
companies. 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.
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Ivy offers model delivery for nine equity strategies
Nine strategies are available in a model-delivery format, to be available in SMA and UMA accounts, providing advisors and investors a new way to access Ivy’s strategies.
Ivy InvestEdSM 529 Plan
A flexible, tax-advantaged 529 plan that allows you to invest for future education goals.
Invest in the future: Health care in emerging markets
Investors commonly see emerging markets as an asset class that requires market timing. That it comes in and out of fashion like turtlenecks and corduroys – just a short-term fad. However, don’t look for reasons this latest investment trend will soon end up in the donation pile.
Ride the cycle
The global economy stands at the dawn of a new business cycle. We outline the implications for investors.
The beginning of a new cycle
We assess the current environment and offer 2021 market observations and the possible implications for investors.
The Pandemic Time Capsule
How Covid-19 Impacts Every Generation and What This Means for a Plan Forward
Raising financially smart kids
Passing on life lessons from generation to generation is important, especially when it comes to topics like money. Discover strategies to raising financially smart kids.
Three plans every Gen Xer needs to consider before they turn 50
Xers - hitting the big 5-0 is a big milestone. Uncover the three essential plans you may want to consider to protect your family and yourself.
Ivy Investments
We stand for a legacy of expertise, focused on delivering strong, long-term results. Our name reflects our progressive product offerings and growing global presence as we continue to adapt to the needs of investors.
Quarterly Commentary
Ivy Mid Cap Growth Fund
Market Sector Update
Portfolio Strategy
Outlook
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, 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.
Top 10 holdings as a % of net assets as of 12/31/2020: CoStar Group, Inc. 3.4, Chipotle Mexican Grill, Inc. 3.3, MarketAxess Holdings, Inc. 2.9, Twilio, Inc. 2.8, Electronic Arts, Inc. 2.7, Monolithic Power Systems, Inc. 2.7, Teradyne, Inc. 2.5, DocuSign, Inc. 2.5, DexCom, Inc. 2.3 and Fastenal Co. 2.2.
The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.
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. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more well-established companies. 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.