Investment Update


Investment Update - Ivy Mid Cap Growth Fund and Ivy Mid Cap Income Opportunities Fund

Commentary as of May 13, 2020

At Ivy, we've been discussing that the market appears to believe in the unprecedented policy support from the U.S. government. So far, roughly $9 trillion in stimulus has been announced. Over the past month, small- and mid-cap stocks have been performing well, at times outperforming the S&P 500 Index. During this same time period, some business models have done better than the others. The growth side of the market has also performed well. Kim and Nathan, please provide your perspective on the current market environment and if the recent rally is supported by the fundamentals.

Kim: I believe that investors are still risk-averse in the current environment. But as the U.S. economy improves and we gain more information about the coronavirus, we think investors will want to be invested in the market. As such, I believe that domestic companies with better fundamentals are being discounted strongly and are being rewarded with premium valuations.

II-VI Inc. is one example of a holding we added to the portfolio just before the recent downturn. This technology sector company manufactures engineered materials and optoelectronic components. It develops innovative products for diversified applications in the industrial, optical communications, aerospace and defense, life sciences, semiconductor capital equipment, and consumer markets. It also makes components for lasers, which is an exciting area in the industry.

We have been watching this company for a few years. We didn’t own it until recently as its industrial laser business that had been strong was drawing down and it had also been impacted by the U.S./China trade war. Moreover, II-VI’s acquisition of Finisar wasn’t initially well received by the markets. Fortunately, that acquisition has turned out to be strong and lucrative for the company.

We added the company to the portfolio just before the downturn and have continued adding to the position during the market downturn. II-VI reported good earnings results on May 12. These results were supported by strong demand for the company’s products including for lasers, integrated circuits, etc.

In my view, II-VI is a testament to the Fund’s process, where we discover companies, take time to understand their fundamentals and managements, and then patiently wait to find the right time and valuation to add them to the portfolio.

That’s a great example of how Ivy adds value as active investors. We scout for companies then spend time and resources to understand their business models and managements. This process allows us to invest in strong business models that may have resilient end-markets despite the economic environment. This provides a great transition into my next question. In the current lockdown environment, how are you collaborating with company managements?

Kim: Ongoing communication with company managements is very important. While nothing can replace face-to-face meetings, we are doing the next best thing – virtual meetings. All conferences, including the JP Morgan Technology Conference held annually in Boston each May, are being conducted virtually.

The format of these virtual conferences is a very convenient way to interact with company managements. We have fireside chats and small group meetings, where portfolio managers and analysts can ask questions in an easy and comfortable environment. At these virtual conferences, we can proactively reach out to companies we don’t currently own to learn about their business models and managements.

For a few years now, as part of our discovery process, we have also conducted weekly calls with analysts from a few brokerage firms we work with. During these calls, we discuss popular investment ideas as well as stocks we may want to avoid.

So overall, we have been doing calls for many years and this form of collaboration has worked well for us. The recent lockdown has opened up innovative venues to work with company managements around the country.

Nathan, we have discussed that it’s a narrow market being powered and driven by fundamentals. In the mid-cap space, with the backdrop of the recent earnings season, what is your perspective on the market landscape?

Nathan: Across the companies that we watch and own, stock prices are reacting to business fundamentals. We own Tractor Supply Company and Scotts Miracle-Gro in both the portfolios – Ivy Mid Cap Growth and Ivy Mid Cap Income Opportunities. The sales level at both companies has held up well in an environment where overall retail sales have slumped. While sales at Tractor Supply have done well on strong demand for its products, the main retailers for Scotts Miracle-Gro – Walmart, Lowe’s, Home Depot and Menards – have remained open throughout the lockdown, and this has supported company sales. We believe companies with strong fundamentals and resilient end markets are being rewarded in the current environment.

I want to point out two areas, where we have ownership and sales and outlooks have been strong, but investors and managements are worried about the future. These two areas are semiconductors and packaging. Due to the uncertainty prevailing around supply chains, we have seen both of these areas react to the recent crisis by building inventory.

We have discussed this situation and are undecided if the current tailwinds of the 5G network rollout for the semiconductors and the pickup in e-commerce will continue to support sales in packaging. We are evaluating if more clarity on supply chain dynamics will lead to better valuations.

Past performance is no guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through May 13, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information 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.

Ivy Mid Cap Growth Fund - Top 10 holdings (%) as of 03/31/2020: CoStar Group, Inc. 3.7, Electronic Arts, Inc. 3.6, Chipotle Mexican Grill, Inc. 3.0, Tractor Supply Co. 2.9, DexCom, Inc. 2.9, MarketAxess Holdings, Inc. 2.8, Teradyne, Inc. 2.5, Fastenal Co. 2.5, TransUnion 2.4 and Monolithic Power Systems, Inc. 2.4.

Ivy Mid Cap Income Opportunities Fund - Top 10 holdings (%) as of 03/31/2020: RPM International 3.4, L3Harris Technologies. Inc. 3.4, Maxim Integrated Products, Inc. 3.4, Ares Management Corp. 3.4, Hasbro, Inc. 3.4, Glacier Bancorp, Inc. 3.3, Encompass Health Corp. 3.3, Garmin Ltd. 3.3, Scotts Miracle-Gro Co. 3.2 and Avery Dennison Corp. 3.2.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.

All information is based on Class I shares. Class I shares are only available to certain investors.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Ivy Mid Cap Growth Fund: Investing in mid-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. Ivy Mid Cap Income Opportunities Fund: Investing in mid-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund typically holds a limited number of stocks (generally 35 to 50). As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a large number of securities.

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.

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.