Ivy Mid Cap Income Opportunities

Ivy Mid Cap Income Opportunities Fund

Market Sector Update

  • The stock market roared into 2019 recovering much of the loss it experienced in fourth quarter 2018. The three biggest concerns driving investor consternation in 2018 have all seemingly accrued to the more bullish side.
  • Interest rates reversed course and contracted in the quarter as the Federal Reserve (Fed) moved its forecast to no rate hikes for 2019 and slowed the pace of balance sheet run-off. Trade talks appeared to have shown some promise of resolution over the coming months, decreasing the likelihood of burdensome tariffs. Finally, the deceleration of economic growth and earnings growth do not appear to be worse than forecasted, allowing for more confidence in the macroeconomic outlook.
  • In quarter, the Russell Midcap Index, the Fund’s benchmark, increased 16.53%. All sectors posted positive returns, but only four sectors bested the overall index with information technology and energy as the positive standouts. Health care and industrials rounded out the list of outperforming sectors.
  • The worst performing sectors in the quarter were communications services, consumer staples, utilities, financials and materials. Consumer discretionary and real estate slightly underperformed the benchmark. In the quarter, there was a decisive preference for the fastest growing and most expensive stocks in the market given the sizeable outperformance on these two metrics.
  • Higher dividend yielding stocks were out of favor during the quarter. Those stocks with a dividend yield of greater than 3.3% underperformed the benchmark. In fact, the only outperformance came from either the non-dividend payers or those with less than a 1.1% yield. Long term interest rates declined, ending the quarter at 2.5% on 10-Year US Treasuries.

Portfolio Strategy

  • In the quarter, the Fund had a positive double-digit return but underperformed its benchmark. Sector allocation was negative. Half of the variance was attributed to a cash position as the Fund experienced strong inflows into a market that was increasing steadily. The Fund’s underweight position in information technology and overweight position in materials also acted as headwinds to performance.
  • Stock selection was a considerable headwind during the quarter with underperformance across most sectors. A significant driver of this underperformance was based on the philosophy and process of the Fund juxtaposed to the areas of the market that saw the most significant gains during the quarter. We are generally not exposed to the fastest growing companies in the market and our dividend yield and dividend growth focus keeps us concentrated on valuations, which all acted as significant headwinds in the quarter.
  • The worst relative performance occurred in information technology as no exposure to software names proved to be an opportunity cost to performance. A difficult quarter for National Instruments and difficult quarterly comparisons for Broadridge in its proxy business also hurt relative performance. While producing positive performance, the Fund’s exposure to more moderate growth semiconductor companies also hurt relative performance.
  • Performance by health care closely matched the underperformance of information technology. No exposure to the non-dividend or very low yield paying subsectors of biotechnology and life science tools and services was a headwind to performance as both of those groups significantly outperformed.
  • The industrials sector was also an area of poor stock selection during the quarter. All of our stocks produced positive returns in the period, but two holdings struggled.


  • Since the inception of the Fund, we continue to watch several key variables to determine positioning. These variables (domestic economic growth, change in interest rates, change in commodity prices and foreign economic growth) have remained consistent and continue to be monitored.
  • Our outlook for domestic economic growth has remained consistent since the start of 2019. We believe we will see a slower growth environment in 2019 versus 2018, but still expect it to be broadly positive, which should provide nice earnings growth for companies. While the clouds of consternation at the end of 2018 have seemingly dissipated, there are always potential new ones that can emerge; however, we feel first quarter 2019 should mark the low point in growth with acceleration for the remaining quarters of the year.
  • We had been concerned about increasing interest rates and the unintended consequences that could arise given how low and for how long rates had remained depressed. It appears the Fed has kicked the can down the road for “normalizing” the environment and thereby removing what we felt was one of the biggest risks to this cycle given the likely unnatural things that have occurred in the market due to the extended period of low rates. With this risk removed over the near-term, it should be more constructive for the market. We feel the Fund can offer a competitive income component relative to the fixed-income markets while providing the potential for income growth and better capital appreciation.
  • We expect that the moderating inflationary pressures driven by commodity prices has the opportunity to surprise the market over the next six months. Many companies push through pricing with a lag relative to their costs increasing. Over the past 18 months, companies have been combating ever increasing raw materials pricing. Over the next two quarter, we would expect pricing to have caught up to cost inflation, providing margin expansion opportunities for those companies that have pricing power. We also expect this to most directly benefit those heavy users of steel, materials, and freight as all have seen recent deflation. Oil prices increased during the quarter and bears watching, but we expect this increase to be manageable for those companies. Tariffs remain a potential wildcard, but the likelihood of implementation has significantly decreased over the past six months.
  • Much is still unknown across the globe. It appears China has been attempting to stimulate its economy and we expect this will produce accelerating growth over the coming months. As this occurs, it should have follow-on impacts in both Europe and Latin America. Brexit remains a potential risk event, but as the stakes are so high, we continue to expect a moderate outcome versus a more extreme exit. With the near-term removal of higher interest rates given actions by the Fed, it appears the U.S. is still the most stable of the global economies to invest in; however, we do expect global growth acceleration to closely match the likely acceleration in the U.S. economy throughout the year.

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 March 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.

Top 10 holdings (%) as of 03/31/2019: Garmin Ltd. 3.1, Cinemark Holdings, Inc. 3.0, Quest Diagnostic, Inc. 3.0, First American Financial 2.9, American Campus Community 2.9, Glacier Bancorp, Inc. 2.9, Broadridge Financial Solutions 2.9, Packing Corp of America 2.9, Umpqua Holdings Corp. 2.9 and Microchip Technology, Inc. 2.9.

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It is not possible to invest directly in an index. Commentary 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. 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. 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. 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.