Ivy Natural Resources Fund

Ivy Natural Resources Fund
03.31.19

Market Sector Update

  • Global equity markets posted positive returns on the broad indexes. The energy and materials sectors also posted positive returns during the quarter, with energy outperforming and materials underperforming the broader equity market.
  • Crude oil prices rebounded significantly higher in the quarter. West Texas Intermediate, the U.S. benchmark, was up about 30% and Brent, the global benchmark, was up slightly more. The OPEC supply reduction announced in December 2018 provided a positive stimulus for the oil market. OPEC’s policy change was in response to waivers granted by the U.S. that allowed Iran to continue exporting oil to approved nations. As a result of the decreased supply from OPEC, global oil inventories declined in the quarter.
  • The U.S. continued to grow oil production in the quarter, even as the rig count declined slightly. Lower rig count was driven by lower oil prices in the prior quarter as well as lower capital expenditures as producers aimed to generate more free cash flow.
  • Other commodity prices moved higher in the quarter; iron ore prices were up more than 20% and copper prices were up more than 10%. Supply disruptions in iron ore were the primary driver of the move higher.

Portfolio Strategy

  • The Fund posted a positive return for the quarter (based on Class I shares), but underperformed the return of its benchmark index. It outperformed its Morningstar category average.
  • The five greatest equity contributors to the Fund’s performance relative to its benchmark index were Rio Tinto plc, ConocoPhillips, BHP Group plc, Occidental Petroleum and Newmont Mining.
  • The five greatest detractors to relative performance were Centennial Resource Development, Inc., Kinder Morgan, Inc., Williams Companies, Inc., TransCanada Corp. and International Flavors & Fragrances, Inc.
  • The Fund’s exposure to the energy sector increased slightly from the prior quarter, ending at about 66% of equity assets, mostly due to appreciation. The remaining sector exposure was in materials and industrials.
  • In general, we seek to own companies in the Fund with low-cost positions, strong balance sheets and the ability to grow profitably with high returns on capital. We also seek to own companies exposed to favorable trends in their respective commodities and sub-sectors.

Outlook

  • We expect the oil market price rebalancing that occurred in the quarter to continue, with OPEC expected to maintain production cuts into the summer. U.S. production growth is expected to decelerate but still grow in excess of 1 million barrels per day in 2019. U.S. supply growth is expected to be roughly in-line with global oil demand.
  • U.S. rig count, after declining in the quarter, is likely to remain flat as producers show spending discipline even with higher oil prices. Exploration and production companies are seeing more pressure from investors to be more prudent in allocating capital in order to generate better investor returns. This discipline could be tested in the second half of 2019 if oil prices remain in the current range or higher.
  • Energy equities have lagged the appreciation in oil prices this year, but we think that gap will be reduced throughout the year as equities gain back some ground versus the commodity.

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 equity holdings as a percent of net assets as of 03/31/2019: Chevron Corp., 5.68%; Halliburton Co., 5.20%; Phillips 66, 4.45%; Concho Resources, Inc., 4.34%; BHP Group PLC, 4.34%; Rio Tinto PLC, 4.30%; EOG Resources, Inc., 4.22%; Marathon Petroleum Corp., 3.68%; Valero Energy Corp., 3.55%; Diamondback Energy, Inc., 3.25%.

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 companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. 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 natural resources can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments; and the cost assumed by natural resource companies in complying with environmental and safety regulations. Investing in physical commodities, such as gold, exposes the Fund to other risk considerations such as potentially severe price fluctuations over short periods of time. The Fund may use a range of derivative instruments in seeking to hedge market risk on equity securities, increase exposure to specific sectors or companies, and manage exposure to various foreign currencies and precious metals. Such hedging involves additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. These and other risks are more fully described in the prospectus. Not all funds or fund classes may be offered at all broker/ dealers.