Ivy Natural Resources Fund

Ivy Natural Resources Fund
09.30.18

Market Sector Update

  • Global equity markets posted positive returns on the broad indexes, with U.S. equity markets again leading the way. The energy and materials sectors were roughly flat during the quarter and underperformed the broader equity market.
  • The U.S. dollar maintained its strength versus most world currencies. Steady growth in the U.S. economy continued to support the dollar.
  • Global trade and economic activity continued to be strong. Markets generally shrugged off the growing trade tensions between the U.S. and China despite additional tariffs between the two countries. The Trump administration completed a revamp of the North American Free Trade Agreement with Mexico and Canada – named the U.S.-Mexico- Canada Agreement – but trade talks with China did not make similar progress.
  • There was some divergence in domestic and international crude oil prices, with Brent oil moving up 4% and West Texas Intermediate moving down 1%.
  • World oil supply was very dynamic in the quarter as supply from Iran and Venezuela continued to decline. Iran is facing a resumption of sanctions in November, causing consumers of oil to begin reducing their receipt of Iranian oil prior to this date. Supply from Venezuela is being challenged by economic conditions and lack of investment in oil fields there.
  • Investment in U.S. oil supply has flattened out because of limited pipeline infrastructure in the Permian Basin in Texas. Despite the slowdown, the U.S. is adding the most incremental barrels to the global oil market. Due to these infrastructure challenges, however, U.S. oil prices remain well below international oil prices.

Portfolio Strategy

  • The Fund posted a positive return for the quarter (based on Class I shares) and outperformed the negative return of its benchmark index.
  • The five greatest equity contributors to the Fund’s performance relative to its benchmark index were Union Pacific Corp., Canadian Pacific Railway Limited, WPX Energy, Inc., Centennial Resource Development, Inc. and Ingevity Corp.
  • The five greatest detractors to relative performance were ConocoPhillips, Exxon Mobil Corp., Halliburton Company, West Fraser Timber Co. and Andeavor.
  • The Fund’s exposure to the energy sector moved higher from the prior quarter, ending at about 66% of equity assets. The remaining sector exposure was composed of materials, industrials and consumer staples.
  • 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. With the increase in oil prices, energy companies are rising in our quality rankings.

Outlook

  • We expect U.S. oil production will continue ramping higher and lead the U.S. to have the strongest supply growth of any country in the world. However, the growth rate of U.S. supply is expected to slow in the coming year because of a flattening of the rig count.
  • Pricing discounts in the Permian Basin have developed because of infrastructure constraints and the inability to find pipeline transport capacity. These discounts are expected to be volatile over the next year before stabilizing in a tighter range.
  • The Organization of Petroleum Exporting Countries is expected to increase supply, mainly from countries like Saudi Arabia, in an effort to replace lost supply from Iran and Venezuela.
  • We think oil supply/demand will be relatively balanced and supportive of higher prices. We think increased cash flow is likely to result in increasing capital investment both domestically and internationally.

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 Sept. 30, 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 Equity Holdings as a percent of net assets as of 09/30/2018: Halliburton Co., 5.78%; Concho Resources, Inc., 4.84%; EOG Resources, Inc., 4.53%; Chevron Corp., 4.31%; Phillips 66, 4.04%; Marathon Petroleum Corp., 3.50%; Valero Energy Corp., 3.46%; BHP Billiton Ltd., 3.37%; WPX Energy, Inc., 3.22%; Canadian Pacific Railway Ltd., 3.20%.

Effective, April 30, 2018, the Fund's benchmark changed to the S&P North American Natural Resources Sector Index from the MSCI ACWI IMI 55% Energy + 45% Materials Index. The S&P North American Natural Resources Sector Index represents U.S.-traded securities in the energy and materials sectors, excluding the chemicals industry, and steel sub-industry. 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. 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.