Ivy Natural Resources Fund

12.31.19

Market Sector Update

  • The energy and materials groups both posted positive returns during the quarter, but still underperformed the broader equity market.
  • Commodity prices increased during the quarter as the dollar declined. The price of West Texas Intermediate crude oil, the U.S. benchmark, increased nearly 13%, copper increased by about 8% and gold increased by about 3%.
  • OPEC again announced plans to further reduce supply at its December meeting, after previously cutting production quota in November 2018. The organization continues to demonstrate an intent to keep the oil market balanced in order to support the oil price.
  • Due to pressure from investors to improve financial returns, U.S. oil producers continued to reduce capital expenditures in drilling activity. Rig count fell throughout the quarter as the companies focused on generating free cash flow rather than maximizing production growth.

Portfolio Strategy

  • The Fund posted a positive return for the quarter but underperformed its benchmark, which also posted a positive return.
  • The five greatest equity contributors to the Fund’s performance relative to its benchmark index in the quarter were Exxon Mobil Corp., Concho Resources Inc., Occidental Petroleum Corp., Ball Corp. and Southern Copper Corp.
  • The five greatest detractors from relative performance were Schlumberger, Enbridge Inc., Canadian Natural Resources Limited, Magellan Midstream Partners LP, and Freeport-McMoRan Inc.
  • The Fund’s exposure to the energy sector stood at about 62% of equity assets at the end of the quarter. The remaining sector exposure was composed of metals, chemicals, paper, packaging, industrial gases and railroads.
  • 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.

Outlook

  • We expect U.S. oil production will continue its deceleration that started in 2019. We think a sustained lower rig count is likely to lead to lower supply growth, better pricing and better financial returns for U.S. exploration & production companies.
  • OPEC is expected to maintain its current policy of holding supply from the market to balance supply and demand. If demand ultimately is stronger than expected, we expect to OPEC to be cautious in adding supply back to the market.
  • Markets expect the oil supply/demand situation to be relatively balanced. Increased cash flow is likely to either be returned to shareholders or used for debt reduction and share repurchases rather than additional drilling investment.

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 Dec. 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 12/31/2019: Phillips 66, 4.90%; Chevron Corp., 4.82%; Marathon Petroleum Corp., 4.09%; Valero Energy Corp., 3.97%; BHP Group plc, 3.79%; ConocoPhillips, 3.76%; Rio Tinto plc, 3.65%; Barrick Gold Corp., 3.49%; EOG Resources, Inc., 3.39%; Concho Resources, Inc., 3.29%.

All information 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 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.