Ivy Science and Technology Fund

06.30.20

Market Sector Update

  • The market’s second quarter snap-back was almost as abrupt as the first quarter’s decline.
  • The reason for the rapid positive market reversal was the speed with which governments reacted to the accelerating COVID-19 pandemic. Shutdowns and stay-at-home orders extended into April, continuing the economic disruption from the first quarter. However, the unprecedented multi-trillion dollar stimulus from the U.S. government, along with rapidly declining interest rates, supported the financial markets. With many businesses shuttered or slowly reopening over the course of the quarter, job losses increased and economic recession remained inevitable.
  • The S&P North American Technology Index, the benchmark for the strategy, increased 32% in the quarter after the roughly 13% decrease last quarter.
  • The information technology sector saw strong performance across sub-sectors, with the software and hardware subsectors the relative outperformers.

Portfolio Strategy

  • The Fund underperformed the benchmark in the quarter. Despite strong absolute performance across the Fund’s information technology and health care holdings, the Fund was unable to beat the relative performance of the alltechnology benchmark. Health care is absent from the Fund’s benchmark.
  • Within information technology, Infineon Technologies, ASML Holding, Microchip Technology, Inc., and Semtech were among the largest relative positive contributors. Detractors included Aspen Technology, Alibaba Group Holding, and ACI Worldwide, Inc. Within health care, Moderna, Inc. Sarepta Therapeutics, Inc. and CRISPR Therapeutics were significant positive contributors.
  • The Fund’s relative underweights in Paypal Holdings, Shopify, Inc., and Amazon.com, Inc. contributed to relative underperformance during the period.

Outlook

  • We believe the changing technology landscape due to COVID-19 is likely to create significant new innovation and innovation-driven investment opportunities. During times of crisis, innovation accelerates. As we mentioned last quarter, over the course of February and March, we raised our cash levels in the Fund, anticipating additional market weakness. We have deployed some of this capital in ideas that we believe will benefit long-term from changes in both company and consumer behavior as the world works through the pandemic. We do expect additional market volatility due to the resurgence of COVID-19 cases over the coming months.
  • The supportive factor for the technology and health care sectors is the constant pace of innovation, especially in the midst of the current crisis. While we are highly cognizant of moves in the market, our three-to-five year timeline for investing allows us to take a longer term approach. For example, technology is going to be more critical going forward for companies to gain advantages. Data aggregation, data analytics, migration towards cloud computing, semiconductors – all are key areas we are positioned to take advantage of going forward. Changes in how people work and where people work are driving shifts in technology utilization. We continue to see strong cloud computing capital expenditure trends, as anticipated, and expect strength through the course of 2020.
  • We continue to be optimistic on semiconductors. The space has contributed strongly to information technology performance over the past couple years and we believe the emergence of new secular growth opportunities, like autos, machine learning and ubiquitous connectivity are likely to continue to support above-market returns in the sector. While we remain constructive on semiconductors, we expect some level of volatility that likely creates compelling new opportunities for the Fund over the longer term.
  • We are carefully monitoring the technology supply chain and demand signals coming from key technology endmarkets as a result of the coronavirus. Currently, both the supply side and demand side are being impacted as a result of COVID-19. Although the trade situation had shown recent improvement, Huawei’s continued inclusion on the U.S. “entity list” and President Trump’s continuing hawkish rhetoric has created a headwind within the technology supply chain that we expect to persist. We believe the U.S. may begin restricting shipment of semiconductor manufacturing equipment used for Chinese semiconductors in the next few quarters and expect this action may have a cooling effect on U.S.-China negotiations.
  • Our exposure to biotechnology helped relative performance again this quarter. Biotechnology remains a key area of innovation within health care and an area where we expect our holdings to continue outperforming over the coming quarters. Gene therapy and personalized advanced therapies are the areas of groundbreaking research and innovation that should provide significant opportunities for investment.
  • Within healthcare, Moderna continued its exceptional performance in the current quarter. Moderna’s COVID-19 vaccine is the lead candidate for initial approval sometime in late 2020. We remain positive not only on Moderna’s positioning for success with a COVID-19 vaccine, but also on its long-term technology platform.

The opinions expressed are those of the Fund’s managers for Class I shares and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2020, 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 6/30/2020: Microsoft Corp. 10.4%, Apple, Inc. 7.5%, Facebook Inc. 6.1%, Vertex Pharmaceuticals, Inc. 4.8%, Micron Technology Inc. 4.8%, Alibaba Group Holding Ltd. ADR 4.1%, Amazon.com, Inc. 4.1%, Aspen Technology, Inc. 4.0%, ASML Holding 3.6%, Cerner Corporation 3.5%,

The S&P North American Technology Sector Index is a modified-capitalization weighted index representing U.S. securities classified under the GICS® technology sector and internet retail sub-industry. It is not possible to invest directly in an index.

All information is based on Class I shares.

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.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund invests more than 25% of its total assets in the science and technology industry, the Fund’s performance may be more susceptible to a single economic, regulatory or technological occurrence than a fund that does not concentrate its investments in this industry. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. In addition, the Fund’s performance may be more volatile than an investment in a portfolio of broad market securities and may underperform the market as a whole, due to the relatively limited number of issuers of science and technology related securities. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. 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.