Ivy Science and Technology Fund

Ivy Science and Technology Fund
03.31.18

Market Sector Update

  • Welcome back, volatility. The exuberance of the tax reform bill passing and continued signs of improving economic growth led to a market that marched upwards in January. But, just as quickly, the market became concerned about a trade war with China, inflation and a potentially more hawkish U.S. Federal Reserve (Fed). These themes played out through the rest of the first quarter, reminding the market that volatility still exists. Globally, rhetoric concerning Russia and North Korea continued but was largely a non-factor in market performance through the end of March.
  • Interest rates are expected to increase at least three times in 2018. In the first quarter, President Trump appointed a new Fed Chairman, Jerome Powell, largely as the market had anticipated. In March, the Fed raised interest rates another 0.25%, with the benchmark rate now at 1.75%. As history has shown, the Fed will adapt to the incoming data, but with job growth and underlying confidence increasing, we fully expect rate increases to continue. A combination of these rate increases, and the Fed’s current balance sheet reduction efforts, is beginning to contribute to volatility as the market debates whether these changes will impact growth rates in the near-term and whether another recession lies around the corner. We still believe these changes will be gradual and, accompanied by stronger economic growth, will be supportive of equity prices with some increased level of volatility. Trade war concerns garnered more concern than any adjustments in Fed policy.
  • Technology stocks were impacted by the increased market volatility. Late in the first quarter, revelations about Facebook Inc.’s use and sharing of user data captured headlines, casting a shadow over several stocks in the technology universe. The discussion concerning user data and security is not a new one, but likely garners much more focus in the coming months and has the potential to impact stock multiples in areas of technology that could be impacted by policy changes. In health care, the lack of any legislative changes continued to provide a stable sector backdrop, and mergers and acquisitions have picked up as we entered the new calendar year.

Portfolio Strategy

  • The Fund posted a positive return (before the effects of sales charges), but underperformed its benchmark index for the quarter. The Fund’s relative underweight to Amazon.com and exposure to Universal Display Corp. explain virtually all of the quarterly tech-related relative underperformance. Universal Display Corp. has been a significant positive contributor to the Fund’s performance over the last few years, but this quarter saw concerns around OLED technology adoption drive a sell-off in the stock. The health care portion of the portfolio (a sector not represented in the benchmark) was the biggest sector-relative detractor in the quarter.
  • At the subsector level, relative allocations to health care technology, electronic components and internet detracted from relative performance.
  • Top relative contributors to performance included Micron Technology Inc., Microsemi Corp., Aspen Technology Inc., WNS Holdings and CSRA, Inc.
  • At quarter end, the Fund had approximately 84% of assets in U.S. equities, 15% of assets in international stocks and the residual in cash and cash equivalents.

Outlook

  • Despite underperforming its benchmark for the quarter, the Fund performed well compared to the broader market. We expect continued volatility for much of 2018, although many of the same trends that drove a strong technology market should remain intact. In the health care portion of the Fund, we saw outperformance in 2017, but relatively underperformed in the first quarter. Our exposure in biotechnology remains a key area of innovation within health care and an area where we expect our holdings to outperform over the balance of 2018.
  • Semiconductors have been strong contributors 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, will continue to support above-market returns in the sector. The Fund remains relatively overweight semiconductors. In the first quarter, semiconductors were the greatest positive contributor to the Fund on a sub-sector basis and we believe this outperformance will continue.
  • In spite of unsettling political headlines concerning trade wars and possible military conflict, underlying business confidence remains relatively high. We expect that optimism to continue, especially with the implementation of tax reform. Globally, growth and hiring trends are strong and we are seeing these trends reflected in accelerating capital spending and improving earnings outlooks across our portfolio. We are watching Fed policy changes carefully to make sure that a shrinking central bank balance sheet and rising interest rates do not damage credit availability or confidence in the management suite. Through the first quarter, we have not seen any changes to these key variables. We believe these policy changes, along with threats of trade wars, remain the biggest risk to impact sentiment in the markets. Additionally, we are watching equity valuations carefully in the context of higher levels of growth, though the recent pullback in the market lessens some of this risk.
  • Our focus remains primarily on security-specific fundamental research. We strongly believe this attention to bottomup research, coupled with the innovation and transformation under way across the globe, will continue to provide investment opportunities for the Fund.

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, 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 03/31/2018: Micron Technology, Inc. 7.7%, Microsoft Corp. 7.1%, Apple, Inc. 5.6%, WNS (Holdings) Ltd. ADR 4.7%, Alibaba Group Holding Ltd. ADR 4.5%, Aspen Technology, Inc. 4.4%, Facebook Inc., Class A 4.2%, Cypress Semiconductor Corp. 4.1% and ACI Worldwide, Inc. 3.7%.

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.