Ivy Science and Technology Fund

03.31.20

Market Sector Update

  • The first quarter started strongly, but mid-February began an almost unprecedented, broad-based, rapid deterioration due to the COVID-19 pandemic.
  • The reasons for this rapid market deterioration in the quarter were the accelerating spread of COVID-19 across the world. Shutdowns and stay-at-home orders during March slashed economic activity and drove concerns into the market of extended job losses, economic recession and long-term economic malaise.
  • The S&P North American Technology Index, the benchmark for the strategy, declined almost 13% in the quarter after the roughly 12% increase last quarter.
  • The information technology sector saw weak performance across sub-sectors, with the software, hardware and semiconductor sub-sectors the relative outperformers. These sub-sectors were down over 10%, but most other subsectors were down more than 20% in the quarter.

Portfolio Strategy

  • The Fund underperformed the benchmark in the quarter. Despite strong outperformance from the Fund’s health care exposure, the technology allocation in the portfolio more than offset this outperformance and led to the underperformance. Health care is absent from the Fund’s benchmark.
  • QTS Realty Trust, Microsoft, Alibaba Group and ASML Holdings were among the largest relative positive contributors. Detractors included WNS Holdings, Euronet Worldwide and ACI Worldwide. Additionally, the Fund’s relative underweights in Amazon.com, Intel and Adobe detracted from relative performance.
  • Within health care, Vertex Pharmaceuticals, Teladoc Health and Moderna were significant positive contributors. Teladoc Health and Moderna performed exceptionally well in the current quarter – we own these stocks based on long-term trends that both virtual health care and vaccine technology trends will be strong. COVID-19 has accelerated both of these trends and the underlying stocks. We believe both stocks remain attractive.

Outlook

  • We believe the current market turmoil due to COVID-19 will create significant new innovation and innovation-driven investment opportunities. During times of crisis, innovation accelerates. Over the course of February and March, we raised our cash levels in the Fund, anticipating additional market weakness. We expect to deploy this capital in new ideas that will benefit long-term from changes we anticipate in both company and consumer behavior as the world works through the pandemic.
  • 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 we work and where we work are driving shifts in technology utilization. We continue to see strong cloud computing capex 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 will 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 COVID-19. Currently, both the supply side and demand side are being impacted as a result of the pandemic. Although the trade situation had shown recent improvement, Huawei’s continued inclusion on the U.S. “entity list” 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.

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 March 31, 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 3/31/2020: Microsoft Corp. 11.0%, Cash 6.5%, Apple, Inc. 6.4%, Facebook Inc. 5.5%, Vertex Pharmaceuticals, Inc. 5.5%, Micron Technology Inc. 4.8%, Alibaba Group Holding Ltd. ADR 4.6%, Aspen Technology, Inc. 4.5%, Cerner Corporation 3.9%, Amazon.com, Inc. 3.6%.

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.