Ivy Science and Technology Fund

12.31.19

Market Sector Update

  • The fourth quarter was an especially strong quarter, finishing off an exceptionally robust performance year in both technology and the broader markets.
  • The reasons for the strong market performance in the quarter were a signaling of progress around the U.S.-China trade dispute, a relatively sanguine interest rate environment and signs of greater economic stability.
  • The S&P North American Technology Index, the benchmark for the strategy, increased almost 12% in the quarter after the roughly 1% increase last quarter.
  • The information technology sector saw strong performance across sub-sectors, with the hardware and semiconductors sub-sectors as the standout performers. Apple was up over 30% in the quarter.

Portfolio Strategy

  • The Fund meaningfully outperformed the benchmark in the quarter. Both the technology portion of the portfolio and the portfolio’s exposure to health care contributed to this outperformance. Health care is absent from the Fund’s benchmark.
  • Within information technology, Micron Technology, Universal Display Corp., ACI Worldwide, Inc., and ASML Holdings were among the largest relative contributors. Within health care, Vertex Pharmaceuticals, Inc. and Sarepta Therapeutics, Inc. were positive contributors.
  • The Fund’s relative underweight in Apple, Inc., one of the benchmark’s largest holdings, was a drag during the period despite being the Fund’s second largest holding. Relative underweight positions in Amazon.com, another large benchmark constituent, also marginally detracted from relative returns.

Outlook

  • The supportive factor for the technology and health care sectors is the constant pace of innovation. 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. We are seeing cloud computing capex returning, as anticipated, and now 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. Although the trade situation has 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 for the next several quarters. We are now more optimistic about U.S.-China negotiations, but expect improvements to remain relatively minor, though meaningfully impactful on market sentiment.
  • Our exposure to biotechnology hurt relative performance last quarter, but showed strong resilience 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 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: Microsoft Corp. 10.3%, Apple, Inc. 6.2%, Facebook Inc. 5.5%, Micron Technology Inc. 5.0%, Alibaba Group Holding Ltd. ADR 4.7%, Aspen Technology, Inc. 4.7%, Vertex Pharmaceuticals, Inc. 4.7%, ACI Worldwide, Inc. 4.5%, WNS (Holdings) Ltd. ADR 4.4% and Euronet Worldwide, Inc. 4.3%.

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.

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.