Ivy Science and Technology Fund

Ivy Science and Technology Fund
12.31.18

Market Sector Update

  • During the quarter, equities reversed course on what were strong year-to-date returns.
  • The reasons for the increased volatility were numerous during the period, including concerns over tightening conditions as it relates to the Federal Reserve, China trade concerns, weakness in China, weakening U.S. economic data and the government shutdown.
  • Broad-based declines across all capitalization ranges and styles resulted in significant declines in the period. Growth styles underperformed value styles while large caps outperformed mid and small caps.
  • The S&P North American Technology Index, the benchmark for the strategy, declined nearly 18% in the quarter, with a 9% pullback in the month of December.
  • The broad decline within technology affected performance across the spectrum, regardless of market capitalization or subsector allocation. Safety, stability and quality outperformed risk and momentum, which is expected given the fears surrounding domestic and Chinese economic growth.

Portfolio Strategy

  • The Fund modestly underperformed the benchmark during the period. Stock selection within information technology was the primary detractor from performance, in which Aspen Technology was the top individual relative detractor. Also, allocations to Alliance Data Systems and WNS Holdings within the IT Services subsector were among top relative detractors.
  • The Fund’s semiconductor holdings, namely Micron Technology, were a drag during the period. Underweight/absent positions in Intel Corp. and Broadcom, Inc. detracted within the semiconductor space.
  • The Fund’s allocation to health care, a sector absent from the benchmark, contributed positively to performance. Biotechnology holdings Ionis Pharmaceuticals and Vertex Pharmaceuticals, were top contributors.
  • The Fund’s underweight allocation to the consumer discretionary sector, mainly its underweight to Amazon, contributed to performance. Additionally, an underweight position in Apple, Inc. and being absent a position in Nvidia Corporation contributed to relative performance as those particular stocks pulled back materially during the period.

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 expect cloud computing capex to bounce back, which is a large component of how we view our investable universe right now.
  • 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. However, recent weakness may put pressure on the space in the near term. We remain constructive on semiconductors, but 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 end markets. With the risk of tariff-related impacts and derivative confidence tempering, we are being opportunistic in adjusting various positions to align with some of the near-term expected weakness.
  • 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 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, 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 12/31/2018: Microsoft Corp. 9.1%, Euronet Worldwide, Inc. 5.7%, Vertex Pharmaceuticals, Inc. 5.2%, Aspen Technology, Inc. 5.1%, Apple, Inc. 4.8%, ACI Worldwide, Inc. 4.7%, WNS (Holdings) Ltd. ADR 4.7%, Micron Technology, Inc. 4.0%, Alibaba Group Holding Ltd. ADR 3.9%, Cypress Semiconductor Corp. 3.8%.

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.

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.