Ivy Science and Technology Fund

Ivy Science and Technology Fund
06.30.17

Market Sector Update

  • Donald Trump continued to dominate headlines in the second quarter of 2017, but during this quarter, skepticism began growing about the administration’s ability to implement potential market-friendly tax policies and Affordable Care Act revisions. Macroeconomic data remained relatively positive, contributing to a positive backdrop for equities. The market remained constructive in the quarter, especially in healthcare, and we believe the backdrop is conducive to increasing economic growth across the globe that should be reflected in higher equity prices.
  • Concerns regarding most healthcare stocks subsided as the market realized Trump’s administration would have a much more difficult time significantly changing healthcare policy. Trump’s inability to come up with a palatable healthcare solution means drastic policy changes, like aggressive government drug-price negotiations, are more likely to be watered down and less impactful on stocks.
  • The markets expect interest rates to increase through the remainder of calendar year 2017. As history has shown, the U.S. Federal Reserve (Fed) will adapt to the incoming data, but with job growth and underlying confidence increasing, we expect rate increases to occur. A combination of these rate increases and the Fed’s balance sheet reduction will lead to tighter monetary policy and will contribute to greater equity market risk longer term. We believe these changes will be gradual and with the growth we are seeing should be supportive of stock prices.

Portfolio Strategy

  • The Fund posted a positive return and outperformed its benchmark index (before the effects of sales charges) for the quarter primarily due to the Fund’s exposure to healthcare, a sector not included in the benchmark, with biotechnology holdings standout performers. Given the strong performance of healthcare, the Fund’s exposure in other sectors, including information technology, consumer discretionary and telecommunication services, only slightly detracted from relative performance.
  • At the industry level, allocations to semiconductors and internet industries provided relative underperformance, while biotechnology was the big positive contributor.
  • Top individual contributors to performance included Alibaba Group Holding Ltd. ADR, Universal Display Corp., Vertex Pharmaceuticals Inc., Ionis Pharmaceuticals Inc. and WNS (Holdings) Ltd. ADR.
  • At quarter end, the Fund had approximately 86% of assets in U.S. equities, 12% of assets in international stocks and the residual in cash and cash equivalents.

Outlook

  • We believe the Fund remains positioned to perform well through 2017. As a reminder, the healthcare portion of the Fund accounted for virtually all of the underperformance in 2016 and, as we saw during both the first and second quarter, we believe the sector is now poised to outperform. The sector seems ripe with much lower valuations and renewed growth opportunities, setting up for a continued potential powerful rally.
  • Semiconductors were a slight detractor during the second quarter. In particular, our exposure to Microsemi Corp. and Dialog Semiconductor plc impacted the Fund, but the overall sector also took a breather from its recent outperformance. Semiconductors have been a very strong contributor 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. We remain relatively overweight semiconductors.
  • Underlying business confidence has driven higher stock prices through the second quarter and we are seeing strong hiring and economic signs globally. Additionally, we are seeing these trends reflected in accelerating capital spending and improving earnings outlooks across our portfolio, which we believe will ultimately lead to outperformance. 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. These policy changes are currently the biggest risk to impact sentiment in the markets.
  • 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 June 30, 2017, 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 06/30/2017: Micron Technology, Inc. 6.7%, Microsoft Corp. 5.1%, Vertex Pharmaceuticals, Inc. 5.0%, Alliance Data Systems Corp. 4.8%, WNS (Holdings) Ltd. ADR 4.7%, Microsemi Corp. 4.4%, ACI Worldwide, Inc. 4.4%, Euronet Worldwide Inc. 4.1%, Facebook Inc., Class A 4.1% and Cerner Corp. 3.8%.

Class R6 shares were renamed Class N on March 3, 2017.

Effective Oct. 1, 2016, Brad Warden was named a portfolio manager to the Ivy Science and Technology Fund.

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.

IVY INVESTMENTS® refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS℠ , and the financial services offered by their affiliates.