Ivy Science & Technology Fund
Commentary as of March 27, 2020
Could you start by talking about what you’re hearing from the management teams you’re speaking with, as well as provide your perspective on the current landscape?
With all the uncertainty, we are spending time talking to management teams. Frankly, no one knows what this is going to look like afternoon, tomorrow, next week, next month, or event six to 12 months down the road. So, we're reassessing the portfolio every day, understanding how the businesses fit in the current and future environments.
It's really easy to get up and do what you do when the economy is strong, when things are "normal." Businesses really have their mettle tested in difficult times, such as now. So, we're spending a lot of time communicating with managers to understand how they're operating in this environment. We want to understand what happens when things change, when what you don't expect to happen, happens. We've been communicating with many of these management teams for well over a decade and have a pretty good idea with how they'll behave through this cycle.
We will get through this, and we feel as convicted as ever in the way the portfolio is structured. We want to make sure that we're well-prepared every day, with some cash, with the right portfolio, for what lies ahead.
Lastly, one thing that has come across in the last couple weeks – as business has ground to a halt, how does that impact demand for certain products? We're still hearing a lot about supply disruptions – places like Malaysia and the Philippines – where many semiconductor companies get their parts. There are still some significant disruptions on this front. Some of these things, like inventory levels, will help offset.
As bottom-up investors, to what extent is the market discounting fundamentals vs. the technical panic?
To answer that, we'd make two points. First, this is truly a black swan event. But it seems like one showed up and half a dozen others were right behind, many a result of the coronavirus. People talk about bear markets, we have seen wild gyrations, and that volatility is probably going to continue for a while. That's the very reason we want to reflect upon the current portfolio and have cash available to add to positions. People always ask, “why do you keep some cash”? The answer is we don't know until we need it.
The Fund has a long-term investment time horizon – years, not months or quarters. Is the portfolio performing in line with your expectations? Take stock of what's happened so far.
Year-to-date the Fund is trailing competitors slightly, but performance is moving around significantly. Thus far, we have names in health care like Teladoc and Moderna which are benefiting from the current environment. Teladoc is advancing as a result of increases in virtual visits, while Moderna has been working with the National Institutes of Health (NIH) to develop one of the first vaccines for COVID-19. Overall in health care, given the shortages we've seen, one would expect to see a lot of innovation going forward to meet some of these needs.
Another area we've talked a lot about is the increase in content in spaces like autos. Companies exposed to this area, like Infineon, have been punished in the current environment. Universal Display, an OLED-manufacturer has taken a hit on lower expectations for smart phone production, but we see that as an opportunity. Over the years, when there have been periods of disruption, we've been able to add to companies we believe in that have strong management teams. We try to be strategic when deploying capital and are watching these companies closely to identify these opportunities.
The consistency in the way the Fund has been managed over a long period of time, how we invest and the innovation-led strategy – we will continue to do these things. This environment gives us an opportunity to add value over the long term. This environment is unprecedented, with the economy coming to an abrupt halt, and the stimulus – there are a lot of moving parts. We're being very disciplined in our approach, making sure we understand the earnings power of the underlying businesses.
In your mandate, you have the opportunity to own innovators that will help drive us forward. Any initial thoughts about this environment structurally favoring certain businesses?
First, there is a soft, sometimes intangible, element to this question. This situation is getting real very quickly. We have said before – never underestimate the power of bad management. In our view, when you see it, run the other way quickly, and never turn back. Our point is that certain organizations have the ability and leadership to be able to innovate and evolve with the markets.
For example, 3D printing companies that were 48 hours ago making widgets and other things are now cranking out health care masks. Another example is Moderna, which we mentioned earlier. In 24 days the company had a vaccine in the hands of the NIH and it is in clinical trials TODAY. That’s biotechnology – a beautiful illustration of science and technology coming together to solve a real problem.
Then in terms of changing habits for people to work and work remotely are being enable by network structures and organizational structures. We're looking for those enabling technologies that provide for advancements in remote learning, remote work, but may also be driven by advancements in data centers.
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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%.
Past performance is not a guarantee of future results. 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.
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.