Ivy Small Cap Core Fund


Ivy Small Cap Core Fund

Commentary as of March 25, 2020

What are you seeing in terms of the current landscape and opportunities?

We think it is a little premature to get excited, but we are encouraged by some of the things that are going on and that we could potentially be seeing signs of approaching a bottom. It appears that the acceleration of the spread of COVID-19 in Italy has slowed which may be a sign that we will start to see a flattening of the curve. We are hoping the U.S. would follow this pattern with it being a week or two behind. After we start to see COVID-19 starting to run its course, then we can get a better idea of a more definite timeline. We also think that the idea of bringing people back to work could be encouraging and is something we will have to keep an eye on since we believe that you can't just completely stop the economy without massive damage.

While the tail risk is becoming more defined, the CBOE Volatility Index is still extremely high. We don't view yesterday's big bounce as a sign of sudden health in the market since these types of jumps don't typically happen in great environments. However, today the stimulus plan was announced, and the Fed has already taken as much action in a month as it took in about eight months during the global financial crisis. While a lot of this is still very unclear, we are trying to understand the magnitude of the hit to the numbers and where the numbers go after we hit a bottom.

To provide some context on the volatility we are seeing in the market, a great example is Cardtronics, an ATM operator and a top 10 holding in the portfolio. Despite it having what we would consider to be a rather straightforward business model, over the last seven consecutive days the stock was down 10.7%, up 12.6%, down 10%, up 18.2%, down 16.4%, down 14.1%, and yesterday (March 24) it was up 0.3%. Unfortunately, this is very common at the moment and until things settle down, it is hard to believe that we have a base. We think it might be too late to go to a strong defensive positioning. Right now we are more concerned with picking around the edges and looking for opportunities for when the bottom actually happens.

Do you think management or the Street has any sense of how low the bottom could be as far as earnings power?

Our general sense is there are some management teams that have a good understanding because their business model allows that to be the case. Likewise, there are a variety of others that have no precedent to work from. We do not think the street numbers are accurately reflecting what is actually taking place because this is happening so quickly. It is going to take some time to find out exactly what is happening. We also would argue that when the dust settles certain industries might be extinct.

For example, movie theaters and retailers like JC Penney's are businesses that have not been embraced by the newer generations. We believe the likelihood of these types of businesses returning to where they were prior to this downturn is relatively low. Aside from certain industries not recovering, we also are considering the transformation of existing industries that could take place, particularly with their margin structures. Along with the demand shock we have witnessed, there has been a supply shock too, which has caused disruption across supply chains. Companies that have experienced this disruption may consider diversifying their manufacturing or bringing it back to the U.S., which would have a cost associated with it and would impact margins.

Are there examples in the portfolio where you see the environment setting up for success?

We believe the bank model has changed pretty dramatically. We are seeing banks closing branches because they are capital intensive and used with lesser frequency as people are more and more fulfilling their banking needs online, rather than going to a physical bank locations. With this being the case Cardtronics offers banks a solution to meeting their customers cash needs which remain through providing a national network of ATMs that they can partner with. In addition to examples like Cardtronics, which could stand to benefit from trends that are being accelerated by this current environment, we are also looking for companies that have strong balance sheets and that we believe not only can survive this current shock but also come out as share gainers.

Would you say the portfolio is performing how you would expect it would in this environment?

Yes, the fund has done well versus peers in this drawdown, which we would expect as we generally have a more defensive posture because of the types of securities we own, and how we like to operate (our positions tend to be larger, higher quality, and with better balance sheets on average than our peers.)

With this said we are also somewhat disappointed that we are not performing better in this environment. The reason why we are not doing as well as we would expect is that we are not winning at the top of the portfolio quarter to date. Being that we are concentrated it can work both for and against you for shorter periods but has worked extremely well for us over time. We wouldn’t read too much into this because we remain very confident in our highest conviction names but bring it up to remind you that in choppy environments there can be periods where concentration can work against us. In this particular case it is not as readily apparent because portfolio construction is compensating for several top holdings underperforming.

While on this topic it is also important to remember that the same characteristics within the portfolio that should protect it on the downside can work against it in a sharp upturn. While we will get more aggressive/offensive with our positioning as we believe we are approaching a bottom this is still unlikely to fully compensate if the market were to go vertical as smaller, more leverage and lower quality names tend to lead off bottoms.


Past performance is not a guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This informa¬tion 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. The views are current through March 25, 2020, and are subject to change at any time based on market or other conditions.

Risk factors:The value of the Fund’s shares will change, and you could lose money on your investment. Investing in small-cap growth and value stocks may carry more risk than investing in stocks of larger, more well-established companies. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. Value stocks are stocks of companies that may have experienced adverse developments or may be subject to special risks that have caused the stocks to be out of favor and, in the opinion of the Fund’s manager, undervalued. Such security may never reach what the manager believes to be its full value, or such security’s value may decrease. The Fund typically holds a limited number of stocks (generally 40 to 60). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. 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

Top 10 equity holdings as a % of net assets as of 12/31/2019: Nomad Foods, Ltd. 4.4, Chemed Corp. 4.1, Cartronics plc, Class A 3.9, Visteon Corp. 3.5, Encompass Health Corp. 3.3, Webster Financial Corp. 3.2, MGIC Investment Corp. 3.1, Cogent Communications Group, Inc. 2.6, Switch, Inc., Class A 2.5, Magnolia Oil & Gas Corp. 2.4.

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. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.