Ivy Small Cap Growth Fund

03.27.20

Ivy Small Cap Growth Fund

Commentary as of March 26, 2020

How has the Fund performed and how is it positioned given this market environment?

We are generally pleased with the Fund’s performance. The Fund has a higher average market capitalization than its benchmark, the Russell 2000 Growth Index, which is a byproduct of our focus on higher quality and established companies within the small cap universe. The higher quality names within the portfolio tend to exhibit higher sales growth and earnings growth than the benchmark.

The Fund’s largest weightings are in the information technology and health care sectors, which combine to make about half of the portfolio’s composition. We usually are overweight information technology and underweight health care, which is still the case today. Our overweight to information technology exposure is primarily from exposure to software companies, while our underweight to health care exposure is primarily from an underweight to biotechnology.

We have shifted to a relatively defensive positioning in this environment. We eliminated all of our energy positions and reduced exposure to consumer discretionary names, which have both been sectors that have been the key weak spots during this crisis. We also eliminated some of our financials positions and added some counter-cyclical positions, such as Houlihan Lokey and First Cash.

Where are you finding opportunities within the small cap growth universe?

Tim Miller: Houlihan Lokey is an investment bank with expertise in restructuring businesses. There was high volume of restructuring activity following the global financial crisis. We believe we may see a similar trend in this environment, which could benefit Houlihan. First Cash is a pawn company that is experiencing high growth in the U.S. and Mexico that has a great management team that has executed well. We have held onto many of the stocks that had greater fear associated with them as long as we still had high conviction in their long-term business models. Higher quality businesses like Churchill Downs, Knight Transportation and NexStar Broadcasting Group are companies we have held in high conviction for quite a while, and believe could be well positioned if we see a recovery.

Ken McQuade: Within health care, we feel good about the exposure we have. We continue to see a trend of patients and procedures are moving outside of the typical brick and mortar hospital setting. Some of our names are experiencing higher volumes from COVID-19. For example, Teladoc is a leading telemedicine provider that provides virtual doctor visits by phone or computer. We believe there is plenty of room for adoption for Teladoc's services.

Two other health care holdings in our portfolio that we believe could benefit from these secular trends are AMN Health Care, a leading nursing staffing agency, and LHC Group, a leading home health company. LHC provides a critical solution for COVID-19 patients given the lack of hospital beds currently available.

Brad Halverson: Our software names have held up relatively well. We are sticking with most of these names and leaning into ones that we believe will do well once we start to see some inflection. Proofpoint, which offers enterprise email security solutions, has benefited from the dramatic increase in email volumes caused the wide adoption of social distancing practices. We believe the company exhibits a strong long-term growth and free cash flow profile.

A newer position in our portfolio, Smartsheet offers a subscription software solution that facilitates workplace collaboration that automates workflows. During the company’s most recent guidance, the management team indicated the company could be unaffected by the pandemic. We aren't exactly sure how that'll play out in the coming months, but we have conviction in the company's long-term trajectory. Health care companies adopting the company's service for workflow needs and the sales staff consisting primarily of internal representatives could help provide some positive tailwinds to Smartsheet's business.

We've also had a long-term position in Monolithic Power, which is an analog semiconductor company with potential growth opportunities across industrials, auto, data centers, and 5G. Coming into the year, the company's internal inventory was below target. Despite Monolithic Power having three of its four factories in China, it appears production is on track to meet the company’s original guidance.


FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

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 stocks may carry more risk than investing in stocks of larger more well-established companies. The Fund may invest in Initial Public Offerings (IPOs), which can have a significant positive impact on the Fund’s performance that may not be replicated in the future. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

The Russell 2000 Growth Index is an unmanaged index comprised of securities that represent the small cap sector of the stock market. It is not possible to invest directly in an index.

Top 10 equity holdings as a % of net assets as of 02/29/2020: Teledoc Health, Inc. 3.1, Nextstar Broadcasting Group, Inc. 2.6, Five9, Inc. 2.5, Mercury Computer Systems, Inc. 2.5, Insulet Corp. 2.1, InterXion Holdings N.V. 2.1, Proofpoint, Inc. 2.0, Varonis Systems, Inc. 1.9, John Bean Technologies Corp. 1.9, Wingstop, Inc. 1.9.

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.