Ivy Tax-Managed Equity Fund

Ivy Tax-Managed Equity Fund

Market Sector Update

  • Despite a strong January for equities, the market soured in February and March, and as the quarter progressed, the list of concerns continued to grow. Overall, broad market indices landed in negative territory. Growth styles materially outperformed value as investors moved away from risk and focused on high-quality, growth stocks.
  • There emerged a gamut of concerns during the quarter. Despite what was a surge of positive earnings revisions during first quarter 2018 related to the tax cuts and underlying economic strength, the market shifted focus to several emerging risks and reigned in stock multiples.
  • Inflation fears began to reemerge in February and resulted in a volatility shock that sent complacent investors scrambling. March was revisited by concerns around Trump Administration turnover, but more specifically calls for tariffs and fears of a potential trade war. The quarter ended with pressure on technology names and how those companies utilized user information.
  • The Federal Reserve (Fed) also maintained the more recent increased tempo of rate increases with a March hike, the sixth since the turn to higher rates began in December 2015, but the fourth hike over the last year.
  • Similar to the equity markets, the yield curve has also had a wild ride during the first quarter. The yield curve initially steepened as investors believed the Fed may have to go higher and longer with rates higher. That moved reversed in the second half of the first quarter, leaving the yield curve to flatten to new lower levels.
  • Quality, growth and momentum factors outperformed during the period while value, risk and corporate cash deployment (dividend yield, dividend growth) underperformed.

Portfolio Strategy

  • The Fund strongly outperformed the benchmark return during the period, before the effects of sales charges. Outperformance was driven by favorable stock selection across a number of sectors.
  • Stock selection in technology, consumer staples, financials and consumer discretionary benefited the Fund’s relative performance.
  • Outperformance in technology was driven by overweight positions in Adobe, salesforce.com and Red Hat, with each stock benefiting from strength in their respective end markets. These stocks also benefited from investors desire for high quality growth names.
  • Consumer staples benefited from an overweight position in Estee Lauder, which is seeing strong organic growth, a rarity within this sector. Performance also benefited from an underweight position in the poor performing consumer staples sector.
  • Financials provided additional outperformance through overweight positions in CME Group and S&P Global. As the global leader in futures, CME Group benefited from the increase in volatility. S&P Global continued strength in the ratings and index businesses.
  • Finally, consumer discretionary saw strength in Amazon.com, which continued to take share in various retail categories and also posted strong growth out of its Cloud offering. Nike shares rebounded nicely as the company completed an inventory reset. The company is also in the midst of a strong innovation cycle.


  • The market is back to worrying. To recap the list of concerns: Continued tightening from the Fed, fears of proposed tariffs becoming a more economically detrimental trade war and beginnings of protectionist policy, concerns about inflation bubbling up and scrutiny of a handful of visible technology firms with access to user data.
  • Trade concerns are hard to gauge as a lot of the press may prove to be just negotiating and positioning for a less ominous final resolution. What is not hard to observe is that global trade and use of a global supply chain has been a boon for global growth, including profitability enhancement for U.S. multi-national companies. A move to a global trade war would impair market valuations.
  • Data points, such as the ISM Manufacturing Index, that appear at peak levels garner a lot of attention as they are likely to become “less good,” but it is important to note that the underlying components do not signal huge risk. For instance, inventory levels, both at the manufacturer and the customer, remain in healthy shape and indicate the need for more inventory stock and sustained growth. Context is important.
  • Inflation exists but just not everywhere, yet. Despite the longevity of the cycle and pockets of price pressure, there is no broad inflationary pressure. With that said, this remains a key risk as the Fed would move to a more hawkish stance with more signals of inflationary pressures.
  • The market pullback from recent highs is understandable as complacency appeared to be high and the aforementioned issues needed to be appreciated in market sentiment and market multiples. Thank you for your continued support.

The opinions expressed are those of the Fund’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 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 holdings (%) as of 3/31/2018: Microsoft Corp. 8.9, Amazon.com 6.1, Apple, Inc. 4.8, Alphabet, Inc. 4.2, Verisk Analytics, Inc. 3.9, salesforce.com, Inc. 3.8, CME Group, Inc. 3.7, Adobe Systems, Inc. 3.5, Stanley Black & Decker, Inc. 3.5 and Visa, Inc. 3.2.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. 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. Tax-management strategies may alter investment decisions and affect portfolio holdings, when compared to those of non tax-managed mutual funds. Market conditions may limit the Fund’s ability to realize tax losses or to generate dividend income that is taxed at favorable Federal income tax rates. In addition, the Fund’s tax-managed strategy may cause the Fund to hold a security in order to achieve more favorable tax-treatment or to sell a security in order to realize tax losses, which could result in losses that exceed any benefits of the tax-managed strategy. The Fund’s ability to utilize various tax-management techniques may be curtailed or eliminated in the future by tax legislation or regulations. While the Fund seeks to minimize tax distributions to shareholders, it may realize capital gains and earn some dividends. 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.