Ivy Tax-Managed Equity Fund

Ivy Tax-Managed Equity Fund

Market Sector Update

  • Equities outperformed most asset classes during the third quarter and remains the clear asset outperformer year to date. Within equities, growth styles of all capitalization ranges led the market higher during the quarter while mid- and large-cap styles lagged. Third quarter continued to accentuate the year-to-date trend of growth strongly outperforming value.
  • The quarter had multiple potential disruptors – tension with North Korea, building tension with Iran, multiple hurricane landfalls, and further normalization of global central bank policy. Despite the noise, the global economic backdrop remained resilient.
  • Manufacturing data remained strong with the Institute for Supply Management (ISM) hitting new highs and inventories generally in check. Business sentiment and capital spending continued to track higher indicating that confidence in pro-business policy remains. Employment was strong and inflation remained in check.
  • The lack of policy progress out of Washington is still a headliner as investors worked through another failed legislative attempt at health care repeal and replace. This latest failure was met with market enthusiasm as expectations quickly pivoted toward tax reform and the necessity to make progress on that front.
  • As aforementioned, growth factor characteristics – long-term earnings per share growth, earnings momentum – outperformed value factors – price to cash flow, earnings yield and price to sales.

Portfolio Strategy

  • Despite a strong return by the Russell 1000 Growth Index (Fund’s benchmark), the Fund outperformed the benchmark for the quarter, before the effects of sales charges.
  • Stock selection in industrials, consumer staples and technology produced the majority of the outperformance.
  • Within industrials, Caterpillar was up strongly as global machinery and construction orders began to move from trough levels. JB Hunt was a strong performer due to the expectation of an overall better freight pricing environment.
  • Outperformance in consumer staples came partly from lack of exposure to several poor performing large securities in the sector. Overweight exposure to Estee Lauder and Monster Beverage also added to the outperformance.
  • Technology added to performance due to an overweight position in semi-capital equipment company Lam Research, which is benefiting from increasing capital intensity in the semiconductor industry.
  • Health care was the only notable detractor during the period. Shares of DexCom moved lower as the approval of a competing glucose monitoring device provided a negative surprise to investors. Allergan shares were also weak as the company signaled another negative revision to estimates.


  • The tone generally remains optimistic on U.S. and global economic growth as excesses seem difficult to find. We expect U.S. economic growth will likely continue in the 2.0-2.5% range for the foreseeable future.
  • With that said, we believe there are several important events that could have a material impact on the trajectory of domestic economic growth: 1) Tax reform, if progress is successful, it could drive a conversation around the trajectory of economic growth, government deficits, and potentially require a response from the Federal Reserve (Fed). 2) Selection of new Fed chairperson – will the person be more hawkish or more dovish? 3) The Fed’s balance sheet runoff and the impact this may have on the yield curve and liquidity.
  • From our perspective, these watch items appear manageable in the near- and intermediate-term and as we have seen from the past several years, any hit to sentiment tends to be an opportunity to add to strong fundamental names. Concern could stem from enactment of any policy that works to dramatically accelerate the business cycle and potentially lead to more disruption as the cycle comes to an end.
  • A more immediate watch item is the level of expectations around advancing the pro-growth policy agenda, specifically tax reform and potentially infrastructure spending. As noted coming out of 2016 and into 2017, the market enthusiasm proved unwarranted and set-up for a sharp reversal of the rotation to early cyclical, deep value names that began in the back-half of 2016. It is possible the market will make a similar rotation ahead of potential tax reform, a trade that could be viewed with skepticism and caution.
  • In aggregate valuations across the market optically appear elevated versus history but this only flags as a watch item given that growth in multiple industries remains strong and companies in which the strategy is focused generally trade as reasonable valuations on the cash they generate.
  • 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 Sept. 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 holdings (%) as of 09/30/2017: Microsoft Corp. 6.9, Apple, Inc. 4.9, salesforce.com, Inc. 4.5, Alphabet, Inc. 4.2, Amazon.com 4.2, Visa, Inc. 3.4, Facebook 3.3, Adobe Systems, Inc. 3.3, Stanley Black & Decker, Inc. 3.2 and CME Group, Inc. 3.1.

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.