Ivy Tax-Managed Equity Fund

Ivy Tax-Managed Equity Fund

Market Sector Update

  • Equity markets pushed to new highs during the second quarter of 2017 with strong gains across most indices. Growth indices – across all caps – outperformed value indices. The rotation that began earlier in the year from riskier deep cyclicals and value equities into higher quality and higher growth equities continued.
  • There was not a material tone change in the quarter and it very much felt like a continuation of the themes at the start of the year – noise from Washington on the policy front, Federal Reserve (Fed) bumping rates up, and economic data generally supportive of moderate economic growth environment. The only other notable event was the continued move lower in oil prices.
  • Investors watched the lack of policy progress out of Washington with interest, although, as illustrated by the strong market returns, these delays were taken in stride. It may be that improved global growth – as illustrated by a weakening U.S. dollar – along with a stable U.S. economic backdrop was enough to maintain positive sentiment. Economic data during the quarter, specifically labor, manufacturing and even slight improvements in retail sales, remained supportive of growth despite fiscal policy delays.
  • The decline in the price of oil did drive concern during the quarter as global growth fears surfaced momentarily. However, the market concluded oil price weakness was supply, not demand, driven, partly due to a productive U.S. oil patch. As such, the damage was fairly contained to the energy sector and energy related industrial sectors.
  • As aforementioned, growth and quality factor characteristics – earnings momentum, return on equity, return on capital – outperformed value factors – price/cash flow, earnings yield and price/sales. Despite the continued market gains, the tilt was towards high quality growth names, while lower quality value underperformed.

Portfolio Strategy

  • Despite strong absolute returns, the Fund underperformed the Russell 1000 Growth Index (Fund’s benchmark) for the quarter before the effects of sales charges.
  • From an attribution standpoint, stock selection produced the majority of the relative underperformance. Health care was a notable detractor.
  • Weakness in several health care names, DexCom, Inc., Shire Pharmaceuticals Group and ACADIA Pharmaceuticals, drove a significant portion of the underperformance. These names were impacted by a broader risk off trade. On the back of lower oil prices, the Fund’s energy overweight also detracted from performance with shares of Halliburton Co. and Schlumberger Ltd. underperforming the Index.
  • Consumer discretionary was a positive contributor due an overweight position in Panera Bread Co., which agreed to be acquired during the quarter.
  • In technology, positions in Lam Research Corp. and Adobe Systems, Inc. benefited from strong quarterly results and a market searching for strong growers.


  • For better or worse the political environment will likely remain bumpy due to needed progress on health care reform, fiscal policy measures and government budget reconciliation. Investors seem to take cues from the pace of progress within Washington and that has added volatility to certain equity prices.
  • Fortunately, the expectation for, and the timing of, significant policy reforms – particularly the big items such as tax reform and fiscal stimulus – have become more reasonable. This set-up is healthy for equity prices as any political stumbles are likely anticipated at this point.
  • The main risk is that policy evolves in a way that somehow disrupts the business confidence that is currently driving increases in capital deployment. Business confidence remains a key linchpin to support sustained economic or accelerating growth in the U.S.
  • Interest rates will continue to move higher as the Fed is likely to move on one more rate increase in 2017 and several again in 2018. Oil prices will likely find some stability but the market will need to endure several quarters of downward earnings revisions in energy related equities.
  • Manufacturing data remains strong, both new orders and shipments. Data will likely remain in expansion territory given inventory across the channel seems well constrained and at this point does not argue for a slowing of production. Valuations across the market do appear elevated but this only flags as a watch item given that growth in multiple industries remains strong. 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 June 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 06/30/2017: Microsoft Corp. 5.7, Amazon.com 5.3, salesforce. com 4.5, Alphabet, Inc. (Google) 4.4, Facebook 4.2, Apple, Inc. 4.1, Adobe Systems, Inc. 3.7, Visa, Inc. 3.3, priceline.com, Inc. 3.2 and CME Group, Inc. 2.9.

Class N shares were added on July 5, 2017.

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.