Ivy Value Fund

03.31.20

Market Sector Update

  • The decade-long bull market came to an abrupt and painful end with the emergence of the COVID-19 virus. Up until that time, the market was looking like it was on track for another solid year. A trade deal with China and record-low unemployment had the stock market setting new highs.
  • Just like that, everything changed. More than 80% of the country was ordered to shelter-in-place, with the rest of the country likely headed that way. With the order, small and large businesses alike were forced to shut their doors and dramatically change how they operated. Record low unemployment changed to record high unemployment almost overnight. Adding to the pain, Russia and Saudi Arabia started an oil price war by disagreeing to any production cuts, causing oil prices to collapse. The Federal Reserve (Fed) then took interest rates to zero. Finally, the U.S. government responded with an unprecedented support package.
  • We expect market volatility to be very high for the near term but are more constructive for the longer term. While each day brings with it an unthinkable new surprise, we believe the coronavirus is temporary, and we expect growth to improve in the back half of 2020 as the frozen economy begins to thaw out.

Portfolio Strategy

  • The Russell 1000 Value Index, the Fund’s benchmark, was down 26.7% for the quarter, underperforming the index for the period. Nearly all of the quarter’s underperformance occurred in March as the market dropped significantly. We believe market volatility often favors value investing; however, many high-quality companies are now trading at depressed prices. We feel optimistic that careful buying at these low prices will be rewarded.
  • The Fund’ best performing sectors on a relative basis were consumer discretionary and information technology. Sectors that dragged on performance included health care and financials. Our largest overweight sectors were information technology and consumer discretionary, while the most underweight sectors were real estate and health care.
  • The virus quickly ended several positive trends in financials, the sector that detracted the most from Fund performance during the quarter. Strong consumer credit card spending dramatically slowed, hurting portfolio holding Synchrony Financial. AGNC Investment Corp., our mortgage real estate investment trust holding, was down due to fears over both mortgage defaults and volatile fixed-income markets. Additionally, the Fund’s underweight to the health care sector, specifically within pharma and health care equipment, detracted from our relative performance as investors flocked to those industries during the pandemic.
  • The Fund’s best sector was consumer discretionary, with Target doing well as a safe haven in a time when many retail businesses are closed. Walmart, in the consumer staples sector, experienced similar benefits. Information technology also contributed, and to date has fared better than many sectors in response to COVID-19. Our investments in Lam Research and Microsoft were the bright spots. Lam Research continues to benefit from strong spending for semiconductors. Microsoft continues to do well with its cloud strategy.
  • Our strategy does not attempt to make sector calls, rather focusing primarily on stock selection. We overweight or underweight sectors based on individual stock opportunity, with some limits to control risk or volatility. We are currently overweight financials and information technology, where we are finding value and yield. These two sectors often move in opposite directions, which can provide an overall lessening of volatility. In these areas, we have been able to find what we believe are good companies with repeatable business models generating high rates of free cash flow, and low stock prices relative to our estimation of each company’s true intrinsic value. Our underweight to real estate and communications services is simply due to lack of compelling ideas.

Outlook

  • The U.S. economy had enjoyed a long successful run from the end of the 2008 recession, but the coronavirus ended this streak in March. We think the pandemic-driven shutdown in economic activity will cause a recession unlike any we have ever seen before. For the foreseeable future, battling the virus will dominate life and drive stock prices and the U.S. economy going forward. While we recognize there are many unknowns in this battle, the government backstop provides the markets a bit of relief. As we get closer to a vaccine, the world should restart, thus our reason for a constructive longer-term outlook. In the meantime, we will continue to seek value as opportunities present themselves.
  • While the economic forces listed above are clearly important factors, our first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic values. This often is due to short-term negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time to seek to benefit clients over the long run.

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, 2020, 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 03/31/2020: Walmart, Inc. 4.7, Philip Morris International, Inc. 4.1, CVS Caremark Corp. 3.9, Bank of America 3.8, Exelon Corp. 3.7, Comcast Corp. 3.5, Fidelity National Information Services, Inc. 3.2, Allstate Corp. 3.2, Northrop Grumman Corp. 3.0 and Citigroup, Inc. 3.0.

The Russell 1000 Value Index is an unmanaged index comprised of securities that represent the large-cap sector of the stock market. It is not possible to invest directly in an index.

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. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

All information is based on Class I shares.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. 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. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Investing in companies in anticipation of a catalyst carries the risk that certain of such catalysts may not happen or the market may react differently than expected to such catalysts, in which case the Fund may experience losses. The securities of many companies may have significant exposure to foreign markets as a result of the company’s operations, products or services in those foreign markets. As a result, a company’s domicile and/or the markets in which the company’s securities trade may not be fully reflective of its sources of revenue. Such securities would be subject to some of the same risks as an investment in foreign securities, including the risk that political and economic events unique to a country or region will adversely affect those markets in which the company’s products or services are sold. 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.