Ivy Value Fund

06.30.20

Market Sector Update

  • The U.S. may have just experienced the deepest and also shortest recession in history. Employment saw a record decline in April, followed by a record increase in May and June. This helped the markets to rally after the decline in the first quarter.
  • The Federal Reserve has taken federal funds rates to zero and signaled it will likely remain there for years to come. The U.S. government responded to the COVID-19 pandemic with an unprecedented support package. During the economic shut down, consumer spending plunged and the savings rate shot up to a record 32.2% in April. Upon economic re-opening, consumer spending began to recover. Housing demand followed the same pattern, as did manufacturing and the price of oil.
  • We expect a high probability of more market volatility in the near term. Several macro issues are in play, including: the path of virus cases, possible additional governmental support packages, the U.S. presidential election, and foreign policy between the U.S. and China. We expect the COVID-19 pandemic to be temporary, although timing is uncertain.

Portfolio Strategy

  • The Fund outperformed the Russell 1000 Value Index, its benchmark, for the period. Our accumulation of oversold stocks during the downturn helped as things recovered. We believe market volatility often favors value investing; however, many high-quality companies are now trading at depressed prices, although they are not trading at levels as attractive as they were in March. We feel optimistic that careful buying at these low prices will be rewarded.
  • Our best performing sectors on a relative basis were financials and information technology. Sectors that dragged on performance included industrials and consumer staples. The portfolio’s largest overweight sectors were information technology and financials, while the most underweight sectors were real estate and communication services.
  • The economic recovery boosted cyclical and oversold sectors. In consumer-facing stocks, Lowe’s and AutoZone added to performance. Ameriprise was our best performer in financials. While all financials rallied strongly during the period, it was our best performing sector by far. Our investments in banks and consumer finance, which suffered in the downturn, led the way back up in the recovery. Information technology was the second best sector, led by NXP Semiconductors and Lam Research. Information technology spending was seemingly immune to the rise and fall of economic activity over the quarter.
  • Our investments in more defensive areas, which led the market in the downturn, naturally lagged some in the rebound. Electric utilities Duke Energy Corp. and Excelon Corp. are prime examples. Global tobacco maker Philip Morris International fell during the period. Other defensive names rose, but not nearly as much as the overall market. Advertiser Omnicom Group, Inc. and defense contractor Northrup Grumman Corp. were in this bucket. We attempt to keep our more cyclical names balanced with more defensive names, not wanting to try to predict large moves in gross domestic project growth. Our cash holdings, the most defensive investment possible, also detracted from portfolio returns.
  • 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 currently finding value and yield. With interest rates stuck at very low levels for the foreseeable future, we have looked for opportunities to reduce the Fund’s overweight position to the financials sector. Areas that hold more interest currently include health care, utilities and industrials. Health care valuations are being held in check due to election uncertainty. Utilities surprisingly fell nearly as much as the market in the downturn, but have not recovered, presenting opportunities for long-term investors. Industrials have recovered somewhat with the market, but have lagged the consumer names. This is normal as consumer spending tends to recover much more quickly versus larger corporate spending.

Outlook

  • The U.S. economy had enjoyed a long successful run since the end of the 2008 recession, but the coronavirus ended this run in March. We think the snap back in economic activity is helpful and should grind higher until we return to precrisis levels. However, we believe this will likely to take another year or so to materialize. The discovery of a vaccine or cure for COVID-19 would accelerate this timeline. In the meantime, we will continue to hunt for 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 is often 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 June 30, 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 06/30/2020: Walmart, Inc. 3.8, Citigroup, Inc. 3.7, Philip Morris International, Inc. 3.5, Comcast Corp. 3.5, CVS Health Corp. 3.4, Fidelity National Information Services, Inc. 3.1, Lam Research Corp. 3.1, Eaton Corp. Plc. 2.9, McKesson Corp. 2.9 and Broadcom, Inc. 2.8.

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.