Ivy Value Fund

12.31.20

Market Sector Update

  • The U.S. equity markets continued to rally after poor first quarter 2020 performance caused by the COVID-19 pandemic. For the fourth quarter, the Fund outperformed its benchmark, the Russell 1000 Value Index, which returned 16.3%.
  • The U.S. economy contracted severely in the first half of 2020, and policy was enacted to combat the situation. The Federal Reserve (Fed) lowered the federal funds rate close to zero, where is it likely to remain for some time. Stimulus checks were sent to many American people and businesses. These policy actions have helped, as employment increased by 855,000 during the first two months of the fourth quarter. As of November 2020, 56% of the 22 million jobs lost during the first two months of the pandemic have been recovered. The unemployment rate remains elevated relative to the pre-pandemic levels but has declined faster than most expected.
  • Housing demand remained strong with help from record low mortgage rates, a demographic tailwind and nesting/work from home trends. Record low inventory continues to place pressure on homebuilders to keep up with demand while also placing upward pressure on home prices, a risk to the outlook for affordability.
  • Personal consumption continued to hold up on net during the first two months of the fourth quarter despite the virus’ resurgence and tighter restrictions. The online portion of consumption continued to take market share from brick and mortar. Goods have more than recovered relative to pre-pandemic levels, while services will likely remain depressed until the vaccine has reached a major portion of the population.
  • Manufacturing activity strengthened, and the combination of elevated orders and low inventories is expected to support ongoing production in coming months.

Portfolio Strategy

  • Our best performing sectors on a relative basis were financials and health care. Sectors that dragged on performance included consumer discretionary and energy. Performance was driven primarily by stock selection, and sector overweight or underweight positions tended to be small. We used various active risk control measures to keep performance contribution from sector weights smaller than contribution from stock selection. Most sectors were within a few percentage points of the benchmark weighting.
  • The continued economic recovery was a benefit to cyclical sectors. Magna, a manufacturer of auto parts, was a prime example. In financials, performance was led by Citigroup, Morgan Stanley and Capital One. These names benefitted both from an improving U.S. economy and slightly higher interest rates. Hospital owner HCA rose as it began to catch up on health care procedures delayed earlier in the year.
  • Our investments in other areas lagged in the rebound. Biopharmaceutical maker Amgen released disappointing data on new drugs it is developing. Lowe’s, which was one of our best performers during the pandemic shutdown, slowed from its previous pace. Energy recovered strongly, and while we had some gains there, our holding in refinery Valero lagged.

Outlook

  • The U.S. economy had enjoyed a long successful run from the end of the 2008 recession, but the coronavirus ended this run in March 2020. We think the snapback in economic activity is helpful, and we expect it to grind higher until we are back to levels pre-crisis. The Fed strengthened forward guidance for interest rates, which sets a very high bar for raising rates until well after the virus is contained. The Fed would also like to see inflation return to a typical level of 2%, but we expect this target won’t be achieved for another year or so. This may result in higher interest rates at the longer end of the Treasury curve. We must also watch as a new administration takes office, and potential governance changes that could affect our holdings.
  • 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 Dec. 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 a % of net assets as of 12/31/2020: Comcast Corp. 4.2, Walmart, Inc. 3.6, Morgan Stanley 3.5, Citigroup, Inc. 3.5, Philip Morris International, Inc. 3.3, Raytheon Technologies Corp. 3.2, Target Corp. 3.1, Capital One Financial Corp. 3.0, CVS Health Corp. 3.0 and Eaton Corp. Plc. 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. 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. The Fund typically holds a limited number of stocks (generally 30 to 45) and the Fund's manager also tends to invest a significant portion of the Fund's total assets in a limited number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund’s NAV than it would if the Fund invested in a larger number of securities or if the Fund's manager invested a greater portion of the Fund's total assets in a larger number of stocks. 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. 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.