Ivy Value Fund

09.30.20

Market Sector Update

  • The U.S. equity markets continued to rally in the third quarter after the poor first quarter caused by the COVID-19 pandemic. While the Russell 1000 Value Index (the Fund’s benchmark) rose 5.59%, the Fund lagged the benchmark's return for the period ended Sept. 30, 2020.
  • The U.S. economy contracted severely in the second quarter, and policy was enacted to combat the contraction. The Federal Reserve lowered the federal funds rate to zero, where we expect it to remain for a long time. Unemployment recipients received a bonus of $600 a week, but that has now expired. Jobs have been re-created in the economy, and we have recovered approximately half the jobs that were lost. Housingdemand strengthened with help from record low mortgage rates, a demographic tailwind and nesting/work-from-home trends. Record low inventory continued to place pressure on homebuilders to keep up with demand, while also placing upward pressure on home prices, a potential risk to affordability. Personal consumptionof goods has seen a strong recovery, while consumption of services has lagged and remains depressed relative to pre-pandemic and likely will until a vaccine is available. Autos, home décor/improvement and electronics have been among the key areas of strength. Manufacturing activity increased with help from auto production and inventory restock across multiple industries.
  • We believe the U.S. economy will continue to improve, but possible risks include the election, the path of the COVID- 19 virus, and the implementation (or not) of further stimulus packages.

Portfolio Strategy

  • Our best performing sectors on a relative basis were information technology and consumer discretionary. Sectors that dragged on performance included industrials and financials. Performance is usually driven primarily by stock selection, and sector overweight or underweight positions fall naturally as a result. We use various risk control measures to keep sector weights from affecting performance more than stock selection.
  • The sharp economic recovery was a benefit to oversold cyclical sectors. In consumer-facing stocks, Target added to performance as consumers purchased higher margin discretionary items, which drove a large earnings beat in the quarter. Target has also improved its online shopping experience to compete more effectively with the competition. In information technology, our investment in Broadcom outperformed as continued strong semiconductor demand from cloud and telecommunications helped the company beat revenue and margin expectations in the quarter. Other positive names included HCA Healthcare and Reinsurance Group of America.
  • Our investments in other areas lagged in the rebound. Financials, which suffer when interest rates move down, hurt performance as Citigroup and Bank of New York Mellon underperformed. Our exposure to the energy sector was also a drag, as declining oil prices pulled down Phillips 66 and Valero.
  • The strategy does not attempt to make sector calls, rather focusing primarily on stock selection. We limit sector overweight and underweight positions to remove macro factors from the portfolio and let individual stock selection drive performance.

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. We think the snap back in economic activity is helpful and should grind higher until we are back to levels pre-crisis. However, this will likely take another year or so. A discovery of a vaccine or cure should accelerate the timeline. In the meantime, we will continue to seek value as opportunities present.
  • 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 Sept. 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 09/30/2020: Comcast Corp. 4.3, Walmart, Inc. 4.2, Philip Morris International, Inc. 3.3, Fidelity National Information Services, Inc. 3.3, Raytheon Technologies Corp. 3.2, Eaton Corp. Plc. 3.2, HCA Healthcare, Inc. 3.2, Broadcom, Inc. 3.1, CVS Health Corp. 3.1 and Citigroup, Inc. 3.1.

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.