Ivy Value Fund

Ivy Value Fund
09.30.17

Market Sector Update

  • U.S. equities continued to show strong upward momentum during the third quarter. The Russell 1000 Value Index, the Fund’s benchmark, gaining 3.12%, but trailed both the broader S&P 500 Index and growth style. Overall, equities outperformed most asset classes in the quarter.
  • Business confidence and capital spending continued trending upward, indicating a sustaining level of overall optimism. Manufacturing data remained strong with the Institute for Supply Management (ISM) Index hitting new highs. Employment was strong and inflation remained in check.
  • The U.S. Federal Reserve (Fed) unveiled the details of its plan to slowly unwind its $4.5 trillion balance sheet while staying the course on interest rate normalization.
  • The quarter saw multiple potential disruptions – escalating tensions on the Korean Peninsula, devastation from multiple major hurricanes and a lack of meaningful policy out of Washington. Through it all, the global economic backdrop was resilient.
  • The solid economic outlook, coupled with hopes that progress on gridlock issues like tax reform and deregulation is achievable, continues to fuel prospects for companies.

Portfolio Strategy

  • The Fund underperformed the benchmark for the quarter largely due to volatility in a few individual holdings. Our largest sector overweights include financials, consumer discretionary and materials. We believe the U.S. banking system is strong and well capitalized, producing several attractively priced equities.
  • Conversely, the Fund was underweight utilities, industrials and telecommunications services. We see very few opportunities in these sectors. However, some industrials ideas are compelling if attractive pricing presents itself. Our cash at the end of the quarter was 3.06%.
  • Our single top performing holding, Micron Technology, delivered returns of 28.9%. Additional strong individual performers included Target Corp., Cigna Corp. and DowDuPont, with all three companies positing double-digit returns for the quarter.
  • The Fund’s underperformance was largely due to volatility in a few individual holdings, specifically Teva Pharmaceutical, Uniti Group and Plains All American Pipeline. We decided to exit our positions in Uniti and Plains All American Pipeline as the thesis of these companies changed, impacting our calculations of their intrinsic value. We have retained our small position in Teva, as we believe the company has a solid footing in the generics space and is poised to create shareholder value by focusing on their balance sheet.

Outlook

  • Barring an unforeseen disruptive event, the economic outlook remains strong. Inflationary and wage growth projections suggest the end of this current expansion has a long way to go. We believe the Fed will continue its plan for normalizing interest rates with one more key federal funds rate increase in 2017.
  • While these economic forces are clearly important factors, the Fund’s portfolio management team first approaches for investment opportunities at the company level. We seek to find quality, growing companies whose stocks are trading below their intrinsic value.
  • At times, this is caused by short-term negative issues, and we become large owners of companies we feel have the ability to shed those factors. However, we continue to seek out and make investments in companies one at a time, striving to benefit clients of the long run.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through September 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 09/30/2017: Energy Transfer Prts 5.4, JPMorgan Chase & Co. 5.0, Citigroup Inc. 4.6, Wal-Mart Stores Inc. 3.9, Capital One Financial Corp. 3.7, Synchrony Financial 3.6, State Street Corp. 3.3, Amgen Inc. 3.2, DowDuPont Inc. 3.2, CVS Corp. 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 Waddell & Reed Advisors Value Fund will merge into the Ivy Value Fund on Oct. 16, 2017.

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. 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. 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.