Market Sector Update

• The U.S. stock market, represented by the Wilshire 5000 Total Market Index, was up 6.49% for the quarter. Inflation indexes have been on the rise during the past few months, with growth rates meaningfully above 2%. Part of the jump in prices is due to depressed prices six months earlier, but the most recent observations suggest that there are new inflationary pressures within the U.S. economy. Investors are expecting at least some continued inflation as the 10-year breakeven inflation rate equaled 2.38% at quarter-end, the highest level in more than five years. U.S. Federal Reserve (Fed) Chair Jerome Powell does not expect much higher inflation in the near-term and the Fed will likely remain patient regardless of price increases above their 2% target.
• All eleven sectors were in positive territory with energy (+31.7%) and financials (+16.7%) representing the best performing sectors. The main laggard this quarter – information technology (+1.4%) – is also the largest U.S. sector at 25% of the Index. There was meaningful return dispersion between size and styles this quarter as the large-cap value index outperformed growth by 7.8% and small-cap outperformed large-cap by 7.7%.
• Equity markets outside of the U.S. also enjoyed a strong quarter, with emerging markets trailing developed markets. Economic indicators out of the U.K. have been encouraging recently, although a slight contraction in growth is expected for the first quarter. Prime Minister Boris Johnson announced a “roadmap” for reopening the economy from the U.K.’s third lockdown, with restrictions being lifted entirely by midsummer. Conditions in Germany are more concerning as AstraZeneca’s COVID-19 vaccine has been suspended due to concerns about serious complications.
• The U.S. Treasury yield curve was up significantly across most maturities during the first quarter, with the long end approaching pre-COVID levels. The 10-year Treasury yield ended the quarter at 1.74%, up 82 basis points from December. Credit spreads tightened with the spread on the broad high-yield market closing the quarter at 3.10%. The Federal Open Market Committee met twice during the quarter, as scheduled, with no change to their overnight rate.

Portfolio Strategy

• The Ivy Wilshire Global Allocation Fund uses a “fund-of-funds” structure that allocates assets among affiliated equity and fixed-income mutual funds with both domestic and foreign investment strategies. As of quarter end, Ivy International Core Equity Fund was the largest underlying fund allocation at about 13.4%, followed by Ivy Value Fund at 10.8%.
• The Fund recorded a positive gain for the quarter, outpacing its blended benchmark return. Global equity markets continued to rally during the quarter, spurred by improving economic results, a massive $1.9 trillion U.S. COVID spending package, and improving COVID infection and health outcomes. Virtually every major equity asset class rallied during the quarter, while fixed-income markets faced a more difficult road as the expected supercharged economic growth increased inflation fears and led to a rapid increase in U.S. Treasury yields. The U.S. dollar strengthened during the quarter, weighing on returns of unhedged foreign equity and fixed-income investments.
• The Fund ended the quarter with approximately 33.4% allocated to fixed-income funds, 35.4% allocated to domestic equity funds, about 31.1% allocated to foreign equity and global real estate funds, and 0.1% allocated to private placement investments.
• The three largest contributors to performance in the quarter were the allocations to Ivy Value Fund, Ivy International Core Equity Fund, and Ivy Pzena International Value Fund. Ivy Small Cap Core Fund was again the underlying allocation with the strongest absolute performance during the quarter, returning 15.67% on a stand-alone basis, while Ivy ProShares Russell 2000 Dividend Growers Index Fund generated a stand-alone return of 14.23%. Ivy Pictet Emerging Markets Local Currency Debt Fund recorded the worst stand-alone performance for the quarter, losing -5.56% as the combination of rising interest rates and a strengthening U.S. dollar weight on returns. Of the underlying funds that recorded negative results for the quarter, all are fixed-income funds.
• The Fund’s largest position, Ivy International Core Equity Fund, was a material contributor to returns, adding 0.82% to Fund results on stand-alone performance of 6.32%. Overall, exposure to equity and real estate funds contributed 4.44% to the Fund for the quarter on stand-alone performance of 6.82%. The Fund’s allocation to fixed-income funds detracted -0.79% to Fund results on stand-alone performance of -2.25%.

Outlook

• The Fund’s allowable allocation ranges are accommodating, but we anticipate equity-oriented investments will range from 55-75% and fixed income-oriented investments will range from 25-45% during most market environments. The Fund’s long-term strategic target is a 65% allocation to global equities and 35% to global fixed income.
• The rapid expansion of the COVID vaccine rollout within the U.S. should help the economy continue its reopening, even if a dreaded fourth infection surge occurs. This re-opening, coupled with the latest round of stimulus checks and other aspects of the latest stimulus bill, is likely to propel domestic economic growth and rapidly improve corporate profitability. While meaningful profit growth is already priced into equities, there is a strong likelihood that growth may be even better than expected, which would continue to push equity prices higher.
• The pace of the vaccine rollout in Europe and much of the developing world is disappointing, but in countries where vaccinations have surpassed a meaningful level, the various vaccines appear to be working well to improve health outcomes, so as countries improve their vaccination rates, hurdles to economic growth should be reduced and those countries may begin to experience meaningful economic growth later in 2021 and into 2022.
• Although we did not expect interest rates to fall during the first quarter, we were surprised by how rapidly interest rates increased. Continued economic expansion, expected increases in inflation, and any additional government spending may continue to put upwards pressure on interest rates, but the Federal Reserve is unlikely to allow treasury yields to rise to pre-pandemic levels in the coming months, so there is an implied ceiling on interest rates that is likely well below 3% for the 10-year Treasury.

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 March 31, 2021, 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.

All information is based on Class I shares.

Wilshire Associates sub-advises a portion of the Fund consisting of the multi-asset segment, which invests in affiliated mutual funds, and shall have no responsibility over any other assets or segments of the Fund.

The Wilshire 5000 Total Market Index is an unmanaged index that represents the total U.S. equity market. It is not possible to invest directly in an index.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. The performance of the Fund will depend on the success of the allocations among the chosen underlying funds. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed-income securities are subject to interest-rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Investing in small-capitalization stocks may carry more risk than investing in stocks of larger more well-established companies. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns on investments in securities of large-capitalization companies could trail the returns on investments in securities of smaller companies. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. 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.