Market Sector Update
- The fourth quarter of the year marked
several unexpected political outcomes
and the resilience of equity markets.
Donald Trump won the U.S. presidential
election and Italian Prime Minister Matteo
Renzi resigned following an unsuccessful
constitutional referendum. Defying
expectations of a fallout from equity
markets, both the U.S. and Italian stock
markets rebounded quickly following
these events.
- A focus on economic growth and inflation
triggered a risk-on trade and reignited the
bond sell-off that began in mid-summer.
In China, there are currently no signs of a
“hard landing”. Consumers seem to be in
decent shape. However, we believe there
is clearly an overbuilding of infrastructure.
There is also excess production capacity
in some industries. The high level of debt
in the financial system is a concern but
most debt is held domestically.
Portfolio Strategy
- The Fund outperformed the benchmark
(before the effects of sales charges) over
the quarter, led by strong stock selection in
the financials sector. A steepening yield
curve born from higher inflation
expectations benefited Fund holdings.
Citigroup Inc., Goldman Sachs Group, Inc.
and Bank of America Corp. were top
contributors to performance over the
period. Additionally, strong selection in
energy, consumer discretionary,
information technology and
telecommunication services all benefited
Fund performance.
- Consumer discretionary holding
Mediaset Spa, an Italian and Spanish
broadcast company, surged during the
period as European media conglomerate
Vivendi disclosed it has accumulated a
20% stake in the company.
- Detractors to performance included stock
selection in the materials and industrials
sectors as well as an overweight
allocation to health care, a poor
performing sector.
- Top individual detractors to performance
included McKesson Corp. and TRI Pointe
Group Inc. Tri Point, a single-family homes
builder, was hurt by softening demand,
though we believe the growth outlook
and valuation remain intact. McKesson, a
pharmaceutical distributor, was under
pressure as populist political rhetoric
regarding the pharmaceutical industry
hurt its valuation. Post the U.S. election,
pricing pressure in the industry has
somewhat abated.
Outlook
- The election of Donald Trump accelerated
the resurrection of value investing
strategies that was already underway. We
believe this is the beginning of a multi-year
rotation that favors value investing, which
benefits from rising rates, higher inflation
and cyclical recovery. This global reflation
trade is being led by the U.S., where
employment and economic activities have
been gathering momentum since early this
year.
- Brexit, Trump’s election win and the Italian
referendum were all considered to be
risks to the market, but they were merely
bumps along the highway to higher global
growth and value strategy
outperformance. Global markets returned
to their upward trajectory post each of
these political events. We believe the
upward trajectory is being led by
financials and energy, as they are the
most undervalued parts of the market.
- We expect Trump will bring lower
regulation, lower taxes, higher
infrastructure spending and a focus on
domestic energy and manufacturing
capabilities. We believe these events will
accelerate U.S. growth, bring on more
inflation and drive interest rates higher.
Such an environment will be great for
value stocks and terrible for bond-proxy
stocks and “quality” consumer staples.
Investment money has been hiding in low
volatility staple stocks since the financial
crisis. We see the trend for investment
funds to bid up the value of financial and
cyclical stocks to last for many years.
The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2016. The manager's views are subject to change at any time based on market and other conditions,
and no forecasts can be guaranteed. Past performance is not a guarantee of future results.
Effective March 24, 2016, Jonathan Norwood and Richard Wong were named additional portfolio managers on the Fund. Effective August 31, 2016, Portfolio Manager Andrew Massie left the firm.
Top 10 Equity Holdings as a percent of net assets as of 12/31/2016: Citigroup, Inc 6.3%, American International Group, Inc. 5.8%, Wells Fargo & Co. 4.4%, Bank of America Corp. 4.0%, Munchener Ruckversicherungs-
Gesellschaft AG, Registered S 3.3%, International Business machines Corp. 3.0%, Chesapeake Energy Corp., 5.75% Cumulative 2.8%, Honda Motor Co. Ltd. 2.6%, HCA Holdings, Inc. 2.5% and Apache Corp. 2.4%.
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. 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. 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. 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.
IVY INVESTMENTSSM refers to the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds, and those financial services offered by its affiliates.
Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and
summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.