Market Sector Update
- U.S. equities closed the quarter in positive
territory and the energy sector again
posted gains overall. Crude oil prices
continued to recover. The price bottomed
in mid-February at about $26 per barrel
but peaked around $53 by year end,
based on West Texas Intermediate crude,
the U.S. benchmark. Global equities
overall also finished the quarter slightly
higher.
- The Organization of Petroleum Exporting
Countries (OPEC) in November agreed to
reduce crude oil production quotas by 1.2
million barrels per day (bpd) — the first cut
in eight years. OPEC set the new target at
32.5 million bpd, which translates to a
meaningful reduction in supply. The move
prompted an energy rally and gains in
most commodity-related currencies.
- The U.S. Federal Reserve (Fed) on Dec. 14
announced a 0.25-percentage-point hike
in the fed funds rate to 0.75%. The
decision-making Federal Open Market
Committee indicated economic
improvements could mean a faster pace
of rate hikes than previously expected.
- Donald Trump’s victory in the U.S.
presidential election surprised global
markets. His stated plans on fiscal
stimulus, tax reforms and reduced
financial regulation prompted global
interest rates and global markets to rise.
The potential impact of Trump’s progrowth
agenda drove a move into more
economically sensitive equity sectors and
market segments.
Portfolio Strategy
- The Fund posted a solid positive return for
the quarter that was in line with its
benchmark index (before the effect of
sales charges).
- Stock selection within the energy sector
was a strong contributor to performance.
The Fund’s small exposure to the
materials and information technology
sectors were mild detractors, as was the
approximately 2% allocation to cash in a
rising energy market.
- The largest contributors to performance
relative to the benchmark index were
overweight positions in Oasis Petroleum
and U.S. Silica Holdings as well as
holdings in Whiting Petroleum, Baker
Hughes and RSP Permian.
- The Fund continued to focus within
Exploration & Production companies on
firms that we think have the best balance
sheets, best shale acreage and low-cost
production. We maintained a theme
related to upstream, onshore U.S.
companies and typically do not invest in
those that, in our view, do not hold either
the best or second-best acreage in a
given shale area.
Outlook
- We forecast global oil demand in 2017 will
grow annually at an average rate of about
1.2 million bpd, on top of the current total
demand of 95 million bpd. The increase
continues to be driven mostly by emerging
markets growth. As new supplies are
needed to meet these requirements in the
coming years, we believe new investment
by energy companies will be required.
- We think OPEC’s action in November
effectively set a floor for oil prices at about
$50 per barrel. We think it’s unlikely that
oil will fall below that floor price for any
prolonged period. However, we think the
move will cause existing inventories to be
drawn down more quickly than they
otherwise may have been.
- We believe oil prices will trend higher in
the longer term, with production slow to
recover and stable demand growth
leading to a market balance in the first half
of 2017. A slight supply deficit could drive
oil prices incrementally higher in coming
years.
- We think global economic growth will
remain slow but will pick up in 2017 and
2018. We think strength in the dollar will
depend on a variety of factors, including
the potential for the Fed to become more
hawkish while other central banks are on
the sidelines, and potential for major fiscal
stimulus and regulatory rollbacks in the
U.S.
- We believe U.S. shale oil continues to
offer opportunities, with much of our focus
on the Permian Basin for production
growth. Companies there continue to
improve efficiency and productivity, and
manage costs effectively.
The opinions expressed in this commentary are those of the Fund's managers and are current through Dec. 31, 2016. The managers' 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.
Michael T. Wolverton was named a portfolio manager on the Fund effective Oct. 1, 2016. He previously had been assistant portfolio manager since 2013.
Top 10 Equity Holdings as a percent of net assets as of 12/31/2016: U.S. Silica Holdings, Inc., 4.75%; Halliburton Co., 4.48%; Schlumberger Ltd., 4.23%; Continental Resources, Inc., 4.17%; Parsley Energy, Inc., 4.06%;
Anadarko Petroleum Corp., 3.76%; Baker Hughes, Inc., 3.70%; Pioneer Natural Resources Co., 3.66%; EOG Resources, Inc., 3.62%; Cimarex Energy Co., 3.56%.
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. 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. 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.