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 also
finished 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 above its benchmark
index return (before the effect of sales
charges).
- Top contributors to performance were the
Fund’s allocations to the energy and
materials sectors. Energy was the largest
sector allocation at nearly 74% of equity
assets at quarter end. The Fund’s
exposure to precious metals through a
gold exchange-traded fund was a
detractor from performance.
- The largest contributors to performance
relative to the benchmark index were
overweight positions in Halliburton Co.,
RPC Inc., Patterson UTI Energy, Rio Tinto
plc and Helmerich & Payne.
- The Fund’s focus within the energy
sector remains on Exploration &
Production companies with what we
consider to be the best balance sheets,
best shale acreage and low-cost
production. We maintained a theme
related to upstream, onshore U.S.
companies. We typically do not invest in
companies 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 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 the potential for 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 no guarantee of future results. 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: Halliburton Co., 7.19%; Schlumberger Ltd., 6.15%; EOG Resources, Inc., 4.70%; Chevron Corp., 4.20%; BHP Billiton plc, 3.56%; Concho Resources, Inc.,
3.35%; Pioneer Natural Resources Co., 3.22%; Rio Tinto plc, 3.10%; Phillips 66, 3.06%; Magellan Midstream Partners L.P., 3.05%.
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. 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. Investing in natural resources 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 natural resource companies in complying with environmental and safety regulations. Investing in physical commodities, such as gold, exposes the Fund to other risk
considerations such as potentially severe price fluctuations over short periods of time. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the 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.