Market Sector Update
- During 4Q2016 global capital markets
once again experienced a sudden volatility
shock, similar to that experienced earlier in
2016. The latest shock, unlike prior shocks,
ignited a stock market rally that very few
saw coming. For the past eight years, the
global economy has gradually healed from
the lingering effects of the 2008
recession, as slow and uneven growth
became pervasive throughout the world.
- The stagnating growth catalyzed
aggressive global Central Bank policy
coordination in an attempt to jump- start
growth. Economic participants whether
they be companies, investors, savers or
politicians, gradually accepted that
structural stagnation had no end in sight.
- The U.S. Presidential election has
drastically altered the view of long-term
economic stagnation. The market rally
greatly favored value over growth stocks,
small stocks over large stocks, and
domestic company stocks over
multinational company stocks. Cyclical
areas performed better than defensive
sectors, while financially leveraged
companies performed better than those
with great balance sheets.
Portfolio Strategy
- In a positive market environment, the Fund
meaningfully underperformed the Russell
1000 Growth Index, its benchmark for the
period ended Dec. 31, 2016. The quarter
also ended one of the worst periods on
record for active management, most
notably in the growth sectors of the
market. Interest rates rose dramatically in a
very short period of time creating large
losses in fixed-income portfolios for the
first time in many quarters.
- Fund performance was enhanced by
positions in financials and energy, but
successes in these areas could not
overwhelm large negative performance
in technology and health care. Notable
winners over the period included CME
Group, Goldman Sachs and Charles
Schwab, while detractors included
companies such as Allergan, Shire, and
Edwards Lifesciences.
- Our large underweight in areas
characterized by stability, such as REITs,
consumer staples and telecom industries
had no meaningful impact on our
performance, which was disappointing
during the quarter as we would have
expected our underexposure to these
areas to have generated much more
positive performance after the election.
- Within the Fund, our positions in the
financial sector have been increased,
positions in defensive areas have been
further reduced, and we are becoming
hopeful that the anomalous valuations in
the bond proxies are on the verge of
correcting. As we look across the
economy, it appears that the U.S. was
accelerating before the election, and
growth should further increase in 2017.
Business optimism, labor markets, global
manufacturing indices, domestic auto
sales and energy prices are now all
moving in a positive direction.
Outlook
- As we look forward to a better economy,
we have to be realistic to the extent that the
current environment in the short term may
not be ideal for growth stocks, as other
areas may have more leverage to better
U.S. economic growth. We are currently in
a market that favors a value style box but
given the rally already experienced in other
areas we believe we could see growth
stocks participate in the rally into 2017.
- Unfortunately, there remains a wide range
of outcomes associated with future
government policies as they have yet to
be defined or vetted. As such, if there is a
policy delay or fumble, it is likely that the
risk appetite in the market would reverse
and valuations would come under
pressure across styles and we might
experience another short-term market
shock, similar to those we have endured
over the past several years.
*Top 10 holdings (%) as of 12/31/2016: Goldman Sachs Group,
Inc. 4.4, Microsoft Corp. 4.4, Lam Research Corp. 4.4,
MasterCard, Inc. 4.4, Home Depot, Inc. 4.0, Celgene Corp. 3.9,
Facebook, Inc. 3.4, Microchip Technology 3.4, EOG
Resources, Inc. 3.3 and Alphabet Inc. 3.3.
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.
The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. 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. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile
than an investment with greater diversification. 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.
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.