Market Sector Update
- Donald Trump’s Presidential election
victory created significant intra-quarter
volatility. The initial negative market
reaction was replaced by optimism that
new fiscal policies, including more
business-friendly tax policies, would
bolster economic activity. We believe this
optimism will lead to higher levels of
economic growth across the globe,
especially in domestic markets, in 2017.
- Health care stocks rallied as concern
over drug pricing pressure abated with
the assumption that Trump’s
administration would be more health care
friendly, especially with the likely
immediate repeal of Obamacare.
Unfortunately, that rally was cut short as
Trump began tweeting about drug price
negotiations. We expect the new
President’s propensity to tweet will drive
more day-to-day volatility in various
sectors, but the ultimate policy changes
will be relatively benign.
- The markets now expect up to three
more interest rate increases in calendar
year 2017. As history has shown, the U.S.
Federal Reserve (Fed) will adapt to the
incoming data, but with job growth and
underlying confidence increasing, we
expect these rate increases will occur.
- The U.S. dollar strengthened through the
quarter, as Trump spoke more about
trade policy and taking a tougher stance
on China.
Portfolio Strategy
- The Fund outperformed its benchmark
(before the effects of sales charges)
primarily due to strong stock selection in
the information technology and consumer
discretionary sectors. Sector allocation
was a negative contributor as the Fund’s
exposure to health care, a sector not
included in the benchmark, drove virtually
all of the relative underperformance.
Within health care, allocations to
biotechnology benefitted performance,
while pharmaceuticals and health care
technology detracted.
- Despite the drag to performance
stemming from the Fund’s allocation to
health care, allocations to consumer
discretionary, telecommunication
services and materials posted relative
gains over the quarter. Within in
consumer discretionary, allocations to
internet and direct marketing retail as
well as household durables posted large
relative gains.
- Top individual contributors to
performance included Microsemi Corp.,
Micron Technology Inc. and Ionis
Pharmaceuticals.
- At quarter end, the Fund had
approximately 84% of assets in U.S.
equities, 13% of assets in international
stocks and the residual in cash.
Outlook
- We believe the Fund is positioned to
perform well as we move through 2017. The
health care portion of the portfolio
accounted for virtually all of the
underperformance in 2016, and we believe
the sector is now poised to outperform. The
sector seems ripe with much lower
valuations and renewed growth
opportunities, setting up for a potential
powerful rally.
- Semiconductors were a solid contributor
during the quarter and the continued
consolidation in that market, along with
underlying economic growth, should drive
earnings upside and stock
outperformance again in 2017.
Additionally, our exposure to key trends
like data analytics, payments
electronification and the technology
revolution in automobiles, should provide
significant opportunities in the next
several quarters. We continue to add
opportunistically to both existing and new
positions, as we believe 2016 allowed for
attractive entry points in stocks that were
unduly punished.
- We believe that underlying business
confidence will drive higher levels of
spending and hiring in 2017. These trends
will accelerate capital spending and drive
earnings for companies across our
portfolio, which may lead to stock
outperformance. We believe the Fund is
well positioned for these trends, as
companies levered to technology and
innovation normally see the earliest
acceleration in spending.
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 Oct. 1, 2016, Brad Warden was named a portfolio manager to the Ivy Science and Technology Fund.
Top 10 Equity Holdings as a percent of net assets as of 12/31/2016: Micron Technology, Inc. 6.1%, Microsemi Corp. 5.5%, Alliance Data Systems Corp. 5.0%, Microsoft Corp. 4.9%, Euronet Worldwide Inc. 4.1%, Ionis
Pharmaceuticals, Inc. 4.0%, WNS (Holdings) Ltd. ADR 4.0%, Aspen Technology, Inc. 3.8%, ACI Worldwide, Inc. 3.8% and Facebook Inc., Class A 3.5%.
Risk factors. The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund invests more than 25% of its total assets in the science and technology industry, the Fund’s
performance may be more susceptible to a single economic, regulatory or technological occurrence than a fund that does not concentrate its investments in this industry. Securities of companies within specific
industries or sectors of the economy may periodically perform differently than the overall market. In addition, the Fund’s performance may be more volatile than an investment in a portfolio of broad market securities
and may underperform the market as a whole, due to the relatively limited number of issuers of science and technology related securities. 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.
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.