Market Sector Update
- Investors reacted negatively to the
surprise result of the U.K. referendum to
leave the European Union (EU), shunning
risk assets and favoring bond proxies such
as utilities and telecoms as well as “safe
haven” sectors like consumer staples and
dividend stocks. The aftermath of the vote
pressured deep-value equities.
- Energy stocks recovered from extremely
distraught levels in February as the
market anticipated more balanced supply
and demand in the second half of 2016
despite a dysfunctional OPEC.
- Post the Brexit vote to the leave the EU,
the Bank of England stood ready for rate
cuts and liquidity to aid an economy that
may fall into a recession. It is widely
believed the European Central Bank
(ECB) does not plan to lower rates further,
and is instead focused on getting the
banking system fit to handle any shocks
in the future.
- The Fund underperformed the benchmark
for the period, with poor sector allocation
leading the decline. That said, stock
selection and currency effects benefited
relative performance for the period. Our
holding in Chesapeake Preferred shares
quadrupled off its recent lows. Energy
securities were the top contributors to
Fund performance during the period.
- Munich Re announced that first quarter
profits were hurt by equity investment
write-downs due to volatility in the
markets. The stock declined on the news
and was the largest detractor during the
quarter. We continue to hold Munich Re
because we believe it is a global leader in
its field. Historically, the company has
been managed conservatively with a
focus on return on capital.
- Our positioning entering the third quarter
has shifted more toward U.S. equities. We
remain mindful of the potential for
financial contagion in the EU, and will
monitor the situation accordingly.
- During the second quarter, positions
were initiated or added in industrials,
health care, consumer staples,
telecommunications and information
technology. We trimmed our consumer
discretionary and energy exposure. We
remain overweight financials and
continue to have no exposure to utilities.
- With the drop in global bond yields
around the world, global banks were sold
off, which hurt the Fund given its relative
overweight position in banks. We are
confident the banks held in our portfolio
are well capitalized.
- Despite macro headwinds post Brexit, we
believe the risk of a recession in the U.S.
remains relatively low, and while major
economists have reduced global growth
rates, we remain focused on company
fundamentals. The ramifications of the
Brexit should unfold over several years and
nobody knows for certain what the
outcome will be. We continue to look for
undervalued companies that will
appreciate to our estimated intrinsic value
over a three- to five-year time period.
- Despite the external shock at month end,
our base case assumptions over the next
few quarters are that U.S. economic data
will remain on solid footing and inflation
will start to gradually emerge (as wages
and commodity prices get baked in).
Hence the U.S. (and U.S. dollar) will likely
prove to be a sanctuary of sort until macro
headwinds abate. We now expect the U.S.
Federal Reserve to remain in a holding
pattern for a longer period, as officials
seem divided on the path of rates in a
post-Brexit world amid renewed
- Companies kick-off the second quarter
reporting season mid-July, so we will gain
additional insight regarding the trajectory
of earnings year to date and for the
second half of 2016 and 2017.
- We believe a stabilizing U.S. dollar, higher
oil prices, lower borrowing costs and
generally low expectations going into
earnings season will improve the odds of
positive surprise. The overhang
associated with Brexit, and the uncertainty
related to the U.S. election, could pose
downside risks; however, we believe this
should provide more fertile ground for
long-term, value-seeking investors.
The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 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 joined Mr. Massie as additional portfolio managers on the Fund.
Top 10 Equity Holdings as a percent of net assets as of 06/30/2016: American International Group, Inc. 8.3%, Citigroup, Inc 7.3%, POSCO 4.9%, Bank of America Corp. 4.3%, Munchener Ruckversicherungs-Gesellschaft
AG, Registered S 4.0%, Tenaris S.A. 3.5%, Mediaset S.p.A. 3.5%, Hyundai Motor Co. 3.0%, SANKYO Co. Ltd. 3.0% and McKesson Corp. 2.5%.
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.
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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.