Market Sector Update
- U.S. and global equities closed a volatile
quarter in positive territory, although the
energy sector finished slightly lower,
based on its benchmark index. Crude oil
prices briefly gained but generally stayed
at the lower levels of most of 2015.
- The U.S. Federal Reserve (Fed)
increased short-term rates in December
and stated its intent for more rate hikes
in 2016 if economic data allow. The Fed
also has indicated that it believes lower
energy prices are transitory and inflation
should meet its 2% target by 2017.
- China’s currency was granted Special
Drawing Rights status by the
International Monetary Fund. China
changed from a U.S. dollar base for its
currency to a “basket” of currencies,
which is likely to help its competiveness
against the dollar.
- Concerns about the pace of economic
growth overall in emerging markets,
continued but slowing supply growth,
increases in global inventories and the
possibility of increasing volumes of
Iranian crude oil coming to market have
been factors in persistently lower prices.
- The Fund posted a negative return for
the quarter that exceeded the negative
return of its benchmark index.
- The Fund’s underperformance relative
to the index was from stock selection in
the energy sector, which accounted for
the majority of the Fund’s quarterly
result. The allocations to cash and to
the industrials sector also were slight
detractors from relative performance.
- The five largest detractors to relative
performance were holdings in Chevron
Corp., Exxon Mobil Corp., Rice Energy
Inc., Continental Resources Inc.,
Cimarex Energy Co. The five largest
contributors were Kinder Morgan Inc.,
Phillips 66 Partners LP, Parsley Energy
Inc., MPLX LP and Columbia Pipeline
- The Fund is focused on what we believe
are the best companies with the best
balance sheets, best acreage, low-cost
production and ability to grow even in a
low-price environment. A current theme
centers on 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.
- We think steady economic growth and
low inflation will continue in the U.S.
this year, and it will remain a bright spot
among developed countries. In our
view, global economic growth is likely to
remain slow overall.
- U.S. shale oil producers have
significantly cut marginal costs. While
we believe all U.S. shale offers
opportunities, much of our focus is on
the Permian Basin as the place
production growth is most likely to
continue. Companies there still are in
the early stages of improving efficiency
and productivity, and are reducing
costs faster than in other, more mature
- We estimate the world is oversupplied
by 1.5-2.0% on total consumption of
95 million barrels per day. However,
we think the year-over-year increase in
global supply will start to diminish, as
output is slowing from producing
countries outside the Organization of
Petroleum Exporting Countries, led by
U.S. shale producers.
- We think current supply/demand
factors and “headline” risks will hold
down oil prices in the short term.
Depending on the demand
environment, we think the
supply/demand imbalance will be
corrected by the second half of 2016
The opinions expressed in this commentary are those of the Fund's manager and are current through Dec. 31, 2015. 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 no guarantee of future results.
Top 10 Equity Holdings as a percent of net assets as of 12/31/2015: Schlumberger Ltd., 4.14%; CME Group, Inc., 4.14%; Baker Hughes, Inc., 3.94%; Halliburton Co., 3.66%; Cimarex Energy Co., 3.49%;
Newfield Exploration Co., 3.42%; Pioneer Natural Resources Co., 3.30%; Parsley Energy, Inc., 3.12%; EOG Resources, Inc., 3.08%; Marathon Petroleum Corp. LP, 2.80%.
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.
Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available a summary prospectus, containing
this and other information for the Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.