Quarterly Fund Commentary
Ivy Pacific Opportunities Fund
March 31, 2013
Frederick Jiang, CFA , CPA
Market Sector Update
- Both the U.S. stock market and U.S. dollar experienced a strong rally during the first quarter of 2013, driven primarily by market stability and growth. Consequently, the strengthening U.S. dollar led to a selloff in emerging markets, as liquidity flew back to the U.S. market.
- In Asia, investors were disappointed by weaker-than-expected economic data from China and India. Economic recovery in China continued, albeit at a slower pace than we expected. Inflation concerns accompanied disappointment related to the Indian government’s new budget, which fails to solve deficit issues and lacks reform measures. Combined, these issues continued to hinder market performance in India.
- A major event affecting foreign markets was the implementation of quantitative easing policies by Japan aimed to end deflation and benefit Japanese companies by devaluing the currency. The Japanese yen depreciated sharply against the U.S. dollar and other Asian currencies, resulting in a large inflow of money to Japan as investors chased stock performance. While a short-term benefit to Japan’s market, these actions negatively impacted the majority of Asia.
- Smaller markets including Thailand, the Philippines, Indonesia and Singapore enjoyed strong performance – the countries were not significantly impacted by the economic problems in China, India and Japan.
- The Fund underperformed the benchmark for the quarter ending March 31, 2013. The Fund’s growth bias was out-of-favor over the quarter resulting in poor stock selection relative to the benchmark and was the main contributor to underperformance.
- The largest security specific detractor to absolute and relative performance came from LG Chemical LTD. The company was one of several in the materials sector that struggled due to slower Chinese growth. China Pacific Insurance and the State Bank of India largely contributed to the performance shortfall as well. In India, the slower growth threatened the credit quality of India’s banking sector, particularly state-owned banks.
- Consumer staple holdings were the largest contributors to performance for the period. Thai Beverage PLC, which benefited from corporate action, and Universal Robina Corp. were the top absolute and relative contributors to Fund performance for the period. Though the Fund was underweight utilities relative to the benchmark, strong stock selection via China Resources Power Holdings Company Limited contributed substantially to returns.
- Over the quarter, the Fund increased its weighting to South East Asian Nations. A move stemming from the combination of continued political stability in the region, sustained robust domestic consumption and investment, and stable commodity price inflation – in our view, key attributes to economic growth for the region.
- We believe that an ongoing urbanization trend, excellent demography and a high savings ratio will continue to strongly drive the Asian economy for the foreseeable future. As more Asians become middle-class consumers, we believe consumption and infrastructure investment themes bode well for opportunistic investing.
- In the short term, we believe risks persist in the market, including: a stronger U.S. dollar, overexpansionary monetary policy in Japan, over leveraging of the Chinese and Indian corporate sector, concerns over a structural slowdown in Chinese economic growth, and unsolved debt problems in many European economies.
- Despite many uncertainties in the Asian market, we think the long-term growth potential in Asia is intact and believe valuations are very reasonable, relative to historical ranges.
The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2013. 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.
Risk Factors. As with any mutual fund, 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. International investing involves additional risks including currency f uctuations, political or economic conditions affecting l the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in a single region involves greater risk and potential reward than investing in a more diversified fund. 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.
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.