Market Sector Update
- Just looking at quarter end equity returns of the major market indices would fall short of explaining the intra-quarter volatility. The Russell 1000 Growth Index (Fund’s benchmark) managed to squeak out a slight gain but it seemed like a victory considering the index was in negative territory midway through February.
- The market rebound intra-quarter continues to validate how the market lacks true conviction and is data point driven. Furthermore, recent market performance seems highly dependent on the Federal Reserve (Fed) interest rate policy – a dovish position positive for equities and a hawkish position negative.
- U.S. economic indicators during the quarter aren’t helping investors find conviction either. While employment gains continue and the consumer appears to be in a healthy position, these are offset by volatile manufacturing activity and the still visible ripple effects from energy.
- The Fund significantly underperformed the benchmark for the period ended March 31, 2016. From an attribution standpoint, stock selection was the main contributor to the underperformance, although sector allocation was also a detractor.
- Health care was the most notable detractor of performance through both stock selection and an overweight position in a weak sector. The sector was pressured due to renewed concerns over drug price reform in the U.S. and also an overall risk-off trade during the quarter, which notably impacted biotech names.
- In terms of health care stock selection, Teva, Shire and Allergan were weak due to the aforementioned sector concerns, but also incremental concerns over acquisition transactions that each company is involved in. Separately, weakness in PTC Therapeutics was a stock-specific event as the Food and Drug Administration rejected the company’s drug treating Duchenne muscular dystrophy.
- Technology was a detractor through stock selection alone. An overweight position in Alliance Data Systems was the key underperformer as investors grew concerned that the credit environment was rolling over.
- Consumer discretionary was also a detractor, completely through security selection. Amazon.com shares sold off after significant appreciation last year and shares of Trip Advisors were weaker on business model transition risk and global terrorist events.
- Energy provided a modest positive contribution as shares of Halliburton and Schlumberger performed well during the quarter.
- When looking at the entirety of 1Q2016, investors started out betting on safety factors (dividend yield, low beta) but once the Fed commentary suggested that it was unlikely to hike rates in the near-term, the equity markets quickly flipped to a risk-on view. Unfortunately, it’s likely these quick market direction changes are going to continue and the trigger for the changes are going to vary.
- The likely reason for these sudden appetite changes is that the U.S. economy continues to walk the line of slow growth, neither tipping toward strong growth nor recessionary territory but investors always fear they will miss either trade. Investors are seemingly playing stock characteristics (value vs. growth, low beta vs. high beta) more so than they are focusing on company specific long-term fundamentals.
- We believe the macroeconomic environment will likely continue to be volatile as the same debates remain: 1) the pace at which the Fed will move interest rates higher, 2) unsteady or decelerating growth in emerging markets, Japan and parts of Europe 3) continued ripple effects from a step-down in energy investment, and 4) the potential for layoffs in the domestic market as global U.S. companies hesitate on investment.
- The Fund will continue to seek strong, sustainable, and defensible growth stocks that we believe can be owned to maturity value. Thank you for your continued support.
*Top 10 holdings (%) as of 03/31/2016: Amazon.com, Inc. 4.5, Allergan 4.1, Apple, Inc. 3.7, Facebook, Inc. 3.5, Alphabet, Inc. 3.5, Salesforce.com, Inc. 3.4, Shire Pharmaceuticals Group 3.4, Adobe Systems, Inc. 2.8, J.B. Hunt Transport Services 2.7 and Visa, Inc. 2.6.
The opinions expressed in this commentary are those of the Fund’s manager and are current through March 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.
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. While the Fund seeks to minimize tax distributions to shareholders, it may realize capital gains and earn some dividends. 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.
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