Quarterly Fund Commentary
Ivy International Growth Fund (prospectus)
June 30, 2010
Manager(s):
F. Chace Brundige, CFA
Market Sector Update
Risk on. Risk off. The period ended June 30, 2010, proved to be another quarter of volatility, this one solidly skewed to the downside. Markets continued to weigh attractive valuations, margins and recovery with sky-high sovereign debt, high deficits and the associated economic drag. The Greek tragedy became more pronounced in April as yields shot up and talk of restructuring grew louder, causing the European central bank and the International Monetary Fund to coordinate a �750 billion backstop for European Union sovereign debt. Meanwhile, in a move reminiscent of 2008, Germany banned naked short-selling of financial stocks and sovereign credit default swaps in a questionable effort to stem the downswing. Throw in continued tightening in the Chinese property market and sharply lower bank lending growth, the Gulf oil spill, and upcoming fiscal austerity in Southern Europe, Germany and the United Kingdom, and it's tough to have expected a positive market. Meanwhile the political leaders of the United Kingdom, Japan and Australia were all tossed out, essentially for mishandling their respective economies. Highly publicized labor unrest in China hints at heightened wage pressures, especially in the export-driven coastal areas. Many manufacturers are beginning to move production inland, where wages are lower, or perhaps to lower cost Asian countries. While this may be slightly inflationary depending upon productivity gains, generally stronger wages (and higher minimum wages in several key cities) will help China in its shift from fixed asset investment to consumption. In summary: a quagmire of drivers has impacted the market, mostly leading downward.
Portfolio Strategy
We made several changes to the portfolio largely driven by individual stock selection. We've maintained our oil services focus despite some weakness stemming from the BP oil spill, and added an offshore driller amidst the turmoil. We increased the Fund's exposure to global auto and truck recovery, Indian motorcycles and infrastructure build out, and the emerging Chinese middle class and luxury consumer. We slightly increased the Fund's exposure to global telecom, where valuations appear to afford opportunity, and increased the materials underweight. The Fund remains underweight in health care. We remain focused on finding what we think are good companies with good business models as the current economic uncertainty (compounded by governments' reactions, which are almost as difficult to forecast) makes sector selection even more difficult.
Outlook
Our outlook is a bit cloudy. We believe that Western economies have tough sledding ahead. Never in post-war history have so many large economies become so levered, compounding it rapidly by spending more than they can collect. The bond markets have essentially called Greece, Portugal and Spain to task. While the Europeans banded together to stave off Greek restructuring (for now) and its cascade of effects, the message is clear--there is too much debt out there. Why not Japan? Why not the United States? When will it become necessary for these countries to become deadly serious about fixing their balance sheets? The answer is unknowable and for that reason calling stock market direction, now and for at least the next few years, is extremely difficult at best. On the positive side, as we've stated before, companies have generally tolerated the downturn well and their balance sheets and cost structures are in a good position to capture earnings growth should demand growth materialize. Valuations look attractive to us (in a vacuum) and consensus is at least cautious. We will look to buy or add when fear levels appear high and sell or trim when we believe overly positive expectations become discounted.