Quarterly Fund Commentary
Ivy International Core Equity Fund (prospectus)
June 30, 2010
Manager(s):
John C. Maxwell, CFA
Market Sector Update
Government debt, politics and policies roiled the markets during the second quarter of 2010. Greek debt is trading like junk and spreads on Spanish and Portuguese debt widened throughout the quarter. The European Union (EU) appears to be holding together; an uncoordinated disintegration of the EU would be extremely negative for equity markets, almost ensuring a double-dip, prolonged recession. Meanwhile, Japan, the United Kingdom and Australia threw out their prime ministers during the quarter. Interestingly, in a period where populist movements are a fear for markets, the United Kingdom chose a more conservative leader, Australia replaced their prime minister due to a proposed tax scheme on resource companies (not citizens), and Japan did their seemingly annual change at the top. China continues to be on a tightening track, though the resumption of yuan revaluation was welcomed by the market at the end of the quarter. Throw in looming global financial regulation, the BP oil spill, slower economic data out of the United States, and North Korea committing an act of war against South Korea, and you had a tough quarter for equities.
Portfolio Strategy
While the Fund is fairly balanced between value and growth, we are emphasizing value over growth. During the quarter we removed our cyclical tilt and reduced our weighting in small- and mid-cap stocks. We believe that market uncertainly has created relative value opportunities in telecommunications, some select cyclical stocks exposed to Southern Europe, and integrated oils. We also think the market is paying too much of a premium for the marginally better "certainty" afforded by the consumer staples and industrials; therefore, we are below the index weighting for both (an infrequent occurrence over the last five years). Our largest weightings relative to the index are telecommunications, energy and consumer discretionary. Financials and utilities are the greatest underweights. From a geographic standpoint, we continue to be underweight Japan and overweight non-Japan Asia for its growth. We have slightly increased our weighting in Southern Europe but remain underweight in Southern Europe, as well as domestic demand stocks throughout the developed world, with the exception of Australia. At this point we feel the market is not expensive, and we see strong relative value opportunities.
Outlook
Today we no longer place a high probability on global growth exceeding current expectations. Increasingly concerned about government mismanagement of the recovery, we are adopting a more consensus outlook along the lines of moderate growth in the developed world with strong growth in the emerging world. Elsewhere, investor exposure to low-yielding, short-duration bonds and cash remains very high when compared to history across the developed markets. We think it makes increasing sense for investors to switch out of these low-yielding capital preservation instruments for higher return opportunities in the equity markets. For the long term, we continue to believe emerging populations in countries like China, India, Russia and Brazil will continue to try to create a standard of living closer to ours. To accomplish this, they will require vast amounts of infrastructure and increasingly productive economies. These trends should drive consumer-facing companies serving these markets as well as infrastructure companies. We remain focused on solid dividend yields and have been increasing our emphasis here. As always, we will continue to buy stock in companies that we feel demonstrate strong cash generation, less leveraged balance sheets and solid opportunities for growth.