Quarterly Fund Commentary
Ivy Cundill Global Value Fund (prospectus)
June 30, 2010
Manager(s):
James Thompson, Jr.
Andrew Massie
Market Sector Update
Non-North American markets, particularly those in Europe, performed quite poorly in the three months ending June 30, 2010. The ongoing fear of a potential sovereign debt default or renegotiation by Greece and contagion fears for Spain, Portugal and Italy, as well as the swift turn from fiscal stimulus programs to fiscal austerity, has dealt blow after blow to anxious market participants. In the midst of such macroeconomic headwinds, however, there are bright spots to consider. First, the precipitous slide in the value of the euro that resulted from the region's balance sheet issues ironically has placed euro-based exporters in a virtuous competitive position for the time being. Second, it appears that the leaders of several key European economies have taken recent developments as a catalyst to rein in spending while opening debate on reforms of taxation systems and labor markets. Meanwhile, the United States continues to suffer from the recent recession, much of it driven by slow employment growth.
Portfolio Strategy
As value investors we are appraisers of businesses, yet during the quarter we were conflicted. We have been seeing increased dividends and share buyback activity as well as private market transactions, yet stocks in general have been declining in market price. We were seeing improvement, yet the market only registered fear. This said, with the recent pullback in markets we are getting more interested. Our list of opportunities is growing as prices decline. We also remain focused on understanding the nature of net asset value growth, the likelihood of the valuation arbitrage closing and, if possible, identifying the particular catalysts to closing the gap between value and price. We continue to look for non-consensus-type ideas in all asset categories that we feel can deliver returns with low risk, such as debt, TARP warrants, convertible bonds and restructurings. We also are investigating methods to more robustly protect the Fund during down markets. With the current market conditions, we believe that we are well placed to seize opportunity for our investors. In addition, in light of the volatility of the various underlying currencies, such as the aforementioned euro example, we continue to reassess our hedging policy on a currency-by-currency basis. Currently, we remain hedged.
Outlook
Looking ahead, our outlook is generally positive. We expect continued issues for sovereigns as they will be challenged by high debt and high expenditures relative to tax receipts. However, we believe that corporations generally are in better shape with free cash flow and reasonable balance sheets. We believe that the market is failing to realize the difference that these two groups face going forward. We feel that our existing holdings exhibit undervaluation that should give rise to both positive returns and protection against loss of capital. Our stocks in general trade at low multiples of what we consider to be normal earnings, especially considering that many of our companies have net cash on their balance sheets. While we expect continued volatility, we also expect that we will be able to take advantage of rapid changes in prices. Our portfolio trades at a larger-than-normal discount to NAV, and while we do not believe that this indicates any near-term indication of strong performance, we do believe that over the long term this is an excellent indication of potential strong performance.