Quarterly Fund Commentary
Ivy Balanced Fund (prospectus)
June 30, 2010
Manager(s):
Cynthia P. Prince-Fox
Market Sector Update
After a strong first quarter, investors witnessed a gut-wrenching stock market retreat in the second quarter of 2010, posting an 11.4 percent loss. The barrage of macroeconomic news throughout the quarter significantly impacted investor sentiment, causing high levels of volatility in the market. The European debt crisis, collapse of the euro, slowdown in China and the BP oil spill consumed headlines over the last three months. What has been absent from the headlines are the positives that we have mentioned in recent quarters, which would indicate that despite all the bad news, a number of indicators remain in an uptrend, one in particular being corporate profits. If profits remain resilient, then we can reasonably assume that companies will eventually expand by hiring and building more capacity. Given the level of uncertainty created by recent events, this may take longer than we had originally anticipated.
Portfolio Strategy
Given that all market sectors posted negative returns, there were few places to hide on the equity side of the Fund. Conversely, our fixed-income portfolio posted positive returns and were about in line with the broad investment grade index. While stock selection was a positive for the quarter and on a year-to-date basis, sector selection was a negative. The two areas that were down the least during the quarter were those where we are most underweight: utilities and telecommunications. The best relative performance came in our consumer discretionary and technology holdings. Consumer discretionary has been a strong performer for us this year, but we are increasingly concerned about the prospect of a more pronounced consumer pullback. The high-end consumer is heavily influenced by net worth expectations (stock market) and the lower income consumer continues to experience the greatest pressure as unemployment levels have remained stubbornly high. Accordingly, we have reduced our exposure to the consumer. Our staples names did well for the quarter, as they are considered more defensive during times of market turmoil. The primary focus of our consumer staples holdings is their market position in the global markets. The thesis of an emerging middle-class consumer that desires global brands still holds, and we have maintained positions where we believe there is brand relevancy to this emerging demographic.
Outlook
We anticipate the swell of macro news to remain influential in the short term. However, we don't anticipate making significant changes to either our individual holdings or current allocations at this time. We remain more convinced that the companies that have done a good job managing through the downturn likely will reap the benefits over the current cycle and be in a better position to grow in a low-growth environment. We continue to focus where share gains, product innovation and international positioning likely will drive top- and bottom-line growth. Going forward, we will continue to make adjustments that reflect our most current thinking.