Quarterly Fund Commentary
Ivy Managed International Opportunities Fund (prospectus)
June 30, 2010
Manager(s):
Michael L. Avery
Market Sector Update
The period ended June 30, 2010, proved to be another quarter of volatility--this one solidly skewed to the downside. The Greek tragedy became more pronounced in April as yields shot up and talk of restructuring grew louder. This caused 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 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. 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. In summary: a quagmire of drivers has impacted the market, mostly leading downward.
Portfolio Strategy
We think stocks are more attractively priced than debt, so emphasis on strong and believable dividend yield has never been higher in our stock selection. Within the fixed-income portion of the fund, we continue to see value in high-quality corporate debt rather than lower yielding, high-quality sovereigns. From a geographical perspective, the Fund remains well-diversified across Asia, with significant exposures in China, India, South Korea, Taiwan and Singapore. We think that corporate earnings will continue to surprise on the upside. We increased the Fundss exposure to India where we believe certain sectors are more attractively positioned. Towards end of the quarter, we added back positions in the Chinese banking sector as we found valuation quite attractive.
Outlook
Our outlook for the months ahead is mixed. 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. On the positive side, 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 (in a vacuum) and consensus is at least cautious. Central banks are keeping rates low and inflation remains benign which are positive signs. We do not believe we will see a deflationary environment develop. Due to the Greek turmoil and high budget deficits, we think that European currencies may remain under pressure for some time to come.