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Amid Recession, a Search for Technology Solutions
Across Sectors
Ivy Funds
June 2009
 Zachary
H. Shafran
Portfolio Manager
Ivy Science and Technology Fund
Below, Ivy Science
Technology
The science and technology sector has generally outpaced the overall
global equity market as stocks have rebounded since March. We think
effective management has helped selected companies maintain healthy balance
sheets and avoid oversupply problems that have affected many financial,
consumer and industrial firms.
Overall, we believe the recession is providing an opportunity for
businesses to create solutions that address global resource, economic and
information imbalances. This is where we are focusing our stock selection
research. We think maintaining a position in science and technology as a
part of a well-diversified, long-term portfolio is important, if not
crucial, given the amount of innovation and transformation we see in the
world today.
Technology firms have cut costs
The stock market has rewarded the fact that
information technology companies, especially semi-conductor and electronics
component providers, have done a remarkably good job at responding to a very
difficult economic environment. As the global recession has unfolded, they
have quickly reduced costs by reducing inventory and production capacity.
What this has meant is that many technology companies have been able to
preserve income statements and balance sheets and generate cash; lots of
cash. This contrasts sharply with most companies in deeply cyclical
industries such as autos, where financials have deteriorated and cash
balances have been burned, triggering bankruptcies and bailouts.
| "All around the globe, and across all
size companies, we’re looking for companies that are leaders in
providing science and technology solutions." |
Greater potential share of
global GDP
What we are seeing on a global basis is that science and technology
companies are reinventing themselves. We believe this process will help
this group of industries capture a greater share of gross domestic product
(GDP) and global market capitalization as the recession winds down. By our
own estimate, the science and technology group accounts for between a
quarter and a third of global GDP across both established and developing
markets.
We operate under the premise that science and technology
touches our lives each and every day, often without our knowing it. This
broad definition is what we use when we look around the globe and think
about all the problems that people talk about or are worried about.
We don't see the world as full of problems as much as we
spend time looking for who's providing opportunities to solve problems.
All around the globe, and across all size companies, we're looking for
companies that are leaders in providing science and technology solutions.
A call on growth
As we look at the developing world, the historic business opportunity for
most of the post-World War II period was to create a roof over people's
heads and provide basic necessities such as indoor plumbing. What people
in developing nations think about now is technology. They want flat screen
TVs, they want refrigerators, they want Internet access, they want cell
phones, they want Smart phones.
Take telecommunications in China, for example. In rural areas, companies
have effectively skipped the wire line build out so that currently 40% of
Internet access is done wirelessly, and the Chinese are augmenting their
3G (third generation) cellular phone networks. People don't need to be
plugged in to a desktop or an outlet. And that equals mobility. We have
exposure to semi-conductor companies such as PMC-Sierra (1.7 percent of
net assets as of May 31, 2009) because they are a key player in the
wireless build out in China.
As we search for stocks, we think a lot about mobility.
We don't think about a Blackberry, for example, as being just a device for
wireless e-mail. We think about it as technology that enhances mobility.
More people want to be able to do what they do "24 by 7 by 365"
anywhere around the globe. (Research In Motion, the maker of Blackberries,
represented 4.6 percent of net assets as of May 31, 2009 and was the
Fund's largest holding).
The science of food, water and
power
We think a lot about opportunities such as water and countries that are
adding water-related infrastructure. Water is becoming a scarce resource
globally. We think about the availability of water in terms of quantity.
We think about the availability of clean water. That's why we are invested
in a French water and environmental services company and a U.S. chemical
company that makes water purification equipment.
We also think a lot about agriculture and ultimately the
opportunity for growing food supplies - consistent food supplies. That's
why we're so interested and invested in fertilizer and seed companies.
Smart infrastructure is another area we like. We're very
interested in companies that are involved in automated or advanced
electric metering. In this country, brown outs and black outs have been
frequent in recent years. In developing markets such as India, many
companies have their own generators because reliability and duration of
service is much more problematic.
Even in the auto sector, innovation can be found. We
look at companies that provide GPS (global positioning system) capability,
provide anti-lock brake systems, and those that provide other kinds of
censors.
Green technology shoots
Finally, we look at energy as a technology opportunity. China, for
example, is building many coal plants and is generally dependent on this
environmentally-challenged fossil fuel to achieve strong economic growth.
This reality, as well as long-term global supply issues surrounding
energy, prompt us to look for related investment ideas, including clean
and sustainable energy opportunities, and new technology to extract gas
from the ocean floor. Natural gas explorer/provider Noble Energy is a top
holding in this area (4.2 percent of net assets as of May 31, 2009).
So these are some of the examples of the kinds of things
we look for as part of our stock selection process. If we can find these
things in companies that can execute on these capabilities and do it well
consistently, we feel we will have built a portfolio that has much greater
capital appreciation potential than the overall equity market or a single
sector focus on traditional information technology.
Past performance cannot guarantee comparable future
results. The opinions expressed are those of the Fund’s manager and are
not meant as investment advice or to predict or project the future
performance of any investment product. The opinions are current through
June 9, 2009, and are subject to change due to market conditions or other
factors. Investing in companies involved in one specified sector may be
more risky and volatile than an investment with greater diversification.
International investing involves additional risks, including currency
fluctuations, political or economic conditions affecting the foreign
country, and differences in accounting standards and foreign regulations.
These risks are magnified in emerging markets. Holdings information is not
intended to represent any past or future investment recommendations.
Holdings and allocations can and do change frequently.
Investors should consider the investment objectives,
risks, charges and expenses of a fund carefully before investing. For a
prospectus containing this and other information for the Ivy Funds, call
your financial advisor or visit us online at www.ivyfunds.com. Please read
the prospectus carefully before investing.
To learn more about Ivy
Funds or other mutual fund companies, visit Fund
Companies. For particular fund information, visit Fund
Selector.
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