Fund Review : Ivy Asset Strategy Fund

By Ted Barnhart

Note: please see disclaimer and disclosure following this post.

A Fund For “Austrians”

If followers of Austrian School Economics were to get together to construct a mainstream equity based mutual fund that addressed their concerns, they would create the Ivy Asset Strategy Fund.

The fund is categorized by Morningstar as a World Allocation fund, and is part of the family of Ivy Funds.  The Ivy Fund family is a subsidiary of Waddell & Reed Financial Inc. and based out of Overland Park, Kansas.

Although fund literature and managers have never specifically mentioned Austrian School Economics, many of the investment themes that have been enacted since the fund’s 1995 inception have focused on issues that can keep “Austrians” awake at night.   Manager Michael Avery, often references the potential side effects of the easy monetary policies enacted by central bankers around the globe.   Indeed Asset Strategy has had a position in gold bullion that goes back as far as the early 2000’s.

A 2010 Wall Street Journal article described the fund as by some measures acting like a hedge fund and ”part of a rapidly growing breed of U.S. Mutual Funds that can trade in almost anything they want, including hedging during times of trouble.”

The original retail version of the fund dates back to April of 1995, and the fund has a track record of both participating in up markets while minimizing or avoiding disaster during bursting of both the Nasdaq Dot Com bubble circa 2000 and more recently the financial crisis of 2008.

Stock Like Returns – “Less Stock Market Risk”

For the ten-year period which ended October 31, 2014, the retail version of the fund inclusive of fees (which is comparable to the total fees of the institutional share class plus advisory fees of BIA) returned an annual average return of 10.76% compared to 8.2% for the S&P500.

As mentioned the fund navigated two rounds of financial calamity with much (relative) success.  From 2000 to 2002 the Vanguard S&P500 Index Fund posted three consecutive annual losses of -9.06%, -12.15% and -22.15%. The Asset Strategy returns for the same years was up 20.66%, down -11.74%, and up 2.3%. In 2008 the Vanguard S&P Index Fund posted a decline of -37.02%, while Asset Strategy “outperformed” with a decline of -26.44%.

As Morningstar analyst Michael Herbst writes: “Over the longer haul, this fund has achieved its goal of delivering stock-market-like returns with less stock market risk.”

Recent Concerns

It should be noted however that  of late not everything has been smooth sailing for the Asset Strategy fund. Trailing five-year returns have significantly lagged broad-based market returns in the U.S., and year to date the fund is actually down nearly 4 % (through October). In and of itself this is not overly concerning from an “Austrian” perspective given that the fund has continued to focus on themes that may be extremely important long-term, but not performing well in current markets.

While much of the allure of Asset Strategy comes from performance in troubled markets the fund has at times also been able to deliver significant outperformance in bull and “bubble” runs, in part by utilizing aggressive hedging strategies which allowed the managers to take on risk that might not otherwise have been accepted. One of the disappointments for Asset Strategy in recent years is that, despite underperforming years which are to be expected, the good years have not provided anything special such as the 40% return in 2007 (compared to 5.4% return of the S&P 500) and the 21% return of 2005 (while the S&P 500 returned 4.7%).

Given the fund’s inability to deliver a home run of late, combined with the resignation of fund co-manager Ryan Caldwell earlier this year; One might ask whether or not the fund managers have had their hands tied a bit, due to internal compliance or regulatory concerns.

Indeed (as referenced by the earlier  WSJ.Com article) in the aftermath of the infamous flash crash of May 2010, the fund’s hedging techniques came under scrutiny as a potential instigator of the mysterious sell off.

When Caldwell’s resignation was originally announced, Ivy Funds  stated that he was leaving the industry but would still serve as a consultant to the fund for the next two years. Shortly thereafter, however the firm announced that the agreement was not being pursued and that “after further discussion and consideration, it was determined that the consulting agreement was not essential to the ongoing investment process.”

It is important to note, that BIA has  no specific evidence or knowledge that current fund management may have some new operating constraints.  It is simply a question that arises when one starts  playing “connect the dots”.

Current Outlook and Allocation

As for the current fund outlook , a recent conference call revealed that Lead Manager Mike Avery is still expressing caution given the uncertainties of monetary policy and that the Fed has indicated the possibility of higher rates come mid 2015. Meanwhile while the European Central Bank and Bank of Japan are taking the opposite course of expanding their balance sheets.   Looking even further down the road is a fear that an inability of the U.S. economy to absorb a higher interest rate environment will lead to calls for further stimulus and thus a continuation of the policy circle and inability of the Federal Reserve to reduce the size of its balance sheet.

As of November 11^th the fund holds about 71% in equities, including an 8% total position in three privately held companies. The fund maintains a 6% position in gold, whose allocation has been as high as 12% in the past. Just 4% resides in fixed income to go along with a current cash buffer of 19%.   It should be noted that a significant long-term capital gain will be distributed, payable on December 11th to holders on record as of the 10^th.

Still A Potential Core Holding

Regardless of recent struggles and concerns with Ivy Asset Strategy, the fund remains an excellent core holding for a follower of Austrian Economics who is looking to use an active management approach, and prepared to take stock like risks.  The risk/reward profile may change a bit however, particularly if  the managers use cash rather than other hedging strategies for risk management. While such a change may not trigger a shift in overall funds allocated to Asset Strategy itself, it may make it appropriate for investors to re-evaluate other holdings in one’s portfolio that have been selected to complement the Asset Strategy Fund.

Edit:  An update to this review has been published on 2/24/2016

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DISCLAIMER: Nothing in this article should be construed as a personal recommendation or investment advice. Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any particular investment security. Investors should conduct their own due diligence and seek the advice of a financial and/or investment professional before making any investment decisions.

 BIA clients and principal may hold a position in securities mentioned in this article.  Positions are subject to change at any time without notice.