Statistics

Ivy Funds: A Deeper Look at Performance

Statistics

For decades, Waddell & Reed stood as one of active management's most venerable names. Tracing its roots to 1937, the financial services giant was one of the first to usher in the modern era of mutual funds. 

In 2002, Waddell & Reed had grown to the point where it was ready to buy Mackenzie Investment Management, advisor to the Ivy Funds. The move, which added 17 mutual funds to W&R's proprietary-branded lineup, was credited with providing a significant boost to its distribution channels. Waddell & Reed's assets under management jumped from around $28 billion that year to more than $135 billion by mid-2014. 

Since then, however, W&R's managers have battled prolonged stretches of net redemptions and lagging performance. This has "left the firm in net outflow mode and forced management to look for ways to rationalize the company's cost structure in order to reflect an overall decline in its AUM," wrote Morningstar strategist Greggory Warren.1

His research note came on the heels of Waddell & Reed's agreement to be swallowed by Australian banker and asset manager Macquarie. The deal is scheduled to close later this year and comes at a reported price to the acquirer of $1.7 billion. The clear prize is Ivy, which provides the international alternative funds player with a much larger American beachhead. By some estimates, the acquisition figures to give Macquarie a top-25 U.S. presence among active fund managers. 2 

The deal figures to sharpen Waddell & Reed's cost-cutting efforts. Shortly after making public its deal with Macquarie, company officials announced they planned to sell W&R's captive brokerage salesforce of more than 1,000 advisors to LPL Financial, an independent U.S. broker-dealer. 

In terms of its existing workforce, Waddell & Reed confirmed reports in March 2021 that it was cutting 200-plus jobs. At the same time, a company spokesman said no changes in the Ivy lineup were planned "at this time." 3

Still, Macquarie owns the U.S.-based Delaware Funds, which runs "many strategies that overlap with or are similar to offerings in Ivy's lineup," pointed out Morningstar shortly after the acquisition was first made public. It added: "The firm has struggled to get back on its feet since 2014 ... Combined with mediocre fund performance and above-average fees charged across the complex, a raft of outflows ensued." 4

At the end of 2020, five actively managed Ivy equity portfolios accounted for 42% of W&R's AUM, according to Morningstar. This significantly adds an element of concentration risk to its turnaround efforts, strategist Warren suggested in his research report. And with less than 30% of Ivy funds rated by Morningstar holding 4- or 5-star ratings over the shorter-term, he added "we find it incredibly difficult to forecast a meaningful recovery in fund flows in the near term."

As this push to reverse Waddell & Reed's flagging track record unfolds, IFA's investment committee thought it might be insightful on the eve of its merger with Macquarie to put under our research microscope this active manager's pre-eminent family of mutual funds. Such an analysis is part of our ongoing Deeper Look series, which investigates claims by managers of peer performance superiority by holding them to a higher standard — i.e., how they've done over longer periods against their respective indexes.

Fees & Expenses

Let's first examine the costs associated with Ivy's 36 strategies with five or more years of data. It should go without saying that if investors are paying a premium for investment "expertise," then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, sales loads — front-end (A), back-end (B) and level (C) — as well as 12b-1 marketing fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds.

Commissions and market impact costs are real expenses associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers.

We can estimate the costs associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in one year. This is considered an active approach, and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities, such as short- and long-term capital gains distributions, than those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 36 active funds offered by Ivy that have at least five years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also, remember that this is what is considered an in-sample test; the next level of analysis is to do an out-of-sample test (for more information see here).

Fund Name Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Deferred Load Max Front Load Global Category
Ivy Municipal Bond C WMBCX 18.00 1.72 1.00 1.00   US Municipal Fixed Income
Ivy Municipal High Income I WYMHX 18.00 0.61 0.00     US Municipal Fixed Income
Ivy Apollo Strategic Income I IIPOX 59.00 0.67 0.00     US Fixed Income
Ivy Limited-Term Bond C WLBCX 61.00 1.67 1.00 1.00   US Fixed Income
Ivy Securian Core Bond A IBOAX 118.00 0.91 0.25   2.50 US Fixed Income
Ivy Corporate Bond A IBJAX 84.00 1.02 0.25   2.50 US Fixed Income
Ivy Government Securities A IGJAX 43.00 0.97 0.25   2.50 US Fixed Income
Ivy High Income C WRHIX 30.00 1.66 1.00 1.00   US Fixed Income
Ivy Small Cap Growth C WRGCX 40.00 2.04 1.00 1.00   US Equity Small Cap
Ivy Small Cap Core A IYSAX 138.00 1.38 0.25   3.50 US Equity Small Cap
Ivy Mid Cap Income Opportunities I IVOIX 25.00 0.83 0.00     US Equity Mid Cap
Ivy Mid Cap Growth A WMGAX 22.00 1.20 0.25   3.50 US Equity Mid Cap
Ivy Value A IYVAX 68.00 1.20 0.25   3.50 US Equity Large Cap Value
Ivy Core Equity C WTRCX 66.00 1.89 1.00 1.00   US Equity Large Cap Growth
Ivy Accumulative A IATAX 85.00 1.10 0.25   3.50 US Equity Large Cap Growth
Ivy Large Cap Growth A WLGAX 33.00 1.01 0.25   3.50 US Equity Large Cap Growth
Ivy Science And Technology C WSTCX 23.00 1.95 1.00 1.00   Technology Sector Equity
Ivy LaSalle Global Real Estate A IREAX 88.00 1.48 0.25   3.50 Real Estate Sector Equity
Ivy Securian Real Estate Securities A IRSAX 59.00 1.43 0.25   3.50 Real Estate Sector Equity
Ivy Natural Resources A IGNAX 44.00 1.77 0.25   3.50 Natural Resources Sector Equity
Ivy Apollo Multi-Asset Income I IMAIX 71.00 0.75 0.00     Moderate Allocation
Ivy Asset Strategy C WASCX 44.00 1.88 1.00 1.00   Moderate Allocation
Ivy Balanced A IBNAX 43.00 1.10 0.25   3.50 Moderate Allocation
Ivy Wilshire Global Allocation A IWGAX 33.00 1.13 0.25   3.50 Moderate Allocation
InvestEd 60 Portfolio WBLAX 18.00 0.86 0.25   2.50 Moderate Allocation
InvestEd 40 Portfolio WICAX 16.00 0.85 0.25   2.50 Moderate Allocation
Ivy Global Bond I IVSIX 38.00 0.74 0.00     Global Fixed Income
Ivy Global Equity Income I IBIIX 43.00 0.92 0.00     Global Equity Large Cap
Ivy Global Growth A IVINX 26.00 1.36 0.24   3.50 Global Equity Large Cap
Ivy International Core Equity A IVIAX 62.00 1.23 0.25   3.50 Global Equity Large Cap
Ivy Pzena International Value A ICDAX 26.00 1.56 0.25   3.50 Global Equity Large Cap
Ivy Managed Intl Opportunities I IVTIX 10.00 1.03 0.00     Global Equity Large Cap
Ivy Emerging Markets Equity A IPOAX 32.00 1.46 0.25   3.50 Global Emerging Markets Equity
Ivy Energy Y IEYYX 23.00 1.35 0.25     Energy Sector Equity
Ivy Pictet Emerging Mkts Lcl Ccy Dbt I IECIX 121.00 0.80 0.00     Emerging Markets Fixed Income
InvestEd 70 Portfolio WAGRX 16.00 0.90 0.25   2.50 Aggressive Allocation
Please read the prospectus carefully to review the investment objectives, risks, charges and expenses of the mutual funds before investing. Ivy mutual fund prospectuses are available at https://www.ivyinvestments.com/reports/ivy 

On average, an investor who utilized a surviving Ivy active equity mutual fund strategy experienced a 1.38% expense ratio. Similarly, an investor who utilized a surviving active bond strategy from the company experienced a 1.08% expense ratio.

These expenses can have a substantial impact on an investor's overall accumulated wealth if they are not backed by superior performance. The average turnover ratios for surviving active equity and bond strategies from Ivy were 48.05% and 59%, respectively. This implies an average holding period of 20.34 to 24.97 months.

In contrast, most index funds have very long holding periods — decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long-term. Again, turnover is a cost that is not itemized to the investor but is definitely embedded in the overall performance.

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Ivy's implementation of active management. We compare all of its 36 strategies that've been in existence for five or more years against its Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition.

We have included alpha charts for each of their current strategies at the bottom of this article. Here is what we found:

  • 72.22% (26 of 36 funds) have underperformed their respective benchmarks since inception.

  • 27.78% (10 of 36 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha.

Here's the real kicker, however:

  • 0% (0 of 36 funds) wound up outperforming their respective benchmarks consistently enough since inception to provide 97.5% confidence that such outperformance would persist (as opposed to being based on random outcomes).

As a result, this study shows that a majority of mutual funds offered as part of the Ivy family have not outperformed their Morningstar-assigned benchmark. The inclusion of the statistical significance of alpha is key to this exercise, as it indicates which outcomes are due to a skill that is likely to repeat and those that are more likely due to a random-chance outcome.

Regression Analysis

How we define or choose a benchmark is extremely important. If we relied solely on commercial indexes assigned by Morningstar, then we may form a false conclusion that Ivy has the "secret sauce" as active managers.

Since Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio.

A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions (betas) of expected return in the U.S. (i.e., market, size, relative price, etc.).

For example, if we were to look at all of the U.S.-based strategies offered as a part of the Ivy funds family that've been around for the past 10 years, we could run multiple regressions to see what each fund's alpha looks like once we control for the multiple betas that are being systematically priced into the overall market.

The chart below displays the average alpha and standard deviation of that alpha for the past 10 years through 2020. Screening criteria include funds with holdings of 90% or greater in U.S. equities and uses the oldest available share classes.

 

As shown above, none of the mutual funds studied had a positive excess return over the stated benchmarks. Likewise, none of the equity funds reviewed produced a statistically significant level of alpha, based on a t-stat of 2.0 or greater. (For a review of how to calculate a fund's t-stat, see the section of this study that follows the individual Ivy funds' alpha charts.)

Why is this important? It means that if we wanted to simply replicate the factor risk exposures of these Ivy funds with indexes of the factors, we could blend the indexes and capture similar returns. 

Conclusion

Like many of the other large active managers, a deep analysis into the performance of the Ivy family of funds has yielded a not so surprising result: Active management is likely to fail many investors. This is due to market efficiency, costs and increased competition in the financial services sector.

As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold and rebalance a globally diversified portfolio of index funds.

Below are the individual alpha charts for Ivy's actively managed mutual funds that have five years or more of a track record.

 

 


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Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.

The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.

Footnotes:

1.) Morningstar, "Macquarie's Acquisition of Waddell & Reed Follows the Pattern We Expected for the Struggling Firm," Greggory Warren, Feb. 2, 2021. 

2.) Euromoney, "Macquarie continues journey from IB to asset manager with US acquisition," Chris Wright, Dec. 3, 2020. 

3.) ThinkAdvisor, "Waddell & Reed to Slash More Than 200 Jobs Following LPL Deal," Jeff Berman, March 8, 2021. 

4.) Morningstar, "Ivy Fund's Parent Sells After a Challenging Period," Robby Greengold, Dec. 3, 2020. 


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.