Mutual Fund Site

Normally the month of May brings about festivities. For example, the Cinco de Mayo celebrates Mexico’s victory over French forces in 1862. And this type of celebration happens across Europe as well, with many countries putting on “May Day” parades. For some, however, May is reminiscent of a “flash crash” that cut into the market so swiftly and deeply (and recovered throughout that same day) that the SEC began an investigation. It was not until recently that the SEC’s report silently named mutual funds company, Ivy, as a source for this May flash crash.

In fact, it was reading about this report and the speculation that surrounded it that we came across this large cap equity fund. That fund is the Ivy Asset Strategy Fund (WASAX), a rather unique and active mutual fund that has so much discretion over how its assets are managed that one might easily confuse it for a hedge fund with an extremely low entry point (just $500 gets you in).

“A Complicated, Active Equity Fund

While it just turns out that this equity fund has maintained a large cap growth approach over the past 5 years, the composition of those equities has shifted. The fund manager has the discretion to do so, and not just with specific securities but among different asset classes as well — as much as 100% can get invested one way over another and as little as 0%. This pretty provides the fund manager with free reign.

Currently, this mutual fund has roughly 32% in Cash with the balance invested in equities. That equity component really has us interested. With 42% invested in Asia, this is the big focus for the fund while a healthy 32% is still invested in North America. This makes it something of a World Allocation fund, minus the fixed income component that many balanced funds have.

In digging a little deeper, it becomes evident that this equity fund favors China (over India) and South Korea (it’s largest non-US equity position is in Hyundai Motors). We also find a heavy position in Gold Bullion at 12.5% of assets, as well as short positions in the DJ Euro Stoxx Index and another short position in S&P E-Mini contracts (for which it was blamed for the May 6 Flash Crash).

“A Truly Tactical Approach With Merit

The reality here is that this mutual fund is not only complicated, but it takes on risks that others are more apt to ignore altogether. This might frighten some investors, but with $23.5 Billion under management, there are many who believe in this mutual fund’s abilities.

In looking at its 4-star rating at Morningstar, it is easy to find reasons to support investing in the Ivy Asset Strategy Fund. In looking at its track record, or annual yearly returns, this fund has been pitted against some target dated balanced funds where it would rank 1st in one year and 97th in the next and against world allocation funds where it ranked 4th in 2007 and 87th on a YTD basis. In other words, comparing this fund on returns alone is not so easily done given the amount of flexibility it has.

“Mutual Fund Performance that Impresses

In terms of true returns, this fund return negative numbers in just 2 of the past nine years (since 2001). One of those negative returns was in 2008 where it robbed investors of almost 26%. The other negative return happened in 2001 where it lost 11%. Aside from 2002 where it returned a modest 3%, this equity fund is no stranger to double digit gains, returning 11.4% in 2003, 12.9% in 2004, 22.3 in 2005, 19.8 in 2006, 41.3% in 2007, 23.8% in 2009. On a YTD basis, it has disappointed with a return of just 2.24%. Visit Morningstar to fully appreciate the performance track record here; the bottom line is that this no speculative mutual fund. It performs, as its total return clearly outlines (3-year total return of 1.8% and a 5-year total return of 11.7%… can’t argue with those numbers).

Getting deeper into this fund involves some advanced knowledge of investment strategies. Given its short-positions and clear derivative bias, investors who are unfamiliar with such strategies will either have faith in the management team’s abilities or get scared and avoid the fund altogether. For most, we recommend having faith. With short positions in virtually all of the asset classes it invests in, the Ivy Asset Strategy fund employs a truly tactical investment approach.

What will have relevance is NET positions. So for a fund that invests $40,000 in, say equities and shorts $30,000 in equities, its NET position will be $10,000 in equities ($40,000 minus $30,000 equals $10,000). For simplicity’s sake, we will look at net positions here.

What becomes evident right away is that this fund has a large net position in Financial Services firms at 21.7%. Its next largest sector holding which deserves mentioning is the Hardware sector at 21.1%, something we have not seen to this degree. However, given that we are looking at net positions, these figures have little meaning without exploring the actual underlying assets (some of these sector weightings can be easily skewed by the mutual fund’s short position in some firms).

“Gold Bullion at 12.54% of Assets

Probably the biggest thing that sticks out here is the mutual fund’s position in Gold Billion. At 12.54% of total assets, this represents nearly $3 Billion at stake in the precious metal. Although there are some hedging characteristics with gold, this certainly represents a tremendous position, one that prospective investors will need to come to grips with. We believe this is one of the only true risks to the fund, especially since we are unable to determine whether this has contributed much to the fund’s performance or not at all. All we see is that the fund has continued to add to its position, although not aggressively.

“Wynn Resorts 4.52% of holdings, YTD return 75.7%

As a casino operator and owner, Wynn presents tremendous opportunity. Clearly, this perceived opportunity has translated into tremendous YTD returns, something that has also impressed the mutual fund which added nearly 27% to its stake here. This happens to be the best performing equity in the portfolio. One reason we like this name for this industry is its presence in China. Not only is this financially lucrative for the company, but adds strength and diversification to its overall portfolio (previously, it was known as the big player in Vegas, which becomes problematic when the economy stalls, as it has). With a dividend yield of just under 1%, there is clearly an incentive here for Ivy to invest in Wynn.

“Hyundai Motors at 4.48% of holdings, YTD return of 31%

Hyundai is fairly easily emerging as an automotive leader throughout the world. As a well diversified manufacturer of personal and commercial vehicles, Hyundai is a position this company continues to add to (by nearly 33% in fact). Although large foreign automotive companies like Toyota continue to enjoy growth, there are some factors that could undermine its efforts. Hyundai is not quite there yet, offering value to the investor and, of course, healthy returns. As far as automobile manufacturers go, Hyundai is seen as a safe bet compared to the larger domestic manufacturers.

“What the Top Holdings Mean

This equity fund’s top holdings perhaps show more clearly just how involved this mutual fund is in determining which positions to take. Each of these three are clearly well thought out and calculated. While the big position in gold is surprising at first glance, there is likely a hedged position somewhere in the portfolio that not only complicates a simplistic overview of the top holdings, but which makes perfect sense.

From what we see here, the top holdings are fairly safe and intelligent. The fund is obviously running with its winners and winding down some of its expiring positions as well. We like, for instance that it is adding more smart positions, such as China Mobile and First Solar. These are progressive investment decisions that can be expected to further improve this mutual fund’s performance and track record.

“Who Should Own This Equity Fund

As far as large cap growth funds go, investors are often cornered for holdings. They are normally domestic or foreign, and the manager has little leverage to make changes that not only make sense but are advantageous to the unit holder. Not the case here. The Ivy Asset Strategy fund has a lot of flexibility to do what makes sense and what can earn.

This fund is not cheap with an expense ratio of 1.05% and fairly aggressive turnover of 96%. These will collectively bite into returns. However, at a $500 entry point, this is extremely affordable for people looking for smart, proven active management and a fund that is extremely interesting in its complexities.