Waddell & Reed

Quarterly Fund Commentary


WRA New Concepts Fund (prospectus)
June 30, 2014


Manager(s):
Kimberly A. Scott, CFA

Market Sector Update

  • Mid-cap growth stocks, as measured by the Russell Midcap Growth Index, delivered yet another in a string of positive returns in the second quarter. The index gained 4.37% in the three months ended June 30, 2014.
  • All economic sectors within the index posted positive gains during the period, with most sectors performing relatively in line. There were two outliers, one on the upside and one on the downside. The quarter’s better performance was spread across both cyclical and defensive sectors. The strongest performance came from telecommunications and energy, as both saw double-digit increases. Consumer discretionary was the weakest of all sectors, increasing less than 2% for the quarter.

 

Portfolio Strategy*

  • The Fund struggled to keep pace with the benchmark and underperformed for the second quarter.
  • Good performance in our technology names was offset by weak performance in consumer discretionary and financials. The Fund saw considerable strength in many technology names, including Electronic Arts, Pandora Media, OpenTable and Zillow.
  • Performance by the Fund’s consumer discretionary holdings was generally weak, as many names struggled in response to concerns regarding the impact of the protracted winter on consumer demand. Names that struggled included DSW Inc., Panera Bread, Carter’s Inc., Dunkin’ Brands Group and Ross Stores. We expect the performance of many of these stocks to improve.
  • Financials was weak across the board, as continued downward pressure on interest rates gave pause to investors in spread businesses that have performed well in recent periods. Oaktree Capital Group, which has the most direct association with credit markets and interest rates, was particularly weak.
  • The Fund underperformed in materials, where we do not have exposure to the paper and packaging and chemicals groups, which produced solid returns for the index in the quarter. Scotts- Miracle Gro provided weak performance due to the company’s sensitivity to weather trends.

 

Outlook

  • While we believe the economic environment is supportive for revenue and earnings growth across many companies in our mid-cap growth universe, there are general trends and market conditions that we think could lead to a period of difficult performance for the equity market over the next six to 12 months.
  • Key concerns center on corporate profitability as we progress through the second half of a long business cycle, a time in which increased investment in labor, in terms of both rising units and rising compensation rates, can exert downward pressure on margins. The economy clearly needs to grow fast enough to allow companies to absorb these rising labor costs. We think there is a risk that the economy will continue to grow, creating a need for more labor investment, but not grow fast enough to efficiently offset incremental costs.
  • The end of quantitative easing is creating another potential source of uncertainty.
  • We are also concerned that the cumulative effects of five years of regulatory action against banks and other financial institutions have likely created disruptive influences.
  • These concerns encourage a slightly more defensive stance in much of the Fund; Greenfield Growth (highly innovative growth companies with the potential to provide future stable growth) stock investing will be more important to returns should economic growth remain modest.

 


*Electronic Arts Inc., Pandora Media Inc., DSW Inc., Panera Bread Co., Carter’s Inc., Dunkin’ Brands Group Inc., Ross Stores Inc., Oaktree Capital Group LLC and Scotts-Miracle Gro (The) (2.6%, 2.1%, 0.9%, 1.1%, 1.4%, 1.8%, 1.8%, 0.7% and 1.0% of net investments at 06/30/2014, respectively). OpenTable and Zillow are no longer holdings of the Fund.

The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2014. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.

Risk factors. As with any mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more well-established companies. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available a summary 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 or summary prospectus carefully before investing.

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