Market Sector Update
- The stock market remained relatively flat
throughout the quarter. The only
standout note within the benchmark was
the dramatic underperformance of
energy, which fell during the period while
most other sectors posted small gains.
- The price of oil fell during the quarter
after remaining relatively flat for the first
half of 2014. Basic supply and demand
factors are causing the declines, as U.S.
production continues to grow while
emerging market economies weaken.
- Falling oil prices also have had a positive
effect on the U.S. consumer, specifically
the lower income segment, as gas prices
make up a large portion of discretionary
spending. These tailwinds to the relative
strength of the economy create another
dynamic of a strengthening U.S. dollar.
- The Fund underperformed its
benchmark in the third quarter.
Underperformance was mostly driven by
stock selection in consumer
- Nervousness around the traditional
advertising market weighed on the
media segment and specifically CBS
Corp. in the quarter.
- Additional fears surrounding a
flattening U.S. auto market and
weakening production outside the U.S.
hurt positions levered to this industry
including Ford and Delphi Automotive.
- Another factor affecting the
performance of several holdings was
the uncertainty surrounding regulatory
approval of acquisitions. While recent
comments from Washington were
meant to discourage future deals based
on lowering tax rates, we continue to
believe that a number of Fund holdings
will benefit materially as acquisition
approval processes run their course and
this uncertainty ends.
- Positive contributors for the quarter
were Canadian Pacific Railway, Bank of
America and Citigroup.
- While the macro outlook is increasingly
complex, it is important to remember
that our focus on finding stocks that
have material upside to long-term
earnings expectations remains
unchanged. Specifically, we are seeking
stocks with the potential for multi-year
periods of positive performance due to
increased expectations for their longterm
- Recently we have shifted to a
somewhat less cyclical stance due to
continued weakness in international
economies. We have sold or reduced
weightings in companies with large
international exposures, as we expect
a period of earnings disappointments.
During the upcoming earnings season
we will work to determine whether this
weakness will be short-lived or
- The Fund continues to have a
significant exposure to companies that
are in the process of either closing or
announcing significant valueenhancing
acquisitions. Around 20%
of the portfolio is positioned this way,
and we believe there is significant
upside should these acquisitions be
approved. While the timing of
approvals is always uncertain, we
wouldn’t be surprised if some of them
occurred before year end.
*Top 10 holdings as of 09/30/2014: Canadian Pacific Railway
Ltd. 4.5%, Bank of America Corp. 3.9%, Applied Materials Inc.
3.9%, Citigroup, Inc. 3.8%, Shire Pharmaceuticals Group 3.7%,
American International Group Inc. 3.4%, Anheuser-Busch
InBev 2.9%, Phillips 66 2.9%, Noble Energy Inc. 2.8% and Dow
Chemical Co. 2.8%.
The opinions expressed in this commentary are those of the Fund’s managers and are current through Sept. 30, 2014. The managers’ 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. Because the Fund is generally invested in a small number of stocks,
the performance of any one security held by the Fund will have a greater impact than if the Fund were invested in a larger number of securities. Although larger companies tend to be less volatile than
companies with smaller market capitalizations, returns on investments in securities of large capitalization companies could trail the returns on investments in securities of smaller 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.