Waddell & Reed

Quarterly Fund Commentary

Ivy Core Equity Fund (prospectus)
September 30, 2014

Gus C. Zinn, CFA
Erik R. Becker, CFA

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.


Portfolio Strategy*

  • The Fund underperformed its benchmark in the third quarter. Underperformance was mostly driven by stock selection in consumer discretionary.
  • 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 earnings power.
  • 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 sustained.
  • 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.

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