Waddell & Reed

Quarterly Fund Commentary


Ivy Core Equity Fund (prospectus)
June 30, 2014


Manager(s):
Erik R. Becker, CFA
Gus C. Zinn, CFA

Market Sector Update

  • The broad market continued its steady rise in quarter. Performance leadership was mixed with the cyclical sectors of energy, technology and materials outperforming the market average, while the more defensive utility sector also posted strong gains.
  • A continued decline in interest rates in late May caused more rotation into bond-like equities and the utility sector.
  • Energy gained a boost from unrest in Iraq, a producer of more than 3 million barrels of oil per day. Instability in the region and concerns of a broadening civil war sent Brent oil prices from $107/barrel at the beginning of the quarter to over $115 at their peak in mid-June. Such events continue increase the appeal of domestic energy investment given the reduced likelihood that oil prices will fall to levels that make U.S. drilling uneconomic.
  • While economic numbers have been volatile thus far in 2014, we believe that the main takeaway is continued upward momentum in U.S. economic growth that appears to be broadening rather than narrowing.
  • The June Payroll Report showed 288,000 non-farm jobs were added. This follows a strong employment report in May. Auto sales are nearing the 17 million mark and there has been a notable increase in merger and acquisition activity.

 

Portfolio Strategy*

  • For the quarter, the Fund modestly outperformed the benchmark, before the effects of sales charges.
  • After a sharp sell-off in more growth-oriented names at the end of the first quarter, which hurt the Fund’s relative performance, many of the portfolio’s holdings continued to show strong earnings in April and were ultimately rewarded with higher stock prices.
  • Fund outperformance was driven by strong security selection rather than sector positioning, with stocks such as Shire Pharmaceuticals, Canadian Pacific Railway, Applied Materials, and Adobe Systems leading the way.
  • While underweight relative to the benchmark, security selection within the energy sector detracted from Fund performance as we failed to anticipate the significant charge higher in oil prices as the result of the events in Iraq. 

 

Outlook

  • Our outlook for the U.S. equity market remains constructive. While the U.S. economy is not yet “firing on all cylinders,” momentum appears to be building.
  • July gross domestic product data is likely to show growth of somewhere between 2.5% and 3% for the second quarter, a sharp acceleration from weather-induced 2.9% contraction in the first quarter.
  • Growth in Europe has improved although still at a level which requires significant efforts by the European Central Bank to keep borrowing rates highly stimulative.
  • Growth in emerging markets appears stable, but certainly well below the inflationary pace of a few years ago. Inflation, which must be watched for cues on when Central Bank policy must become less accommodative, remains tame. We continue to operate in a not-to-hot and not-too-cold climate that has been relatively attractive for investing in U.S. equities.
  • We continue to find value in select areas within consumer discretionary, industrials and materials, which have not been as prone to extreme valuation adjustments and have upside based on economic expansion.

 


*Shire Pharmaceuticals Group, Canadian Pacific Railway Ltd., Applied Materials Inc. and Adobe Systems Inc. (3.3%, 4.4%, 3.8% and 3.4% of net investments at 06/30/2014, respectively).

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. 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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