Waddell & Reed

Quarterly Fund Commentary


Ivy Core Equity Fund (prospectus)
March 31, 2015


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

Market Sector Update

  • Equity index returns were subdued for the quarter as forecasts for both U.S. gross domestic product (GDP) and corporate earnings were downgraded during the period.
  • Drivers of these negative revisions included both one-time factors of tougher winter weather and a West Coast port strike, combined with the longer-lasting impacts of decreased energy investment and a stronger U.S. dollar.
  • Corporate earnings growth, also muted in the quarter, was driven primarily by the decline within energy. The earnings outlook for multinational companies has also suffered from the effects of a stronger dollar.
  • Relative weakness during the period came from areas that had outperformed in 2014, including the more defensive areas and the largest companies with higher international sales. Health care and consumer discretionary led the market, while utilities and energy lagged.

Portfolio Strategy

  • The Fund outperformed its benchmark (S&P 500 Index) in the quarter ended March 31, 2015, before the effects of sales charges.
  • Performance was driven by overweight positions in health care and consumer discretionary as well as the Fund’s longstanding underweight in utilities. Stock selection in many of the Fund’s best performers, primarily in health care, were largely offset by underperformance in railroad holdings and other names hurt by the decline in energy prices.
  • Another key driver for the market and Fund continues to be the theme of large acquisitions across many industries. The low interest rate environment combined with, in most cases, large operational synergies has created a somewhat unique environment where equity markets are rewarding companies doing the buying.
  • The Fund continues to be “catalyst rich” in this area as many of our holdings have either recently completed or are on the verge of completing important acquisitions. We expect the portfolio to meaningfully benefit throughout the year as acquisitions are completed, and synergies result in increased expectations for future earnings power.

Outlook

  • While economic data throughout the quarter has undoubtedly been weaker than expected, we believe growth should improve from here. We currently believe tough weather is mostly to blame and expect consumption growth to drive improvement in GDP. We have continued to increase Fund exposure toward an expected pickup in consumption.
  • We think the largest sequential declines in energy have mainly occurred and believe this should lessen the GDP drag in the coming quarters. The currency markets are another key factor from an economic and corporate earnings segment. Since mid-2014, the nominal broad trade weighted value of the dollar is up sharply. This type of move has been seen only twice in the past 30 years. The dramatic pace of this move has weighed on corporate earnings for multinationals as translation effects and pricing reactions have negatively affected reported revenue growth.
  • Currently, the Fund does not have outsized bets relative to predicting the macro variables of oil and currencies. We have increased our focus on more company-specific stories that we believe can deliver better than expected multi-year earnings through new products, cost restructuring and increasingly strategic acquisitions. We expect stocks to primarily be driven by earnings growth versus additional multiple expansion.

 


The opinions expressed in this commentary are those of the Fund’s managers and are current through March 31, 2015. 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.

The S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. It is not possible to invest directly in an index.

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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