Waddell & Reed

Quarterly Fund Commentary


Ivy Core Equity Fund (prospectus)
March 31, 2014


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

Market Sector Update

  • Despite significant volatility along the way, the markets finished the quarter in positive territory. The more defensive sectors of utilities and heath care were the leaders.
  • Numerous factors contributed to the defensive performance, including a roughly 30 basis point decline in the 10- year Treasury yield over the quarter, which typically increases the attractiveness of higher yielding sectors.
  • In March, a rotation across sectors started, in which higher growth stocks that had outperformed the market over the past few quarters suddenly lost ground to more value-oriented stocks, which had recently underperformed. Among the possible catalysts for the rotation were the Federal Reserve’s March comments stating that a potential interest rate rise might occur sooner than originally expected, and stretched valuations among some of the highest growth stocks.

 

Portfolio Strategy*

  • The Fund posted a modest return, but underperformed its benchmark in the quarter.
  • Relative performance was significantly positive during January and February, especially as companies reported fourth quarter earnings and discussed 2014 outlooks. This reversed during March, with the sector rotation shift from outperformers to underperformer, but relative performance attributed to stock selection was still a positive for all three months of the quarter.
  • Applied Materials Inc., Harman International Industries Inc. and Alexion Pharmaceuticals Inc. had the strongest appreciation in the quarter. This was offset by negative relative performance, mainly attributed to the Fund’s overweight position in consumer discretionary and underweight position in utilities.
  • We believe the adoption of mobile Internet remains a significant global theme that is reshaping most industries. Even though most consumers in developed economies have mobile devices, usage continues to increase. This trend is a benefit to holdings like Facebook Inc. and Alliance Data Systems Corp., whose sales growth rates are uniquely tied to consumers moving more everyday tasks to their mobile devices.

Outlook

  • Whether the short-term environment favors growth or value stocks, the Fund’s multi-year focus remains unchanged.
  • The Fund’s goal is to invest in companies ahead of the market’s rising expectations and to seek companies believed to have industry leading competitive positioning.
  • For the past year, there has been a more cyclical tilt in the portfolio. This positioning remains due to our belief that economic data will continue to strengthen while monetary policy will remain accommodative.
  • The Fund continues to find more value in companies whose businesses are more levered to an improving economy than companies who have a more defensive non-cyclical business. This is likely to remain in place over a multi-year time frame as interest rate levels begin to normalize in the U.S and the conviction in a self-sustaining recovery cements itself.

 


*Applied Materials Inc., Harman International Industries Inc., Alexion Pharmaceuticals Inc., Facebook Inc. and Alliance Data Systems Corp.(3.6%, 1.7%, 2.0%, 1.9% and 1.1% of net investments at 03/31/2014, respectively).

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