Market Sector Update
- The Fund’s benchmark continued to show strength with third quarter gaining more than 5%.
- Cyclical sectors led the market during the quarter with materials, industrials and consumer discretionary performing well.
- Defensive sectors including consumer staples, telecommunications and utilities underperformed. While this pattern is typical when market returns are positive, it is in stark contrast to earlier in the year when the defensive sectors outperformed in a strong “up” market.
- The Federal Reserve’s (Fed) surprise decision to delay its tapering of the bond-buying program was another important development during the period.
- As the quarter came to a close, the status quo of a slowly improving economy with highly accommodative monetary policy remained in place, a welcomed combination for the equity market.
- The Fund outperformed the benchmark during the period, before the effects of sales charges.
- Shifts in market focus from macro-related drivers to more company-specific fundamentals were key drivers for relative outperformance.
- The majority of outperformance was driven by stock selection, with strong performance from Facebook and some of the Fund’s largest holdings led by Cummins, Harley Davidson and Dow Chemical.
- Sector allocation also provided positive attribution as the Fund maintained a more cyclical tilt within the portfolio. While favoring cyclical sectors hurt performance earlier in the year, sector selection contributed to outperformance for the period.
- We did not increase our cyclical exposures meaningfully this quarter and believe there is now more of a valuation balance between the cyclical and more defensive areas of the market.
- While the market leadership is likely to remain volatile on a quarter-to-quarter basis, our strategy of finding strong earnings stories that play out over a 2-3 year time horizon is the best way to drive sustainable outperformance for our shareholders.
- Our outlook for the U.S. equity market continues to be constructive despite the usual list of concerns.
- A transition has occurred within the equity market since the beginning of the year.
- The market’s admiration for companies who benefit from near zero interest rates has shifted to a focus more on companies who can sustainably grow in a world where economic tailwinds are modest.
- Companies with stagnant high dividend yields, takeover targets or high debt loads all benefited earlier in the year when 10-year Treasury yields were near record lows.
- Currently, companies that are demonstrating better than expected earnings growth potential are leading the equity market. With margins near peak levels, and modest economic tailwinds, we expect the market to reward companies with better than expected revenue growth potential.
*Facebook Inc., Cummins Inc., Harley-Davidson Inc. and Dow Chemical Company (2.0%, 2.8%, 3.0% and 2.4% of net investments at 09/30/2013, respectively).
The opinions expressed in this commentary are those of the Fund’s managers and are current through Sept. 30, 2013. 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 insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.
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.