Market Sector Update
- International and U.S. equity markets were higher but volatile during the quarter. Federal Reserve (Fed) “tapering,” the debt ceiling and perhaps lofty market valuations were some of the domestic concerns during the quarter.
- The failure of the U.S. Congress to pass a budget and uncertainty surrounding the debt ceiling debate weighed on asset prices at quarter end.
- In Europe, markets were higher as economic data came in slightly better than expected and due to a belief that Eurozone GDP grew out of its recession. Japanese markets were positive in the quarter as data was roughly par with expectations. After a sell-off last quarter, emerging markets recorded mid-single digit performance and outperformed the S&P 500 Index. Asian markets were mixed, with a number of them lower than earlier in the year.
- The Fund posted strong absolute performance for the period but slightly underperformed relative to the benchmark. Top absolute contributors to Fund performance were PostNL, GameStop Corp., and American Intl. Group (2.7%, 2.1% and 6.2% of Fund net assets as of 9/30/2013, respectively). Laggards were few and far between; however, long-term winner Deutsche Lufthansa AG (3.2% of Fund net assets as of 9/30/2013) detracted marginally.
- In general, the Fund’s large cash position, nearly 22% at quarter end, was a drag on performance in an up market. Over the past several quarters, the Fund’s cash level has risen as a function of equity prices rising faster than our company valuations, thereby reducing the margin of safety.
- Through the quarter, the Fund increased its exposure to Europe and parts of Asia, while allocations to both Japan and the U.S. declined. Profits were taken as holdings in financials and consumer discretionary were sold, thereby reducing the allocation to these sectors. On the other hand, the allocation to energy, industrials and information technology increased.
- For the foreseeable future, we remain cautious as markets do not thrive on uncertainty. We see uncertainty coming from several sources, notably the Fed’s monetary policy; the U.S. political landscape; China’s attempt at steadying growth while shifting the basis of its economy to more of a consumer focus; and Europe, where we believe sustained growth needs to be demonstrated. The result may lead to more market volatility with risk-on, riskoff days.
- The process remains unchanged, seeking deep value opportunities with a focus on individual undervalued stocks. Currently, opportunities have presented themselves in South Korea, less so in Europe, and in a marginal fashion in the U.S. Domestically, energy opportunities, specifically in natural gas, remain attractive, as do some financials. Overseas, certain low-cost-to-produce materials companies continue to be attractive. A nascent demand for automobiles has provided opportunity, as have broadcast media and certain retail operations.
The opinions expressed in this commentary are those of the Fund’s manager 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. 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. International investing involves additional risks including currency f uctuations, political l or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. 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.