Quarterly Fund Commentary
David P. Ginther, CPA
Market Sector Update
- U.S. equities continued to reach record highs in the broad market indexes during the quarter. Global equities in general also gained.
- U.S. economic indicators are showing some pickup in activity after a first quarter slowed by severe winter weather. We estimate U.S. gross domestic product (GDP) growth in the second half could reach 2.5 to 3% after being virtually flat in the first half.
- Crude oil touched a nine-month high as tensions in Iraq drew the world’s attention away from the ongoing unrest in Syria and Ukraine.
- Actions by the European Central Bank in June to cut interest rates and make additional low-cost loan funding available for companies with difficulty getting credit supported the economy and markets there. Economic growth in Japan was somewhat stronger than expected, as it was in India where a change in leadership generated optimism about economic reform and growth. China’s economy showed signs of slight slowing.
- The Fund had a strong positive return for the quarter and finished above its benchmark index (before the effect of sales charges).
- Top contributors to performance in the quarter were spread across the energy industry, with key performers in the equipment & services and storage & transportation segments.
- We continue to have a bias in the Fund toward growth companies, particularly in the exploration & production and equipment & services segments. We look for low-cost producers with quality assets and management teams that are careful stewards of capital. Overall, we continue to seek energy companies that are gaining the benefit of past capital expenditures over those with new costs for investment and exploration.
- We still see opportunities in oil and gas producers with exposure to shale basins, services companies with North American exposure and U.S. refiners because of their cost advantage.
- We expect slow economic growth and low inflation in the U.S. this year. We think there will be continued growth in U.S. oil and gas production in the medium term, based in part on the continued expansion in shale fields and improvements in related technology.
- We believe exploration & production companies, oil service companies and infrastructure providers may be the main beneficiaries of potential expansion in oil production.
- We still think natural gas prices are likely to remain in their current range for the foreseeable future, as demand fundamentals have not changed and supplies in the U.S. remain adequate for demand. U.S. natural gas exports are likely to grow over the next several years, but this is unlikely to have any effect on domestic prices in the nearterm.
- Global energy demand remains at strong levels, led by emerging markets. Slow economic growth continues to weigh on demand but we still think there will be slight improvement in the global economy this year after a slow start. As noted in the past, any improvement in developed countries can add support for growth in emerging markets.
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. 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. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. 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./strong>