Quarterly Fund Commentary
David P. Ginther, CPA
Market Sector Update
- U.S. equities paused in their advance during the quarter, recording only a small gain for the period in broad market indexes. Global equities also retreated, based on investor concerns about global economic weakness and ongoing geopolitical tensions.
- Indications of slow U.S. economic growth and slowdowns in China, Japan and the eurozone weighed on markets, including commodities that focus on global demand.
- Crude oil prices remained volatile in the quarter, trading in a narrow range around $100 per barrel. Growth in demand has been weak for crude oil this year and much of that weakness has been driven by non-U.S. markets including China.
- The U.S. continued strong oil production growth during the quarter, which helped improve the U.S. trade deficit and increase the value of the dollar, the currency of global oil markets.
- The Fund posted a negative return for the quarter, although its performance was slightly better than the negative return of its benchmark index (before the effect of sales charges).
- Top detractors from performance in the quarter were mainly in the equipment & services and, to a lesser extent, exploration & production segments.
- We still think exploration & production and equipment & services segments of the energy industry offer long-term potential for the Fund. These companies are closely tied to the ongoing increase in U.S. oil production. We believe there are likely to be continued opportunities in these segments. We seek low-cost producers with quality assets and energy companies that are gaining the benefit of past capital expenditures, versus those taking on new costs for investment and exploration.
- Another key focus for the Fund still relates to 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 think the U.S. will continue to have slow but steady economic growth and low inflation this year and next. We also expect slow global economic growth but do think global energy demand will grow, especially outside the developed world.
- We believe the U.S. will continue to increase oil and gas production in the medium term, with further expansion in shale fields and related technology. We believe exploration & production companies, oil service companies and infrastructure providers will continue to be the main beneficiaries of this growth.
- We do not expect a significant drop-off in overall demand for energy in the near future. Most of the growth has come from developing countries, including China, India and across the Middle East. As these economies grow, we think they will pursue a more “Western” lifestyle and continue to demand more energy.
- Heightened geopolitical risks in areas such as the Mideast and Russia/Ukraine continue to overhang markets, generating uncertainty for many investors.
The opinions expressed in this commentary are those of the Fund's manager and are current through Sept. 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.