Waddell & Reed

Quarterly Fund Commentary

Ivy Energy Fund (prospectus)
September 30, 2015

David P. Ginther, CPA

Market Sector Update

  • U.S. and global equities closed a volatile quarter in negative territory. Crude oil prices recovered slightly from the depressed levels earlier in the year.
  • China devalued its currency in August, ending a decades-long tie to the U.S. dollar and moving to a market-based approach instead of a daily “fixing” by its central bank. The move added to concerns about slower economic growth there and the implications for the rest of the globe.
  • The U.S. Federal Reserve in September decided to leave interest rates unchanged at near zero, citing market volatility and global economic uncertainty. Markets continued to focus on any indicators about the timing of an eventual rate hike.
  • Geopolitical concerns in and around the Middle East continued to unsettle investors. Russia’s actions late in the quarter to intervene in Syria’s civil war further complicated fighting there and the mass movement of refugees into Europe.

Portfolio Strategy

  • The Fund posted a negative return for the quarter that generally was in line with the negative return of its benchmark index.
  • The Fund’s underperformance relative to the index was from stock selection in the energy sector, which accounted for the majority of the Fund’s quarterly return. The allocations to cash as well as the financials and industrials sectors were slight contributors to relative performance.
  • The five largest detractors relative to the benchmark were in master limited partnerships (MLPs) or services companies with a significant focus outside the U.S. The five holdings were MPLX LP, Energy Transfer Equity LP, Tallgrass Energy GP LP, Weatherford International Ltd. and Whiting Petroleum Corp.
  • The Fund is focused on what we believe are the best companies with the best balance sheets, best acreage, low-cost production and ability to grow even in a low-price environment.


  • We think steady economic growth and low inflation will continue in the U.S. this year, keeping it the leader among developed countries. We think global economic growth will remain slow overall but show mild improvement.
  • We do not believe short-term price volatility can mask long-term global demand. We estimate the world is oversupplied by 1.5-2.0 million barrels per day (bpd) and estimate demand growth this year of 1.4-1.5 million bpd, largely driven by lower prices. We think the year-over-year increase in global supply now will start to diminish as the Organization of Petroleum Exporting Countries and U.S. shale output are slowing. Even if demand growth slows to a more typical 1 million bpd in 2016, we believe supply growth will need to reaccelerate.
  • U.S. shale oil producers have cut marginal costs. While all U.S. shale offers opportunities, much of our focus is on the Permian Basin, where we think production growth is most likely to continue. Companies in the Permian are in the early stages of improving efficiency and productivity. We’re seeking companies that we think can survive and even thrive in a low-price environment.
  • We think the supply/demand imbalance will be corrected by second-half 2016. Looking to 2017- 18, we think capital spending cuts across the industry will continue to affect supply and oil prices will move steadily higher as demand grows.

The opinions expressed in this commentary are those of the Fund's manager and are current through Sept. 30, 2015. 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.

Top 10 Equity Holdings as a percent of net assets as of 09/30/2015: CME Group, Inc., 3.95%; Baker Hughes, Inc., 3.94%; Schlumberger Ltd., 3.81%; Cimarex Energy Co., 3.73%; Halliburton Co., 3.54%; EOG Resources, Inc., 2.95%; Concho Resources, Inc., 2.72%; Pioneer Natural Resources Co., 2.69%; Newf eld Exploration Co., 2.64%; i Tesoro Corp., 2.49%.

Risk factors. 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.

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