Waddell & Reed

Quarterly Fund Commentary

Ivy Energy Fund (prospectus)
December 31, 2015

David P. Ginther, CPA

Market Sector Update

  • U.S. and global equities closed a volatile quarter in positive territory, although the energy sector finished slightly lower, based on its benchmark index. Crude oil prices briefly gained but generally stayed at the lower levels of most of 2015.
  • The U.S. Federal Reserve (Fed) increased short-term rates in December and stated its intent for more rate hikes in 2016 if economic data allow. The Fed also has indicated that it believes lower energy prices are transitory and inflation should meet its 2% target by 2017.
  • China’s currency was granted Special Drawing Rights status by the International Monetary Fund. China changed from a U.S. dollar base for its currency to a “basket” of currencies, which is likely to help its competiveness against the dollar.
  • Concerns about the pace of economic growth overall in emerging markets, continued but slowing supply growth, increases in global inventories and the possibility of increasing volumes of Iranian crude oil coming to market have been factors in persistently lower prices.

Portfolio Strategy

  • The Fund posted a negative return for the quarter that exceeded 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 result. The allocations to cash and to the industrials sector also were slight detractors from relative performance.
  • The five largest detractors to relative performance were holdings in Chevron Corp., Exxon Mobil Corp., Rice Energy Inc., Continental Resources Inc., Cimarex Energy Co. The five largest contributors were Kinder Morgan Inc., Phillips 66 Partners LP, Parsley Energy Inc., MPLX LP and Columbia Pipeline Partners.
  • 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. A current theme centers on upstream, onshore U.S. companies. We typically do not invest in companies that, in our view, do not hold either the best or second-best acreage in a given shale area.


  • We think steady economic growth and low inflation will continue in the U.S. this year, and it will remain a bright spot among developed countries. In our view, global economic growth is likely to remain slow overall.
  • U.S. shale oil producers have significantly cut marginal costs. While we believe all U.S. shale offers opportunities, much of our focus is on the Permian Basin as the place production growth is most likely to continue. Companies there still are in the early stages of improving efficiency and productivity, and are reducing costs faster than in other, more mature shale areas.
  • We estimate the world is oversupplied by 1.5-2.0% on total consumption of 95 million barrels per day. However, we think the year-over-year increase in global supply will start to diminish, as output is slowing from producing countries outside the Organization of Petroleum Exporting Countries, led by U.S. shale producers.
  • We think current supply/demand factors and “headline” risks will hold down oil prices in the short term. Depending on the demand environment, we think the supply/demand imbalance will be corrected by the second half of 2016

The opinions expressed in this commentary are those of the Fund's manager and are current through Dec. 31, 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 12/31/2015: Schlumberger Ltd., 4.14%; CME Group, Inc., 4.14%; Baker Hughes, Inc., 3.94%; Halliburton Co., 3.66%; Cimarex Energy Co., 3.49%; Newfield Exploration Co., 3.42%; Pioneer Natural Resources Co., 3.30%; Parsley Energy, Inc., 3.12%; EOG Resources, Inc., 3.08%; Marathon Petroleum Corp. LP, 2.80%.

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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