Market Sector Update
- International and U.S. equity markets were higher but volatile during the quarter. In July, markets experienced gains stemming from optimism regarding a global recovery. In August, markets were down due to potential Federal Reserve (Fed) tapering and emerging market foreign exchange weakness. And in September, markets rebounded on global recovery and anticipated less Fed tapering this fall.
- Global markets climbed the wall of worry (of what can go wrong) with the European market having the best performance in local currency. The dollar weakened approximately 4% versus the majority of major international currencies, which aided foreign stock performance converted back to U.S. dollars. Major equity market contributors included low interest rates and growing confidence that U.S. economic growth is resilient even with the impacts from the tax and government fiscal cuts.
- In our opinion, the European Central Bank’s position of backing euro countries and banks is key in stabilizing the markets and is the glue keeping the European Union markets relatively stable. The optimistic belief that Europe was on the path to recovery resulted in strong performance for the European market over the quarter.
- The Fund posted strong absolute performance for the period but underperformed relative to the benchmark. Poor stock selection was the primary detriment to performance as select industrials, consumer discretionary and financials holdings posted relatively large losses. In addition, the Fund’s cash allocation of approximately 7% hindered performance in a rising market.
- From a country allocation standpoint, the Fund’s overweight position in Germany (which we added to this quarter) aided relative performance; however, underweight allocations and stock selection in France and Spain – countries with strong performance – was a net drag on performance for the period.
- As the quarter progressed, we became more confident of European economic stabilization, continued steady-but-slow growth in the U.S., and solid growth in China (a major importer from Europe). As a result, we increased our overweight position to consumer discretionary at the expense of consumer staples.
- The Fund remains overweight information technology, industrials and consumer discretionary, while underweight financials, energy, utilities, consumer staples, telecommunications, health care and materials. We believe our overweight positions provide solid growth prospects, while our underweight allocations tend to have high relative valuations or slowing earnings momentum.
- We think global growth will improve over the next 12 months to a range of 2.5 to 3.0% with the U.S., Europe and emerging markets rebounding relative to 2013. We expect Europe to grow faster in 2014 as austerity measures become less of a drag on gross domestic product (GDP). We believe the U.K. is positioned to grow faster than the Eurozone as housing incentives and a better banking market offset its government’s austerity measures designed to reign in its structural deficit.
- We continue to follow policies stemming from the U.K. and the rest of Europe, including both stimulation and austerity measures from foreign governments and the European Central Bank. Furthermore, we believe China’s multi-year rebalancing to a more consumer-based economy as well as its anticorruption efforts needs to be monitored. In our view, these changes will have lasting impacts throughout the global marketplace in shaping GDP growth, commodity prices and multinational profits.
- In our view, the strongest long-term GDP growth will occur in emerging markets and the U.S. due to better demographics and a better business climate. In an effort to capture this, we will mostly invest in European multinationals with strong exposure to the U.S. and/or emerging markets.
Robert Nightingale of Ivy Investment Management Company was named portfolio manager of the Fund on Oct. 1, 2013. From June 30, 2009, through Oct. 1, 2013, the Fund was managed by Thomas A. Mengel.
The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 30, 2013. 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. 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. 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.