Waddell & Reed

Quarterly Fund Commentary

Ivy European Opportunities Fund (prospectus)
December 31, 2013

Robert Nightingale

Market Sector Update

  • Like last quarter, international and U.S. equity markets posted gains, yet market volatility seemed to slightly subside. The month of October saw gains stemming from continued comfort regarding U.S. and European economic stability. November was down due to potential Federal Reserve (Fed) tapering and the lack of easing by the European Central Bank (the market wanted more), while December rebounded led by positive U.S. economic data. As a result, the Fed announced it will start tapering their monetary stimulus, thus removing an element of uncertainty from the market.
  • In our opinion, the European Central Bank’s (ECB) position of backing euro countries and banks is key in keeping the markets content and is the glue keeping the European Union markets relatively stable. In the U.S., as the Fed begins tapering, perhaps renewed confidence in the underlying strength of the U.S. economy will lead to private sector investment, further adding to investor confidence.
  • The belief that Europe continues on the path to recovery resulted in strong performance for the European market over the quarter. Simply put, neither the politicians nor central bankers caused market turmoil and as a result, markets responded positively. While structural problems still exist, signs of gross domestic product (GDP) growth in Spain, Ireland and Italy overwhelmed any negative sentiments.

Portfolio Strategy

  • The Fund posted strong absolute and relative performance for the period. Strong stock selection was the primary aid to performance as select industrials, consumer discretionary and financials holdings posted relatively large gains. The Fund’s cash allocation of approximately 1% hindered performance in a rising market, but much less than in the third quarter when cash was near 7%.
  • From a country allocation standpoint, the Fund’s overweight position in Germany aided relative performance; however, an underweight allocation in Spain hurt. Stock selection in the U.K. and France relatively outperformed, which somewhat offset an underweight position and poor stock selection in Italy – a country with strong performance due to perceived economic stabilization.
  • As the quarter progressed, we became more confident of European economic stabilization, continued economic improvement in the U.S., and solid growth in China (a large export market for Europe). With this more positive backdrop, the Fund became fully invested in equities. The Fund increased sector weightings in energy, financials and consumer discretionary at the expense of information technology and consumer staples. This was primarily due to high relative valuation concerns as well as expected earnings downgrades in the consumer staples sector.


  • We think global growth will improve in 2014 to around 3.5% with the U.S., Europe and emerging markets rebounding relative to 2013. We expect the U.S. and Europe to grow faster in 2014 as austerity measures become less of a drag on GDP. We believe the U.K. is positioned to grow faster than Europe, as housing incentives and a better banking market offset its government’s austerity measures designed to reign in its structural deficit. Due to the Fund’s overweight position in the Eurozone and the belief the euro will weaken versus the U.S. dollar, we are hedging a portion of our euro exposure.
  • 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 ECB. Another key factor is whether businesses, which are flush with cash, will increase spending, share repurchases or dividends as they gain confidence surrounding the economy’s future. All else equal, that should help the markets.
  • Furthermore, we believe China’s multiyear rebalancing to a more consumerbased 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 based in Europe.

Robert Nightingale of Ivy Investment Management Company was named portfolio manager of the Fund on Oct. 1, 2013.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 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 fluctuations, political 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.

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