Waddell & Reed

Quarterly Fund Commentary

Ivy European Opportunities Fund (prospectus)
March 31, 2014

Robert Nightingale

Market Sector Update

  • Like last quarter, international and U.S. equity markets posted gains, yet market volatility persisted. In January, market performance woes stemmed from lower expectations regarding U.S. GDP (gross domestic product) growth. February saw gains as the market generally became comfortable that the economic slowdown experienced in January was mostly due to inclement winter weather. In March, Russia’s annexation of Crimea, and continued provocations in Eastern Ukraine, weighed on the markets.
  • In our opinion, the European Central Bank’s (ECB) monetary posturing is the glue stabilizing the European Union markets. Currently, the ECB remains vigilant for signs of deflation or additional indicators of economic stress, recently mentioning potential “unconventional” easing in efforts to weaken the euro.
  • The belief that Europe continues on the path to recovery resulted in solid 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, they are slowly being addressed in Spain, Italy and likely soon in France.
  • Meanwhile, China is running into imbalances and frictions in their country that are hurting GDP growth and the global stock markets.


Portfolio Strategy

  • The Fund posted weak absolute and relative performance for the period. Poor stock selection, particularly in the financials, health care and energy sectors, was the primary detractor to performance.
  • From a country allocation standpoint, the Fund’s underweight in Italy, a relatively strong-performing market, was a top detractor for the period. Additionally, stock selection in France hindered performance, although this was somewhat offset by good stock picking in the U.K.
  • As the quarter progressed, we became more confident of European economic stabilization and continued economic improvement in the U.S. On the other hand, we have grown wary regarding Chinese growth (a large export market for Europe) and Russian military activity in Ukraine. As a result, we decreased exposure to Russia as we expect GDP growth to slow and believe governmental sanctions could increase. With continued European stabilization, the Fund remains almost fully invested – cash averaged less than 2% during the quarter.
  • The Fund remains overweight industrials, consumer discretionary, information technology and health care, while underweight energy, financials, consumer staples and telecommunications. 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 economic growth is picking up and monetary policy is likely to remain aggressive for the foreseeable future, but to a lesser extent in the U.S. and the U.K. We think the Fed reducing/ending tapering and beginning to raise interest rates in late 2014 to 2015 will keep the markets on edge.
  • We continue to follow policies stemming from the U.K. and the rest of Europe, including stimulation, reforms and regulation measures from foreign governments and the ECB. Another key factor is whether businesses, which are flush with cash, will increase spending, mergers and acquisitions, 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. We are concerned that slower GDP growth will slow profit potential for European firms.
  • In our view, the strongest long-term GDP growth will still occur in emerging markets and the U.S. due to better demographics and a better business climate.

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 March 31, 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.

Russell 1000 Value Index is an unmanaged index comprised of securities that represent the large-cap sector of the stock market. It is not possible to invest directly in an index.

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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