Waddell & Reed

Quarterly Fund Commentary

Ivy European Opportunities Fund (prospectus)
September 30, 2014

Robert Nightingale

Market Sector Update

  • International markets underperformed during the quarter and returns were dampened by U.S. dollar appreciation relative to most currencies. Market volatility increased, with the European market falling hard in July, running upwards in August through mid- September, and yet falling again in late September.
  • The European Central Bank (ECB) implemented aggressive policies, taking rates negative and introducing the targeted longer-term refinancing operation (TLTRO) in an effort to inject additional credit into Europe. The objective is to ultimately stimulate loan growth in hopes of restarting a generally moribund economy while preventing possible deflation. In our opinion, the ECB’s monetary posturing is the glue stabilizing the European Union markets. The market continues to test the ECB’s resolve, but low inflation will allow them to become more aggressive.
  • The belief that Europe continues on the path to recovery faded as the quarter progressed as economic numbers out of Italy and France were poor, accompanied by signs of weakness from German manufacturing.
  • The U.S. economy rebounded in the second quarter after a slower-thanexpected start to the year, continuing its momentum through the third quarter. The U.S. Federal Reserve (Fed) is exiting quantitative easing and looks to be raising rates by next summer.

Portfolio Strategy

  • The Fund posted negative performance, but outperformed (before the effects of sales charges) relative to the benchmark. Strong stock selection, particularly in industrials and consumer staples, benefitted performance and more than offset poor stock picking in energy. The Fund’s overweight allocation to health care, a top-performing sector, contributed to relative performance. U.S. dollar currency hedges to select European currencies were the largest contributor to absolute and relative performance.
  • Top individual contributors to relative Fund performance included Ashtead Group, the Fund’s largest holding, and Ingenico (2.7% and 1.3% of Fund net assets, respectively).
  • As the quarter progressed, we became less confident of European economic stabilization. Over the quarter, the Fund increased its allocation to consumer staples and information technology, while reducing exposure to consumer discretionary and health care. The Fund remains fully invested – cash averaged less than 1% during the quarter.
  • The Fund is overweight health care, consumer staples, information technology and consumer discretionary, while underweight financials, materials, telecommunication and utilities. We believe our overweight positions provide solid growth prospects, while our underweight allocations tend to have high relative valuations or slowing earnings momentum.


  • Italy and France are currently implementing governmental and private sector reforms in an effort to competitively position their economies on a global scale. However, they are missing their government deficit targets, which will likely lead to a compromise with the European commission – leading to firmer reform targets. By spring, the ECB, who has been pushing hard for the implementation of reforms by weaker European counties, will most likely implement quantitative easing if inflation stays very low and reforms pick up speed.
  • We believe the U.K. will grow much faster than Europe as new-build housing incentives and a better banking market offset its government’s austerity measures and strong currency.
  • We believe China’s multi-year 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 gross domestic product (GDP) growth, commodity prices and multinational profits based in Europe.
  • In our view, the strongest long-term GDP growth will still occur in emerging markets and the U.S. due to better demographics.


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 Sept. 30, 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.

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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