Waddell & Reed

Quarterly Fund Commentary


Ivy European Opportunities Fund (prospectus)
June 30, 2014


Manager(s):
Robert Nightingale

Market Sector Update

  • Like last quarter, international and U.S. equity markets posted gains, but with less market volatility. That said, a rebel invasion in Iraq caused an initial oil price spike, but so far the invasion has had little impact on oil production. Going forward, we believe this to be a real concern for oil and the stock markets.
  • 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 belief that Europe continues on the path to recovery resulted in solid performance for the European market over the quarter. While structural problems still exist, they are slowly being addressed in Spain, Italy and soon in France. Past economic reforms have helped Spain’s economy stabilize. The market is now looking for economic structural reforms from Italy and France. In our view, both need to cut regulation, taxes and government spending.

Portfolio Strategy

  • The Fund posted positive performance (before the effect of sales charges), but underperformed relative to the benchmark. Poor stock selection, particularly in consumer discretionary and industrials, was the primary detractor to performance. The Fund’s overweight allocation to health care, a top-performing sector, and strong stock selection in that sector was the primary contributor to relative performance.
  • Top individual contributors to Fund performance included Shire, the Fund’s largest holding, and Marine Harvest (3.7% and 1.7% of Fund net assets, respectively).
  • As the quarter progressed, we became more confident of European economic stabilization and continued economic improvement in the U.S. Over the quarter, the Fund increased its allocation to health care and financials and reduced exposure to materials and utilities due to capacity concerns. With continued European stabilization, the Fund remains fully invested – cash averaged less than 1% during the quarter.
  • The Fund remains overweight health care, consumer discretionary and information technology, while underweight, financials, consumer staples 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.

Outlook

  • Economic and political issues continue to exist, but on a whole both the U.S. and Europe continue to recover from the great recession. In Europe, we see Spain’s economy gaining footing after years of reform. In the next year, Italy and France will attempt to do the same in an effort to competitively position their economies on a global scale. 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 UK.
  • We believe the UK is positioned to grow much faster than Europe as newbuild housing incentives and a better banking market offset its government’s austerity measures and strong currency.
  • Furthermore, we believe China’s multiyear rebalancing to a more consumerbased economy as well as its anticorruption efforts need 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. 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 Funds's manager and are current through June 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 portfolio and the variable insurance product carefully before investing. The portfolio and variable insurance product prospectuses contain this and other information, available by calling your financial advisor, visiting www.ivyfunds.com or contacting the applicable insurance company. Please read the prospectuses or summary prospectuses carefully before investing.

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