Quarterly Fund Commentary
Ivy International Core Equity Fund
September 30, 2013
John C. Maxwell, CFA
Market Sector Update
- International markets rose more than 11% in the quarter, based on the Fund’s benchmark, with the weaker U.S. dollar enhancing international performance. While the news during the quarter was mixed, money flowing from fixed income to equities accelerated and drove equities higher as the fear of rising rates (bond losses) was triggered by the threat of the U.S. Federal Reserve (Fed) tapering its asset purchase program.
- From a market standpoint, political headlines were mostly negative. This was highlighted by the U.S. government shutting down at quarter end and Japan confirming it will raise its sales tax from 5% to 8% on April 1, 2014. On a friendly note, the popular Mrs. Merkel will remain the head of the European Union’s largest state – Germany – following national elections that took place in September.
- From an economic perspective, Western Europe and China did better than expected while Japan performed about par with expectations. U.S. data was slightly disappointing, leading the Fed to stay the course with its asset purchase program. The new governor of the Bank of England moved to a stance of status quo rather than incremental easing, largely due to an improving economy.
- The Fund slightly underperformed the benchmark for the quarter. The Fund’s defensive positioning, currency hedges and cash allocation hindered performance.
- On the other hand, strong stock selection positively contributed to Fund performance, particularly in the information technology and energy sectors. Emerging markets once again fared worse than their international developed counterparts; however, emerging-market stocks in the Fund performed relatively well.
- We expect to maintain cash levels at or below 5% of assets in the Fund. We closed the quarter with a 7% and 4% hedge on our European and Japanese exposures, respectively. We continue to seek undervalued companies or reasonably priced companies that we think can do well in a slow-growth environment and withstand a material downturn.
- The Fund’s sector allocation continues to favor stable over cyclical stocks and remains neutrally positioned between growth and value. Approximately 9% of the Fund is directly exposed to emerging-market stocks, which we think is reasonable given that emerging markets have underperformed for the last three years. We continue to see relative value opportunities in telecommunication services, energy and information technology.
- We believe global economic growth is fragile but showing positive momentum with global monetary policy remaining aggressive, though having peaked in the U.S. and the U.K. We think improvement in economic growth will eventually lead to tighter monetary and fiscal policy in the advanced economies. In our opinion, the slower economic growth experienced since 2008 is likely as good as we can expect today, with greater downside than upside risks.
- We think relative valuation remains supportive for international equities, while absolute valuations are unexciting. Equities are trading at levels that are in line with to slightly above their historic averages (over the last 25 years), while bonds are trading at a significant premium. That said, in most markets, 10-year bonds traded off through the quarter while equities appreciated, reducing the relative attractiveness of equities. This year, for the first time since the downturn, we are seeing money flow from bonds to equities rather than vice versa.
- Long term, we believe emerging countries will try to improve their population’s standard of living. To accomplish this feat, the countries will require strong real economic growth which is currently in question. There are increasing signs of stress in these developing countries, though their growth remains substantially ahead of their developed market counterparts. In the end, we believe maintaining our exposure to developing markets is important.
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. These risks are magnified in emerging markets. 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.