Waddell & Reed

Quarterly Fund Commentary


Ivy International Core Equity Fund (prospectus)
December 31, 2015


Manager(s):
John C. Maxwell, CFA

Market Sector Update

  • Broad international markets performed relatively well, up just under 5% in U.S. dollars for the quarter. That said, global economic growth remained generally muted despite easy monetary policy around the globe.
  • China continues to be at the forefront of investor concerns. Uncertainty abounds in several areas including the economy’s overall global competitiveness; the ability to rotate to a service and consumption based economy; and the sustainability of a controlled exchange rate.
  • After many false starts, the U.S. Federal Reserve raised rates for the first time this cycle despite lackluster economic data. Monetary policy in Europe and Japan remain aggressive, and policy heads suggest they are prepared to do more, though the market was disappointed with Draghi’s tempered announcement during the most recent ECB meeting. Expectations were high for a more aggressive response to the current conditions.
  • From a market standpoint, the continued decline in commodity prices and the associated sell-off of high yield securities are concerning and have our attention.

Portfolio Strategy

  • The Fund outperformed the benchmark (before the effects of sales charges) for the quarter. During the quarter, we reduced the Fund’s cyclicality from a sector allocation standpoint. As a result, the Fund’s allocation between stable and cyclical sectors was relatively balanced at quarter end. We used to believe economic growth would be better than consensus; however, that is no longer the case. That said, core holdings emulate the Fund’s investment philosophy – what we believe are favorably priced companies with strong cash flows and exposure to identified key investment themes.
  • On a sector basis, consumer staples and health care were the top contributors to performance for the quarter. The top individual contributor to Fund performance was Baidu.com- ADR (0.9% of Fund net assets).
  • The Fund’s emerging-market positions performed well over the quarter as did our hedge to the Chinese yuan. Overall, currency effects were the top relative contributor to performance for the period.
  • We expect to maintain cash levels at or below 5% of Fund assets. We have an approximate 10% hedge to the Chinese yuan.

Outlook

  • Last year, the combination of lower energy costs; more available and cheaper money; and generally weaker currencies outside the U.S. failed to deliver the better economic growth we were expecting. Therefore, we are returning to our stance that economic growth will remain muted for the longer term, which is in line with the general consensus.
  • We think relative valuation remains supportive for international equities, while absolute valuations are less attractive. Equities, outside emerging markets, are trading at valuation levels above their historic averages (over the last 25 years), while bonds are trading at a dramatic historic premium to long-term averages. Emerging-market equities trade at valuation levels well below historic averages.
  • Long term, we believe emergingmarket countries will try to improve their populations’ standards of living. To accomplish this feat, the countries will require solid real economic growth, which currently is not being achieved. There are increasing signs of stress in these developing countries, though in many cases their growth remains ahead of their developedmarket counterparts.
  • We continue to seek opportunities that are in line with the Fund’s current investment themes: disproportionate growth of emerging-market consumers; believable and sustainable dividend yield; companies benefiting from increased mergers and acquisitions; and infrastructure development – particularly the internet.
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    The opinions expressed in this commentary are those of the Fund’s manager and are current through December 31, 2015. 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. 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 or economic conditions l 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.

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