Waddell & Reed

Quarterly Fund Commentary

Ivy International Core Equity Fund (prospectus)
September 30, 2014

John C. Maxwell, CFA

Market Sector Update

  • International markets were down almost 6% in the quarter based on the Fund’s benchmark. Poor international returns were almost all due to the strengthening U.S. dollar. Not only were currencies weak against the U.S. dollar, but commodities also experienced a declined.
  • From a market standpoint, political headlines were generally negative in the quarter. The Ukraine situation remains unresolved and dangerous. ISIS continues to be a major problem in Syria, Iraq and increasingly Turkey. On a positive note, Scotland voted to stay in the U.K., but concessions to win the vote will mean changes to the union where more power is delegated to the regional level.
  • From a central bank standpoint, the European Central Bank (ECB) committed to further aggressive actions – this time to expand their balance sheet by 1 trillion euros. This, coupled with the U.S. Federal Reserve’s continued tapering and marginally more aggressive posture to raising rates, fueled the stronger U.S. dollar.
  • From an economic perspective, macroeconomic data was disappointing. China struggled after only a few months of better economic data, and in Japan, the lingering effects of the consumption tax hike led to disappointing economic results despite a very aggressive central bank. Western Europe did surprisingly poorly, while the U.S. and U.K. performed relatively well.

Portfolio Strategy

  • The Fund outperformed the benchmark (before the effects of sales charges) for the quarter, with currency effects (the Fund positioned in regions that did better than average against the U.S. dollar) the largest contributor to relative outperformance. From a sector standpoint, an overweight allocation to information technology and an underweight allocation to materials benefitted performance.
  • The Fund has an approximate 11% allocation to emerging-market (EM) stocks. The Fund’s EM allocation was a positive contributor to performance, driven by gains in China, our largest EM allocation. After a strong run in emerging countries, we trimmed our exposure to make room for an increased weighting in European multinationals. Our 11% EM weight reflects our continued view that valuations in the asset class remain attractive. Additionally, we reduced our weighting in Japan.
  • The Fund’s sector allocation no longer favors stable over cyclical stocks as we believe the discount of cyclical stocks relative to the stable/defensive sectors has become too wide to ignore. Over the quarter, we increased the Fund’s allocation to industrials and materials at the expense of health care, consumer discretionary, energy and telecommunications. We continue to see the best investment opportunities in information technology.
  • We expect to maintain cash levels at or below 5% of Fund assets. Also, we exited our European hedge in the quarter.


  • We believe global economic growth is fragile and lost some momentum in the quarter despite global monetary policy being extremely easy. We think improvement in economic growth will eventually lead to tighter monetary policy, and to a lesser extent fiscal policy, in 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 generally less attractive. Equities are trading at valuation levels above their historic averages (over the last 25 years), while bonds are trading at a historic premium to long-term averages.
  • Long term, we believe emergingmarket countries will try to improve their populations’ standard of living. To accomplish this feat, the countries will require strong, real economic growth, which currently is not being achieved. 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 makes sense.


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. 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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