Waddell & Reed

Quarterly Fund Commentary

Ivy International Core Equity Fund (prospectus)
December 31, 2014

John C. Maxwell, CFA

Market Sector Update

  • International markets were down about 3.5% in the quarter based on the Fund’s benchmark. Poor performance was, by and large, due to the strong U.S. dollar as international markets generally posted gains in local currency. Brent crude oil, which started the quarter just under $100 a barrel, ended under $60 – a drastic decline.
  • From a market standpoint, political headlines were mixed. Between the ongoing turmoil and oil price declines, Russia and its currency came under severe pressure. In addition, Greece is back in the headlines with a nationalist party gaining votes and forcing a snap election in January 2015. The U.S. and Japanese elections were generally positive for markets.
  • From a central bank standpoint, Japan, Europe, Switzerland and China set a very dovish tone. For example, Japan, which began the quarter with the most aggressive quantitative easing, increased its commitment to buy assets by 60%. It seems that only the U.S. Federal Reserve is moving in a direction of tighter policy.
  • From a macro-economic perspective, economic-surprise indices generally improved from low levels in developed economies outside the U.S. – while U.S. data, from higher levels, was flat. Low bases of comparison, lower oil/energy costs, weak currencies, lower rates and increasingly aggressive central banks should support improving economic data.

Portfolio Strategy

  • The Fund outperformed the benchmark (before the effects of sales charges) for the quarter. Strong stock selection drove performance, while currency effects and sector allocation were also positive contributors. Information technology and materials were the best performing sectors. We significantly reduced our energy weighting at the beginning of the quarter, which benefitted performance.
  • The Fund has an approximate 11% allocated directly to emerging markets (EM) with another 3% in U.S. names that we believe are EM proxies. The Fund’s EM holdings accompanied by our strong weighting in European multinationals drove performance in the quarter. Our 11% EM weight reflects our continued view that valuations in the asset class remain attractive.
  • The Fund’s split between stable and cyclical stocks is in line with the benchmark. Over the quarter, we increased the Fund’s allocation to materials and consumer discretionary at the expense of energy and telecommunication services.
  • We expect to maintain cash levels at or below 5% of Fund assets. We have currently hedged our Chinese yuan and Brazilian real exposure. We continue to seek reasonably priced companies that we think can do well in a slow-growth environment and withstand a material economic downturn. So far, we perceive the huge and rapid decline in the oil price as a benefit to consumers globally rather than an asset bubble that has broken and will lead to global contagion.


  • We believe global economic growth is fragile but improved through the quarter. Global monetary policy remains extremely easy. We think improvement in economic growth, should it occur, will eventually lead to tighter monetary policy, and to a lesser extent fiscal policy in advanced economies. In our opinion, the slower economic growth 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 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’ standards of living. To accomplish this feat, the countries will require strong, real economic growth, which they currently are not achieving. 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 Dec. 31, 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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