Waddell & Reed

Quarterly Fund Commentary

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

John C. Maxwell, CFA

Market Sector Update

  • International markets posted solid performance, based on the Fund’s benchmark, which delivered gains exceeding 4% during the quarter. The U.S. dollar was relatively flat. Money flows to emerging-market equities were solidly positive in the quarter.
  • From a market standpoint, political headlines were generally negative in the quarter. The Ukraine situation remains unresolved and dangerous. Within Iraq, war has broken out, which so far has had little impact on oil production, but did cause an initial price spike.
  • From a central bank standpoint, 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 U.S. continued tapering, yet a rise in rates may be on the horizon.
  • From an economic perspective, macroeconomic data was mixed to slightly disappointing. China performed well with data rebounding strongly after hitting a very deep five-year trough. The U.K. and Europe appear to be losing momentum, while Japan is doing better than expected in the wake of the consumption tax hike. Leading indicators appear to be positive in the U.S. while coincident and lagging data have been disappointing.


Portfolio Strategy

  • The Fund outperformed the benchmark for the quarter (before the effects of sales charges), with strong stock selection as the main contributor to performance. Stock selection in healthcare, led by the Fund’s largest holding Shire (4.5% of Fund net assets), drove outperformance followed by the Fund’s financial holdings.
  • The Fund has an approximate 14% allocation to emerging-market (EM) stocks. The Fund’s EM allocation was a strong contributor to performance in the quarter driven by double-digit returns in China and Brazil – our two largest EM allocations. In our view, EM represents one of the few asset classes with attractive valuations and solid growth prospects after underperforming for approximately four years.
  • The Fund’s sector allocation continues to favor stable over cyclical stocks, which helped performance in the quarter. That said, perceived attractive valuations of a number of high-quality cyclical stocks are becoming increasingly interesting. From a sector standpoint, we continue to see relative value opportunities in information technology, energy and consumer discretionary.
  • We expect to maintain cash levels at or below 5% of Fund assets. We closed the quarter with an approximate 8% European currency hedge. We continue to seek reasonably priced companies that we think can do well in a slowgrowth environment and withstand a material economic downturn.



  • We believe global economic growth is fragile but showing positive momentum with global monetary policy extremely easy. We think improvement in economic growth will eventually lead to tighter monetary, 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 significant premium to historic averages. Money flows from bonds to equities slowed in the quarter, after turning last year.
  • 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 is important.


The opinions expressed in this commentary are those of the Fund'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. 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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