Waddell & Reed

Quarterly Fund Commentary

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

John C. Maxwell, CFA

Market Sector Update

  • International markets posted modest performance, based on the Fund’s benchmark, which posted gains of less than 1% during the quarter. The U.S. dollar was flat, having little impact on performance. Money flows to emergingmarket equities turned positive in the last two weeks of the quarter, ending the longest weekly string of negative outflows on record.
  • From a market standpoint, political headlines were generally mixed in the developed world, while negative in emerging markets. Russia’s annexation of Crimea, formerly under Ukrainian control, is clearly a negative for markets, but the event was generally taken in stride as expectations are that the situation will not escalate.
  • The U.S. Federal Reserve (Fed) began tapering in January. As a result, expectations have increased that interest rates are likely to rise.
  • From an economic perspective, macroeconomic data was generally mixed. By and large, U.S. data was slightly weaker than expected, with inclement winter weather viewed as the driving force for the decline. Europe continued on the slow road to recovery, while posting lower-than-expected inflation, increasing the likelihood of further unconventional monetary policy or quantitative easing. Generally speaking, inflation remains very low throughout the developed markets, while monetary policy remains accommodative.


Portfolio Strategy

  • The Fund outperformed the benchmark (before the effects of sales charges) for the quarter, with strong stock selection driving performance. Top individual contributors to performance included Teva Pharmaceuticals and Caixa Bank (2.3% and 1.8% of Fund net assets, respectively). The Fund’s sector allocation played a peripheral role during the quarter, marginally contributing to relative performance.
  • The Fund’s sector allocation continues to favor stable over cyclical stocks. Approximately 11% of the Fund is invested directly in emerging-market stocks, which we think is reasonable given that emerging markets have underperformed for more than the last three years. In our view, emerging markets represent one of the few asset classes with attractive valuations and solid growth prospects. We continue to see relative value opportunities in information technology, energy and select financials.
  • From a geographic standpoint, the Fund’s allocation in Europe (particularly in France, Spain and the U.K.) outperformed, while the Fund’s emerging-market exposure was a drag on performance.
  • We expect to maintain cash levels at or below 5% of Fund assets. We closed the quarter with an 8% European currency hedge. We continue to seek undervalued, reasonably priced companies, and are increasingly looking for growth companies that we think can do well in a slow-growth environment and withstand a material downturn.



  • We believe global economic growth is fragile but showing positive momentum with global monetary policy extremely 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 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 levels above their historic averages (over the last 25 years), while bonds are trading at a significant premium. Money flows from bonds to equities continued unabated in the quarter, after turning last year.
  • Long term, we believe emerging-market countries will try to improve their populations' 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 March 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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