Waddell & Reed

Quarterly Fund Commentary

Ivy International Core Equity Fund (prospectus)
December 31, 2013

John C. Maxwell, CFA

Market Sector Update

  • International markets rose more than 5% in the quarter, based on the Portfolio’s benchmark. The U.S. dollar was mixed, weakening versus the euro and pound while strengthening against most other currencies. As such, the dollar posed as a slight headwind to international performance.
  • From a market standpoint, political headlines were generally benign. While the U.S. government shutdown and major issues with the U.S. “Affordable Care Act” were embarrassing, they proved to be non-events for the markets. In Europe, political turmoil was relatively quiet – a welcome change. Meanwhile, Japanese and Chinese relations remain tense and bear watching. That said, no new escalation took place in the quarter.
  • From an economic perspective, macroeconomic data was generally positive across developed markets. China was mixed, as were most emerging markets. The Federal Reserve (Fed) announced that it would reduce its current monetary stimulus efforts by decreasing its bond-buying program from $85 billion to $75 billion per month. As a result, an element of uncertainty was removed from the market. Inflation remains very low throughout the developed markets, while monetary policy remains accommodative.

Portfolio Strategy

  • The Portfolio outperformed the benchmark (before the effects of sales charges) for the quarter. Strong stock selection was the primary contributor to relative outperformance, and the Portfolio’s sector allocations and currency positioning also positively contributed to performance.
  • Top individual contributors to performance for the period included Shire PLC and ING (3.3% and 2.3% of Portfolio net assets, respectively). From a sector allocation standpoint, detractors to performance were limited and the Portfolio’s cash position, averaging approximately 3%, was the largest drag on performance in a rising market. The Portfolio’s overweight position in information technology, a strong performing sector, was the largest contributor to relative performance.
  • We expect to maintain cash levels at or below 5% of assets in the Portfolio. We closed the quarter with a 7% 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.
  • We think relative valuation remains supportive for international equities, while absolute valuations are no longer attractive. Equities are trading at levels above their historic averages (over the last 25 years), while bonds are trading at a significant premium. That said, in most markets, 10-year bonds traded off through the quarter while equities appreciated, reducing the relative attractiveness of equities. This year, for the first time since the downturn, we saw money flow from bonds to equities rather than vice versa – driving equity market performance.
  • Long term, we believe emerging countries will try to improve their population’s standard of living. 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 December 31, 2013. 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.

Investors should consider the investment objectives, risks, charges and expenses of a portfolio and the variable insurance product carefully before investing. The portfolio and variable insurance product prospectuses contain this and other information, available by calling your financial advisor, visiting www.ivyfunds.com or contacting the applicable insurance company. Please read the prospectuses or summary prospectuses carefully before investing

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.

Variable investment options are subject to market risk, including loss of principal, and are suitable for long-term investing, particularly for retirement. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 ½ may be subject to a 10 percent IRS penalty in addition to taxes. Ivy Funds VIP are only available

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