Waddell & Reed

Quarterly Fund Commentary


Ivy International Growth Fund (prospectus)
September 30, 2014


Manager(s):
Sarah C. Ross, CFA

Market Sector Update

  • Global equities declined modestly in the third quarter. U.S. equities were a relative bright spot, posting slight gains. Emerging markets were particularly weak, negatively impacted by the expectation of an eventual U.S. rate increase and the strengthening U.S. dollar relative to the majority of foreign currencies. Volatility spiked in the quarter on increased global growth uncertainty.
  • Relatively weak economic data from the European Union and China have resulted in uncertainty in the global equity markets. China’s growth rate appears to be slowing, and the government’s effort to crack down on corruption has added uncertainty, particularly in luxury Chinese consumption.
  • The U.S. economy continues to exhibit stable growth, albeit at low levels, with persistently encouraging trends in employment and growth in the housing industry.
  • During the period, assets classes generally viewed as more stable and safe outperformed. Health care was an outperformer across geographical regions. Energy was particularly weak due to lower energy commodity prices and fears surrounding slowing global growth rates.

Portfolio Strategy

  • The Fund outperformed the benchmark (before the effect of sale charges) for the period, driven primarily by sector selection and favorable currency effects. The Fund’s overweight in information technology and health care was a positive contributor. Stock selection was weaker in the quarter, driven primarily by poor selection in consumer discretionary – specifically auto-related companies. On a positive note, stock selection in industrials benefitted performance.
  • In some cases, recent growth fears have created opportunities to buy shares in what we believe are strong, structural growth companies with solid barriers to entry on price weakness. We have tried to take advantage of market volatility by adding to high conviction names on weakness.
  • In addition, we see opportunities for investment in companies that benefit from positive structural growth themes that will likely continue despite slow global growth. These include increasing middle-class consumption in emerging markets, including China; growing penetration of internet retailing; increased travel penetration in China; positive healthcare trends; and increasing North American energy production.
  • We expect continued long-term strength of the U.S. dollar and have partially hedged currency risk against the Japanese yen, euro and British pound.

Outlook

  • The backdrop for global growth remains moderate, with slowing growth in China expected; anemic growth in Europe and Japan; and the U.S. showing modest improvement. We expect the economic environment in the U.S. to be more positive than some international counterparts as lower unemployment, stable home prices and solid consumer confidence create a relatively favorable environment. We expect the U.S. dollar to continue to strengthen on stronger economic data versus the rest of the world and the likelihood of an eventual rise in U.S. interest rates.
  • Political uncertainty surrounding the Ukraine, Russia and the Middle East (ISIS), along with uncertainty surrounding global growth, may cause continued bouts of short-term volatility. However, there are still a number of positive underpinnings to the global macro backdrop, including U.S. unemployment, structural changes in Japan and stabilization in Europe.
  • We believe the likelihood of price/earnings expansion is limited and believe market outperformers will be driven predominantly by earnings growth. We continue to focus the portfolio on strong secular growth companies that can post earnings growth and share price appreciation given their unique products and services.

 


Portfolio Manager Sarah Ross took over the management of the Ivy International Growth Fund on August 4, 2014.

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 fund, the value of the Fund’s shares will change, and you can 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 and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers

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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