Market Sector Update
- In general, equity markets were broadly up, with the exception of much of the emerging markets, and the S&P 500 Index closed the quarter at year highs. The accommodative stance of the Federal Reserve (Fed) accompanied with the “great rotation” (bond investors moving to equities) were key contributors to the market’s success.
- In Europe, and similar to the U.S., performance gains seemed to originate from multiple expansion rather than economic growth. As a result, Europe seems to have emerged from recession, but general economic growth has been tepid. The Japanese market enjoyed gains over the quarter, but the yen’s approximate 7% slide relative to the U.S. dollar led to less impressive returns in U.S. dollars.
- Currently, the European Central Bank (ECB) remains vigilant for signs of deflation or additional indicators of economic stress. These indicators may lead a number of central banks, including the Bank of Japan, to potentially enact further monetary stimulus, unlike the Fed that stated it will begin to curtail its current quantitative easing program.
- The Fund posted strong absolute performance and outperformed the benchmark (before the effects of sales charges) for the period. Strong stock selection was the primary contributor to relative outperformance, and the Fund’s sector allocations and currency positioning also positively contributed to performance.
- Top individual contributors to Fund performance included consumer discretionary holding Galaxy Entertainment Group and health care holdings Fresenius SE and Shire plc (3.4%, 2.7% and 2.9% of Fund net assets, respectively).
- Detractors to performance for the period were limited, with poor stock selection in telecommunication services and the Fund’s cash position, averaging slightly less than 6%, as the top detractors.
- The Fund’s allocation to Japan contributed positively to Fund performance; however, the yen weakened relative to the U.S. dollar, diminishing performance.
- We believe the U.S. economic recovery will carry on, which will likely cause interest rates to continue to rise (hopefully modestly) and the U.S. dollar to strengthen. As a result, we believe this will likely lead to continued underperformance in emerging markets as negative current accounts, dwindling foreign investment flows and increases in commodity prices will stunt growth. That said, developing markets with positive trade and current account balances, accompanied with exposure to developed end markets (like South Korea), should fare better.
- We expect the composition of growth in China to continue to affect its trading partners. This holds especially true for China’s neighboring countries and for the country’s commodity providers (especially mining countries like Australia, Indonesia, and to some extent, Brazil).
- We continue to follow policies stemming from the U.K. and the rest of Europe, including both stimulation and austerity measures from foreign governments and the ECB. Another key factor is whether businesses, which are flush with cash, will increase spending, share repurchases or dividends as they gain confidence surrounding the economy’s future. All else equal, that should help the markets and we believe we will see continued improvement with some of the larger hard-hit European economies like Spain and Italy. In our view, France could continue to trail.
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.
The S&P 500 is an unmanaged index of common stocks.
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.