Market Sector Update
- Stocks posted another strong quarter of performance, capping off the best year for broad market equity returns since 1997.
- Stocks benefited from declining risk premiums and growing confidence that the global economy has moved beyond the economic and banking crisis and is transitioning to a more “normal” economic environment. This “normal” environment is one where investor fears of systemic risk have faded into the background and the focus is on the increasingly solid footing of the global economic expansion. This is characterized in the U.S. by slow, but steady revenue growth, high and sustainable levels of profitability, and abundant cash flow for much of corporate America.
- For many markets, this de-emphasis of macroeconomic concerns simply means higher valuations across industries, sectors and capitalization ranges, regardless of investment style. It has also provided a more favorable environment for active managers as stock correlations have declined to more normal levels. This environment proved beneficial.
- The Fund outperformed its Russell 1000 Growth benchmark for the quarter, before the effects of sales charges. The Fund benefited from an underweight in consumer staples. Favorable performance was largely driven by strong stock selection in consumer discretionary, industrials and health care.
- Outperformance in consumer discretionary was led by holdings in Las Vegas Sands Inc. and Wynn Resorts Ltd. Outperformance in industrials was primarily driven by exposure to aerospace and railroad companies. The Boeing Company and Precision Castparts Corp. are benefiting from a strong new product cycle and massive order backlogs in commercial aircraft, driven by more fuel efficient designs and the low cost of financing.
- Railroad holdings such as Canadian Pacific Railway LTD., Union Pacific Corp. and Kansas City Southern are beneficiaries of the resurgent U.S. energy industry, growing auto production in Mexico and a generally improving U.S. economy.
- Finally, strong stock selection in health care was the result of exposure to the biotech firms Gilead Sciences Inc. and Biogen Idec Inc. Other strong performers included MasterCard Inc., Harman International Industries Inc. and CBS Corp.
- Key negative contributors were largely concentrated in technology, where competitive pressures remain intense and corporate spending plans are still uneven.
- Generally speaking, U.S. corporate balance sheets remain rock solid. As a result, managements continue to actively return cash to shareholders through increases in dividends and share repurchases. Returns on equity are quite high for growth stocks so they should, in theory, be able to return more capital to shareholders and we continue to see management teams move in that direction.
- Key problematic geographies such as Europe have stabilized and are showing positive surprises to profitability with the potential for continued improvement. While China’s growth rate remains uncertain, the absolute rate of growth in the region is high enough that most multinationals can continue to do well there. We expect many leading multinationals to benefit over the next couple of years as former headwinds become tailwinds.
- These factors, combined with modest U.S. economic and profit growth, should provide a favorable backdrop for the equity market. We continue to emphasize growth companies operating in large or fast growing markets that we believe can possess sustainable competitive advantages and generate superior margins and high returns on capital.
*Las Vegas Sands Inc., Wynn Resorts Ltd., The Boeing Company, Precision Castparts Corp., Canadian Pacific Railway Ltd., Union Pacific Corp., Kansas City Southern, Gilead Sciences Inc., Biogen Idec Inc., MasterCard Inc., Harman International Industries Inc. and CBS Corp. (4.3%, 3.2%, 2.4%, 1.9%, 3.0%, 2.4%, 2.0%, 4.3%, 4.0%, 4.5%, 1.7% and 2.9% of net investments as of 12-31-2013).
The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2013. The managers' 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.
Russell 1000 Index is an unmanaged index comprised of securities that represent the large-cap sector of the stock market. It is not possible to invest directly in an index
Risk Factors. As with any mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with great diversif cation. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal i Deposit Insurance Corporation or any other government agency. 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.