Market Sector Update
- Second quarter 2014 equity performance
was solid across most investment styles,
geographies and capitalization ranges.
U.S. large-cap stocks were particularly
strong during the period, outperforming
small caps, bonds and global equities.
- Despite a seemingly unending string of
global macroeconomic, financial and
geopolitical concerns, markets continue
to show amazing resilience.
- Even with all all of the recent turmoil,
investors have taken comfort in the
knowledge that companies are in very
good financial shape, the banking
system has healed, systemic risk has
been greatly reduced and substantial
slack still exists in most global
economies, thereby minimizing near
term inflation threats.
- As we have noted before, much of the
recent market advance has been driven
by price-to-earnings (P/E) multiple
expansion associated with declining risks
as earnings growth remains relatively
- The Fund generated strong returns but
underperformed the benchmark for the
- From an attribution standpoint, strong
stock selection offset some unfavorable
sector positioning. Health care was an
area of particular strength driven by
continued strong performance in select
biotech holdings such as Gilead
Sciences, Inc., Celgene Corp. and Shire
- Fund exposure to the railroad sector
and select technology companies also
aided portfolio returns. These factors
offset underweighting in the strong
performing energy sector, Fund
overweighting in the relatively weak
performing the consumer discretionary
sector and exposure to global gaming
stalwarts Las Vegas Sands Corp. and
Wynn Resorts Ltd., which lagged due to
a slowdown in Macau gaming activity.
- As you may recall, first quarter ended
with an abrupt and substantial decline
in many growth stocks. This continued
into April, providing an opportunity to
add to select positions where the sell-off
did not seem justified given current
fundamentals and valuation levels.
- As the market rebounded throughout
the second quarter, it is notable that the
growth companies with the best
margins, profits and cash flows have
come back the most.
- Looking ahead, we see the usual mix of
bright spots and caution flags in our
observations about the economy.
Favorable underlying trends include
steady improvement in the labor
market, solid spending on large ticket
items such as aircraft and autos, and
booming capital spending in the energy
- However, the housing recovery
appears to be stagnating as
consumers react to the significant
rebound in prices and access to credit
remains somewhat constrained.
Furthermore, while consumer
spending and confidence is generally
solid, it remains challenged at the
lower income cohorts.
- We see the recent uptick in merger
and acquisition activity as a potential
sign of growing business confidence,
but it has largely been driven by tax
considerations and cost synergies up
to this point.
- Overall, the trajectory of the economy
appears to be on the familiar 2.5-3.5%
growth track we have grown
accustomed to – disappointing those
who expected a stronger snap back
after the weather-induced gross
domestic product decline of the first
- All told, these various pockets of
strength and weakness appear
supportive of continued modest profit
growth with minimal risk of serious
inflation, resulting in a favorable
backdrop for growth stock investors.
Thank you for your continued support.
*Gilead Sciences, Inc., Celgene Corp., Shire Pharmaceuticals,
Las Vegas Sands Corp. and Wynn Resorts Ltd. (4.3%, 3.6%,
1.6%, 3.8% and 2.1% of net investments as of 06/30/2014,
The opinions expressed in this commentary are those of the Funds's manager and are current through June 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 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 diversification. 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. 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 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.