Quarterly Fund Commentary
Ivy Managed European/Pacific Fund
December 31, 2013
Michael L. Avery
Market Sector Update
- U.S. equities continued to make gains in the fourth quarter. Global equities in general also gained during the quarter and for the year.
- Stocks continued to react positively to slow but steady U.S. economic growth, largely driven by consumer spending and the energy, industrials and, to a lesser degree, housing sectors. A federal budget agreement in December between House and Senate negotiators helped reduce market uncertainty.
- The Federal Reserve (Fed) announced late in the year that it would reduce its bond-buying program from $85 billion to $75 billion per month, taking a very small step toward reducing economic stimulus while maintaining aggressive monetary policy. The Fed said it will not raise interest rates until unemployment falls well below 6.5%, but emphasized that level is not a trigger for rate hikes.
- China in mid-November announced an ambitious economic plan with reforms in 16 major areas and a target of 2020 for “decisive” results. The country’s gross domestic product (GDP) grew an estimated 7.7% for the year. We’re now watching the impact of lending policies there and the potential impact on GDP in 2014.
- The Fund delivered a strong positive return (before the effect of sales charges) in the quarter. We continued to hold a dominant weighting to the underlying Asian fund.
- The weightings in the Fund reflect our continued theme related to the growth in consumption from the expanding middle class across emerging markets, and on investments in companies that may benefit from this trend. We still believe there are opportunities to participate in the rising prosperity of these individuals across Asia.
- The underlying Europe fund had a strong positive return for the quarter (before the effect of sales charges). The market view that Europe remains on a path to recovery helped performance in European markets overall. Signs of GDP growth in Spain, Ireland and Italy in particular overcame any negative sentiments. Strong stock selection was the primary aid to performance of this underlying fund as select industrials, consumer discretionary and financials holdings posted relatively large gains.
- The underlying Asia fund also had a strong positive return (before the effect of sales charges). That fund kept an overweight position compared with its benchmark in markets in northern Asia and an underweight in southern and southeast Asia, which contributed to performance. Holdings related to the entertainment industry and the internet again were contributors.
- We think economic growth in the developed countries will show the largest improvement in 2014, which in turn will help support growth rates in emerging markets.
- Recession in the eurozone ended in the second quarter of 2013. We believe growth will continue to be positive, although sluggish, with eurozone GDP growth overall averaging 0.8% in 2014.
- We think 2014 GDP growth in Japan will average 1.8%. We believe emerging-market economic growth will be mixed in 2014, with growth in China averaging about 7.6% for the year.
- In the face of ongoing monetary stimulus, stock markets have continued to re-price risk. We think that is evident in rising valuations, decreasing correlations, decreasing volatility and other metrics. While equities may be a less compelling investment choice now because of valuations and the low-growth economic environment, we still prefer them in relative value terms.
The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 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.
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. Investing in a single region involves greater risk and potential reward than investing in a more diversified fund. The performance of the Fund will depend on the success of the allocations among the chosen underlying funds. Investing in small-cap companies may carry more risk than investing in stocks of larger and more-established companies. 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.