Waddell & Reed

Quarterly Fund Commentary

Ivy Micro Cap Growth Fund (prospectus)
December 31, 2013

Paul Ariano, CFA
Luke Jacobson, CFA
Paul LeCoq
Alexis Waadt

Market Sector Update

  • U.S. equity markets continued to grind higher toward the end of 2013 as investors’ risk tolerance and confidence increased.
  • Many were able to focus more on the improving economy after the Federal Reserve (Fed) took the looming issue of “tapering” off the table and instituted a $10 billion reduction in the monthly purchase program.
  • America’s economic situation appears to be brightening. Labor costs are becoming more competitive. Unemployment rates are trending down. Energy costs are in check. Cyclical areas of the economy have picked up. Consumer confidence, corporate profits, housing activity, auto sales and bank loan activity have all improved from crisis lows. Corporate balance sheets are strong and the biggest U.S. banks are capitalized.

Portfolio Strategy

  • The Fund outperformed its Russell 2000 Growth and Russell Microcap Growth benchmark for the quarter, before the effects of sales charges.
  • Investments in the health care sector provided the greatest contribution to portfolio return, driven by stock selection in the biotechnology and pharmaceutical groups.
  • Investments in the industrials sector (building materials) also added significantly to performance after lagging in third quarter.
  • The information technology, consumer and energy groups all contributed to the portfolio’s outperformance for the period.
  • Telecommunications stocks lagged the broader portfolio and were a slight drag on performance.


  • We believe the environment for microcap stocks continues to be positive.
  • After five years of exceptionally tight lending standards, the companies in the Fund finally have access to capital to build growth plans.
  • Micro-cap stocks have experienced multiple expansion for the first time since the financial crisis in 2008. Going forward, we believe the strong earnings growth characteristics of the portfolio will be the driver that moves stocks higher from current levels.
  • Risk control and stock selection are critically important in this environment and we continue to actively manage Fund exposure (on a sector/industry basis as well as at the security level) and construct a portfolio with companies experiencing strong forecasted long-term earnings growth rates.
  • In the current slow-growth environment, we believe companies that exhibit strong and highly predictable rates of growth will command premium valuations.


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 2000 Growth is an unmanaged index comprised of securities that represent the small-cap sector of the stock market. Russell Microcap Growth measures the performance of the micro-cap growth segment of the U.S. equity market. It includes those Russell Microcap Index companies with higher price-to-book ratios and higher forecasted growth values. 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. 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. Investing in micro-cap stocks may carry more risk than investing in stocks of larger, more well-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.

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