Waddell & Reed

Quarterly Fund Commentary

Ivy Micro Cap Growth Fund (prospectus)
December 31, 2015

John Bichelmeyer, CFA

Market Sector Update

  • As 2015 came to a close, U.S. economic growth clearly ended on a weaker note given the continued collapse in commodity prices and the associated weakness it has caused in the industrial economy and high-yield bonds. It made for a complex and challenging quarter, when combined with the first interest rate increase after seven years of rates at near zero.
  • Despite this challenging economic backdrop, equities bounced higher in the quarter after the dramatic third quarter sell-off, and micro-cap and small-cap stocks were no exception.

Portfolio Strategy*

  • During the quarter, the market was once again led by large-cap companies, as measured by the S&P 500 Index. The Fund underperformed its benchmark indexes, Russell Microcap Growth and Russell 2000 Growth during the period ended Dec. 31, 2015. Both allocation effect and stock selection were negative in the quarter.
  • Health care was the weakest sector in the Fund and accounted for a significant portion of the negative quarterly relative underperformance. This segment of the market is notoriously volatile, and this quarter was especially so, with four stocks up greater than 20% while at the same time five were down greater than 20%.
  • Materials and industrials were responsible for the remaining relative underperformance as the dramatic drop in commodity prices took its toll on holdings such as Flotek Industries, Inc. and Thermon Group Holdings.
  • Telecommunications and consumer discretionary were two areas that contributed positively to the Fund. The transition to next generation communication systems and services is starting to take hold in a more meaningful way, which is benefiting holdings such as 8x8, Inc. and RingCentral, Inc. In the consumer area, rising wages and home values are providing solid tailwinds for several holdings.


  • Undoubtedly, 2016 should be another year of conflicting macro data points, which in all likelihood will make it an eventful year. The start of trading this year is already proof of that. Today’s cross currents make it is especially easy for emotions to drive markets, both up and down, yet fundamentals usually always win out over time.
  • Our objective is to seek out companies with longer-term secular growth tailwinds that appear innovative with strong business models and have a durable competitive advantage.
  • The goal is to use macroeconomic induced weakness to add to existing holdings as well as establish new positions in these types of holdings. This enables us to upgrade the quality of the portfolio and help better position the Fund for long-term capital appreciation.


*Top 10 holdings (%) as of 12/31/2015: 8x8, Inc. 3.4, Tile Shop Holdings 3.3, LogMeln, Inc. 2.8, Rentrak Corp. 2.6, Intersect ENT, Inc. 2.6, Zix Corp. 2.6, Sportman’s Warehouse Holdings, Inc. 2.4, Nautilus Group inc. 2.4, Cornerstone OnDemand 2.4 and ICU Medical, Inc. 2.2.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 2015. 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 Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. The Russell Microcap Growth Index measures the performance of the microcap growth segment of the U.S. equity market. The S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. It is not possible to invest directly in an index.

Risk factors. 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 f nancial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully i before investing.

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