Waddell & Reed

Quarterly Fund Commentary

Ivy Micro Cap Growth Fund (prospectus)
September 30, 2014

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

Market Sector Update

  • Equity markets experienced higher volatility in quarter as worries over geopolitical unrest, tepid economic growth, a hyperbolic dollar, and the impact of the Federal Reserve’s (Fed) transition from “tapering” to the inevitable “first rate hike” began to weigh on investor confidence.
  • Equities had a heavy sell-off in early August followed by a sharp rebound and another decline into the end of the quarter.
  • Small-cap stocks in particular had a bumpy ride, flirting with correction territory while larger cap stocks were essentially flat for the quarter.
  • In September the Fed acknowledged ongoing improvements within the economy, but expressed concerns over labor market underutilization, weak inflation and a slow housing sector recovery, and thereby reaffirmed its support in stimulating the economy for some time to come.

Portfolio Strategy

  • The Fund underperformed the benchmark for the 3-month period ended September 30, 2014.
  • Investments in the energy sector were the greatest detractor from return, following a strong 2nd quarter, when the sector was the greatest contributor to portfolio performance.
  • Investments in the industrials, consumer discretionary, health care and technology sectors did not add to portfolio totals. However the driving force behind the portfolio’s Q3 performance was caused by the size and high-growth characteristics of the portfolio, which were definitely not favored during the period.


  • So far 2014 has been frustrating for many investors witnessing the opposing forces of reduced stimulus and uninspiring economic growth rates leading to compressed price-toearnings (P/E) multiples (especially among stocks with the highest revenue growth rates). However, the economy is slowly recovering, inflation remains low, the market is resilient, and there’s a lot of cash in the system with no place to go.
  • While external shocks and headline risks might heighten the overall global economic risk profile, we believe recession fears remain off the table and stock market dips provide opportunities. History tells us that at points like this, company fundamentals eventually become the primary driver for stock market action and a positive scenario for growth stocks unfolds.
  • We anticipate the economy will continue to improve, albeit at a relatively slow pace.
  • Risk control and stock selection are critically important and we continue to actively manage Fund exposures and construct portfolios with companies experiencing strong forecasted longterm earnings growth rates.


The opinions expressed in this commentary are those of the Fund’s managers and are current through Sept. 30, 2014. 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.

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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