Waddell & Reed

Quarterly Fund Commentary

Ivy Micro Cap Growth Fund (prospectus)
March 31, 2014

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

Market Sector Update

  • Equity markets experienced a rollercoaster ride in the first quarter. Stocks began the year in a state of relative calm, but dropped in mid- January over mounting concerns over the impact of Federal Reserve (Fed) tapering; a potential “bad weather” drag on U.S. gross domestic product growth; emerging market troubles; and slowing Chinese economic data.
  • Following the Fed’s March 18-19 meeting, Chair Janet Yellen’s comment suggesting that the Fed may start raising short-term rates sooner than investors were expecting (as early as mid-year 2015), shocked the markets.
  • Hardest hit were those stocks with the highest revenue growth rates, as well as small caps and biotechnology stocks. Despite this, many broad stock market indices managed to finish the quarter with slight gains and near all-time highs.


Portfolio Strategy

  • The Fund outperformed its Russell 2000 Growth and Russell Microcap Growth benchmarks for the quarter, before the effects of sales charges..
  • Within the Russell 2000 Growth Index benchmark, the smallest stocks (those with a market cap under $500 million) outperformed the broader index. Companies with high-growth rates also outperformed the slower growers, despite being hit hard in March.
  • Investments in the energy sector (oil equipment and services) provided the greatest contribution to Fund return for the quarter. Investments in the health care (biotechnology), consumer discretionary and industrials were also additive for the period.
  • Investments in the consumer staples and financials sector were a slight drag on performance.



  • America’s economic situation has brightened since the 2008-09 crisis lows.
  • Labor costs have become 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.
  • Risk control and stock selection are critically important and we continue to actively manage the Fund’s exposures (on a sector/industry basis, as well as at the security level) and construct portfolios with companies experiencing strong forecasted long term earnings growth rates.

The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 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.

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 inves

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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