Waddell & Reed

Quarterly Fund Commentary


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


Manager(s):
Paul Ariano, CFA
Luke Jacobson, CFA
Paul LeCoq
Alexis Waadt

Market Sector Update

  • Investors experienced mixed conditions during the second quarter. Equity markets moved on concerns over geopolitical tensions (escalating Middle East unrest, Russia-Ukraine-Crimea conflicts), the impact of Federal Reserve tapering and tepid economic growth.
  • Early data from the second quarter indicated the economy is improving as warmer weather has helped release pent-up demand in housing, autos, goods and services.
  • Micro-cap stocks had quite a bumpy ride from the end of February through mid- May, as investors violently rotated away from stocks that were small in size as well as those with high growth characteristics.
  • Technology and health care (biotech) issues were hit particularly hard during this period, although the groups have since rallied back from correction territory on improving economic news.

Portfolio Strategy

  • The Fund underperformed the benchmark for the period ended June 30, 2014.
  • Investments in the energy sector (oil equipment and services) provided the greatest contribution to portfolio return for the quarter. The portfolio benefitted from an overweight position in this best performing sector.
  • Investments in the financial services sector also added to portfolio returns.
  • Despite the June rally in technology stocks, the sector was the greatest detractor from performance in the quarter. Industrials (building materials and machinery), health care and consumer stocks also were a drag on performance. While there were some company-specific disappointments, the underperformance for the quarter can largely be attributed the rotation away from those stocks with low market capitalization.
  • We made minor adjustments to the portfolio during the quarter. A few names were sold as they “outgrew” the micro-cap space. The proceeds were redeployed to new issues.

Outlook

  • So far 2014 has been frustrating for many investors witnessing the opposing forces of reduced stimulus and uninspiring economic growth rates, resulting in compressed price-to-earnings (P/E) multiples (especially among stocks with the highest revenue growth rates). However, we are now seeing that the “bad weather” related impacts to first quarter gross domestic product are being reversed, as demand for autos, housing and many other consumer items is healthy. In addition, employment reports announced in early July were positive.
  • We anticipate market levels will be higher by year-end, driven by earnings growth and continued improvement in the domestic economy. Risk control and stock selection are critically important and we continue to actively manage our 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 June 30, 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.

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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