Waddell & Reed

Quarterly Fund Commentary

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

John Bichelmeyer, CFA

Market Sector Update

  • Economic prospects became less bright since the beginning of 2015 and the market’s action continued to be turbulent. Capital spending, home building, vehicle sales and government spending levels have either slowed or leveled off.
  • The dollar continued its ascent, the foreign trade outlook deteriorated and oil prices sagged into what seems to be a bottoming process. And while the unemployment rate continued to decline, it was unfortunately accompanied by slower-wage growth.
  • At this stage, weaker data points and their implications for disappointing gross domestic product growth and belowtarget inflation pose a problem for Federal Reserve (Fed), as it desires to begin raising short-term interest rates. The Fed now seems to be approaching the upcoming rate hike cycle with caution.

Portfolio Strategy

  • Within the Russell 2000 Growth Index, the largest names continued to outperform while the smallest names lagged the broader index. For example, stocks with a market cap (float-adjusted) above $1 billion gained in Q1, while those with a market cap below $250 million declined for the period. This was a continuation of the trend exhibited in 2014.
  • The Fund underperformed for its benchmarks for the period ended March 31, 2015.
  • Investments in the technology sector (particularly software) were the greatest detractors from portfolio return. Investments in industrials (building materials, construction) also reduced portfolio returns. The micro-cap nature of the Fund had a negative impact on the relative performance versus the benchmarks.
  • Fund investments in health care provided the largest contribution to portfolio return in the quarter, led by biotech companies. The portfolio benefitted from an overweight position and double-digit returns from the sector.
  • The portfolio is currently overweight health care, including pharmaceuticals, biotechnology, and medical instruments. We have a market weight position in technology, consumer discretionary and energy. The portfolio is underweight materials and financials.


  • Current expectations are that the Fed will be gentle and slow as it begins its rate hike cycle. However, history shows that the actual market response to Fed action may initially be turbulent despite all of the transparency and communication. On the other hand, properly executed monetary policy actions could likely result in large quantities of investment capital to flow to the U.S.
  • The strong dollar would restrain business activity somewhat but would also restrain inflation and interest rates – and the Fed may even be able to reduce its balance sheet by selling Treasuries to the rest of the world.
  • In this environment, we believe companies that exhibit strong and highly predictable rates of growth will command premium valuations. 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. At points like this, company fundamentals eventually become the primary driver for stock market action and a positive scenario for growth stocks unfolds.

The opinions expressed in this commentary are those of the Fund’s managers and are current through March 31, 2015. 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.

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. 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 portfolio and the variable insurance product carefully before investing. The portfolio and variable insurance product prospectuses contain this and other information, available by calling your financial advisor, visiting www.ivyfunds.com or contacting the applicable insurance company. Please read the prospectuses or summary prospectuses carefully before investing.

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