Waddell & Reed

Quarterly Fund Commentary

Ivy Micro Cap Growth Fund (prospectus)
September 30, 2015

John Bichelmeyer, CFA

Market Sector Update

  • For investors, 2015 is turning into a year to forget. Stocks, commodities and currency funds are all in the red, while bonds have offered up minimal gains through the end of third quarter.
  • U.S. micro- and small-cap stocks, particularly within the health care, materials and energy sectors, experienced indiscriminate selling during the back half of September, which caused one of the worst sell-offs since 2011.
  • The Fund’s benchmarks (Russell Micro Cap Growth Index and Russell 2000 Growth Index) fell 17.24% and 13.06%, respectively. This compares to the S&P 500 Index’s decline of 6.43%. This marks a reversal from the earlier part of the year, when smaller companies were viewed as a safe haven from all the global uncertainty.

Portfolio Strategy*

  • The Fund underperformed for the quarter. A portfolio manager change took effect on July 1 and significant portfolio repositioning was substantially completed during the period. The overall number of holdings was reduced to 70 as of Sept. 30 from 104 as of June 30.
  • Given the sharp sell-off, it is not surprising to see that all of the major sectors had negative returns for the quarter. Allocation effect was positive in the period while stock selection was negative.
  • Technology was the weakest sector for the Fund in regard to selection effect and accounted for the majority of the negative relative underperformance. Weaker-than-expected earnings from Barracuda Networks was the main cause as the company cited weaker than expected performance in Europe, and more specifically, its inability to close large deals within the region.
  • Other detractors were: Consumer staples, where uninspiring earnings results from Chef’s Warehouse and Inter Parums, Inc. caused the stocks to drop substantially; and financials with weak stocks and an underweight position in the best performing sector for both indexes.
  • Positive contributors included strong health care stock performance, a sizable cash position and an underweight in telecommunications.


  • After the quarter’s significant sell-off, valuations for many micro- and small cap companies appear increasingly attractive.
  • The portfolio has been re-positioned with the average position size increasing as a result of significantly fewer holdings. By having fewer holdings, this should allow for greater focus on our highest conviction investment ideas generated by the firm, while at the same time providing prudent sector and industry diversification.


Top 10 holdings (%) as of 09/30/2015: Rentrak Corp. 2.9, LogMeln, Inc. 2.7, Floteck Industries 2.6, 8x8, Inc. 2.4, Tile Shop Holdings 2.3, Cornerstone OnDemand 2.2, Zix Corp. 2.1, Nautilus Group 2.1, ICU Medical 2.0 and Intra-Cellular Therapies 2.0.

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