Waddell & Reed

Quarterly Fund Commentary


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


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

Market Sector Update

  • Equity markets continued to experience higher volatility during the fourth quarter.
  • A grinding recovery from mid-October’s steep decline (primarily driven by fears around the Federal Reserve’s (Fed) exit from quantative easing), was followed by the fallout over OPEC’s decision to not cut oil production.
  • Investors quickly reacted to the “gamechanging” OPEC drama, as evidenced by the plunge in oil prices and energyrelated stocks. Concerns about the effect and possible contagion implications of declining oil prices on energy sector profits trumped optimism over the positive impact of falling energy prices on consumer spending.
  • Even early-December retail and consumer confidence data supporting the benefits of low oil prices on the broader economy failed to change market sentiment. However, comments from the Fed’s December meeting, combined with the release of very strong U.S. economic data, helped set the stage for a strong year-end rally.

Portfolio Strategy

  • Small caps outperformed the broader market in the quarter, although those under $250 in market capitalization lagged. Within the Russell 2000 Growth Index, a Fund benchmark, higher priced stocks outperformed, as did slower growers.
  • The Fund underperformed its benchmark for the 3-month period ended Dec. 31, 2014.
  • Investments in the health care sector provided the largest contribution to portfolio return, as the group gained for the quarter. The Fund benefited from an overweight position and strong stock selection.
  • Energy investments were the greatest detractor from return. The Fund’s exposure to the sector was in line with the benchmarks; however, the group declined precipitously as commodity prices plunged.
  • Investments in industrials lagged the broader market and reduced portfolio totals.

Outlook

  • America’s economy is faring well compared with the rest of the world, and there appears to be no recession in sight.
  • The building blocks for strong and sustained U.S. economic growth are in place – slack labor, available capital and revolutionary technologies – so we believe the economy is on its way toward a self-sustained recovery. However, many headwinds persist (fragile investor confidence, subpar global economic growth, global instability, China/Europe economic slowdowns) and so this continues to be a challenging investment climate where stock selection and active risk management are extremely important.

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

Russell 2000 Growth Index is an unmanaged index comprised of securities that represent the small-cap sector of the stock 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 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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