Waddell & Reed

Quarterly Fund Commentary


Ivy Mid Cap Growth Fund (prospectus)
September 30, 2014


Manager(s):
Kimberly A. Scott, CFA

Market Sector Update

  • In third quarter, mid-cap growth stocks, as measured by the index, posted their first negative return in the past eight quarters.
  • Performance by sector was mixed, with half of the economic sectors outperforming, and the other half underperforming. Underperforming sectors were some of the more interest rate and economically sensitive groups, namely utilities, financials, materials, industrials and energy. Interestingly, utilities and financials are generally sensitive to interest rates in the opposite direction, so the underperformance of financials may be more related to economic sensitivity and concerns about a slower-growth environment, along with materials, industrials and energy.
  • Energy was a main underperformer during the quarter. Abundant U.S. oil production, combined with global economic growth concerns, appears to have finally caught up to the energy sector. The strong dollar is also considered to be contributing to the decline in the price of oil.
  • Conversely, health care, technology, telecommunications services, consumer staples and consumer discretionary all outperformed. The outperformance of this mix of both defensive and economically sensitive sectors tells no distinct story about a consensus direction for the economy and the market.

 

Portfolio Strategy

  • The Fund continued its relative performance struggle and underperformed the benchmark for third quarter. The majority of the underperformance was concentrated in technology and industrials with financials and energy also hurting performance.
  • The underperformance in technology was due entirely to security selection, as most of the Fund’s holdings declined in price. Industrials was a soft spot within the index, and Fund names were weaker still. Fund names were varied, but the pace of global growth remains the overarching concern.
  • Financials and energy were broadly weak. A number of our small and regional bank stocks, underperformed, as expectations for higher interest rates, and potentially better spread income did not play out in the quarter.
  • Energy stocks suffered as concerns about the rate of global economic growth, and a growing abundance of oil and gas in the U.S. combined to send investors to seek and exit from a group that has performed very well in recent quarters.
  • Strength in the quarter came from in consumer discretionary, consumer staples and materials. Materials stocks gave a small positive boost to performance. The Fund’s health care stocks also made an overall positive contribution to performance.

 

Outlook

  • While we believe the economic environment is supportive for revenue and earnings growth across many companies in our mid-cap growth universe, there are general trends and market conditions that bear a watchful eye. The economy is likely to remain at its current slow growth pace of 2.5- 3.0%. However, the market is on watch for a multitude of macro and economic concerns.
  • Recent data from retailers suggest continued improvements after a harsh winter and a mild summer. The holiday season is set up to positively surprise consumer discretionary names given the combination of lower gasoline prices (more discretionary income) and lean inventory positions.
  • We are encouraged that the fundamental issues that could potentially impact earnings and cash flow streams will bring a renewed focus on higher quality business models and stocks, and potentially lead us out of the low quality outperformance market we have been in for some time now.

 


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

Risk factors. As with any mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more well-established companies. 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. 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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