Market Sector Update
- Mid-cap growth stocks rose again in the third quarter, following gains in both the first and second quarters.
- Six of 10 economic sectors outperformed the Russell Mid Cap Growth Index in the quarter, with the strongest performance largely from the most cyclical sectors. These included consumer discretionary, information technology, industrials and energy.
- Health care and utilities also outperformed with the latter recovering from a loss in the second quarter associated with the increase in interest rates in the spring and early summer.
- Financials, materials, consumer staples and telecommunications sectors all underperformed.
- The market environment in the third quarter was definitely more pro-cyclical and risk-oriented as investors became more comfortable with potentially improving and sustained economic growth, encouraging data and indicators, and the Federal Reserve’s (Fed) decision to not begin to tapering its Quantitative Easing program.
- The Fund outperformed the benchmark in the quarter, before the effects of sales charges.
- The swift increase in interest rates early in the quarter was a benefit to Fund performance, as many stocks outside of our ownership that had performed strongly earlier in the year because of either highly attractive dividends, or because of cheap credit. This phenomenon turned somewhat, very late in the quarter, as the Fed decided to leave its current strategy in place, but the balance of performance was ahead of the benchmark for the period.
- The largest contributor to outperformance was consumer discretionary, where many of our holdings had strong returns that stood out even in this outperforming group. These included Ulta Salon, Cosmetics & Fragrance Inc., Under Armour Inc., LKQ Corporation, Harman International Industries, Burberrry Group plc and Michael Kors Holdings Ltd.
- Security selection in information technology, industrials and health care sectors were also positive contributors to relative performance. One of the top contributors was in the health care sector as Onyx Pharmaceuticals received a buyout bid from Amgen.
- Performance by energy, financials, materials and telecommunications combined to contribute close to 30 basis points of outperformance for the period.
- The largest drag on performance was the Fund’s 2.5% to 4.5% cash weighting across the quarter.
- We remain generally constructive in our outlook for the U.S. economy throughout 2013 and into 2014, both absolutely, and relative to prospects and expectations for growth in other regions of the world.
- The economic recovery we have been witnessing since 2009 has been moderate, but generally steady. The first three years of the economic rebound were marked by significant corporate restructuring that led to a strong profit recovery. Revenue growth has been slow, but costs have been largely contained, especially the costs of labor and credit.
- The second phase of the recovery, which the U.S. likely entered late last year, is based on demand for housing and autos, in addition to buoyant activity in the energy industry, and looks more like a normal early recovery from a recession. This second act of the recovery could build solid momentum and have some staying power if we continue to see job growth and cooperative credit markets.
- Unfortunately, our meddlesome and dysfunctional governmental leaders are doing their best to keep the U.S. economy from reaching a higher potential. A crisis of uncertainty coming from government keeps confidence in check, and whether the eventual problems are real or perceived, can impact economic activity in the nearer term.
- We think the very positive developments in the U.S. – a stable and rebounding housing market, abundant opportunity for growth in oil and gas exploration and production, and a trend toward manufacturing more in the U.S. again, closer to sources of demand and inexpensive energy supplies – are all supportive of growth in the domestic economy. In addition, we are seeing economic improvements beginning to materialize in Europe and Asia, and a synchronized global recovery developing, which will be good for many companies both in the U.S. and abroad.
- We see small business development beginning to percolate again, supported by encouraging lending statistics. Pent-up demand by consumers for autos and other capital goods is also a plus for growth.
- Within this generally positive environment, we see opportunities for growth companies to continue to perform well and continue to look for attractively valued stocks in the many areas.
*Ulta Salon, Cosmetics & Fragrance Inc., Under Armour Inc., LKQ Corporation, Harman International Industries, Burberrry Group plc and Michael Kors Holdings Ltd. (2.3%, 2.1%, 2.1%, 2.0%, 1.1% and 1.1% of net investments at 09/30/2013, respectively). Onyx Pharmaceuticals and Amgen are not currently holdings of the Fund.
The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 30, 2013. 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.
Russell Mid-Cap Growth Index is an unmanaged index comprised of securities that represent the mid-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. 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. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.
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.