Market Sector Update
- The Russell Midcap Growth Index (Fund’s benchmark) was very weak in 3Q2015, losing 7.99%.
- All economic sectors within the index posted losses in the quarter. Energy, materials and health care delivered weak returns, all declining double-digits. Consumer staples sector turned in the best performance for the quarter.
- Utilities, consumer discretionary and consumer staples fared the best, likely related to more domestic economic exposure and an encouraging outlook for consumer spending.
- Stocks in sectors where commodity prices and international markets are important to their business outlooks tended to fare much worse in the quarter.
- The Fund substantially underperformed the index in the quarter. One factor in the weak performance included underexposure to momentum names in the Fund.
- Additionally, there was weakness in many consumer names associated with the dollar strength and weakness in emerging markets. BorgWarner underperformed, first on concerns about business in Asia, followed by the Volkswagen automobile emissions scandal, as that company is a major customer of BorgWarner.
- Other weak names included Tiffany & Company, Ralph Lauren Corporation and Burberry Group.
- Health care underperformance was largely based on sector allocation as the Fund was overweight this underperforming group. Our specialty pharmaceutical and biotech names were weaker on fresh concerns over drug pricing.
- Outsized exposure, both direct and indirect, to the struggling energy sector in the wake of the index’s annual reconstitution of sector weights contributed to underperformance. Many industrial names also struggled.
- The Fund performed better than the index in technology, materials and financials. Pandora Media was a strong standout performer in technology and within materials, Scotts Miracle-Gro and Valspar outperformed.
- Our outlook remains cautiously constructive, as it has been for much of the year. The U.S. economy is in a growth, albeit a slow growth, mode. Economies elsewhere remain challenged, which restricts the ultimate strength of domestic companies and the economy.
- There are more stresses on the earnings outlook for U.S. companies than we have seen in a considerable period of time.
- The strengthening dollar has been another source of earnings pressure. This impact should subside as the year progresses, given current exchange rates, but we will continue to see a near-term impact on the earnings.
- The significant decline in stock prices since May has done much to improve the valuations and investability of many stocks, but much of the market, particularly leading-edge growth companies, remain expensive by our calculations.
- Our outlook is based on confidence that the positives (employment, housing, lower energy prices, more accommodative lending) we see in the economy should be enough to offset negatives to earnings, allowing earnings and stock prices to move higher. We think these positives will outweigh the negatives as we progress through 2015.
*Top 10 holdings (%) as of 09/30/2015: Northern Trust Corp. 3.0, Pandora Media 2.8, Intuitive Surgical 2.8, Electronic Arts 2.7, Signature Bank 2.4, Fortune Brands Home & Security 2.4, CME Group 2.4, Zoetis 2.4, Microchip Technology, Inc. 2.4 and First Republic Bank 2.2.
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 Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. 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. 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.