Quarterly Fund Commentary
Ivy Pacific Opportunities Fund
September 30, 2013
Frederick Jiang, CFA , CPA
Market Sector Update
- By and large, international markets were higher but volatile during the quarter. After a sell-off last quarter, emerging markets recorded mid-single-digit performance and outperformed the S&P 500 Index. Asian equities had a small rally in the period, led by Chinese and Korean equities, as China’s economy stabilized and showed some signs of strength since June.
- Performance between North Asia and South and Southeast Asia has diverged. While North Asia (China, Korea and Taiwan) booked double-digit gains on average, South and Southeast Asia (India, Indonesia, Thailand, Malaysia, the Philippines and Singapore) experienced a correction due to weakening economic trends and local currencies.
- Korea performed well primarily due to better economic conditions in China, as China remains Korea’s single largest export destination. We suspect the rebound in China was mainly caused by inventory restocking; however, governmental policy also may have contributed to growth.
- India and Indonesia were some of the worst performing countries in the quarter. Both countries suffered from widening current account deficits as well as budget deficits. Their currencies experienced large fluctuations during the quarter as foreign investors reduced exposure.
- The Fund outperformed the benchmark for the quarter. We kept an overweight position in North Asia and an underweight position in South and Southeast Asia, which served us well. Our bet on the long term growth of Asian consumers paid off as well.
- Stock selection in the information technology and consumer discretionary sectors was the largest contributor to relative outperformance for the period. Galaxy Entertainment Group Ltd. (4.2% of net assets as of 9/30/2013) and Baidu.com Inc. (2.8% of net assets as of 9/30/2013) were the Fund’s largest contributors to performance on an absolute and relative basis.
- A few covered call options on some of the Fund’s largest positions were detractors for the quarter as was a cash allocation that was a drag on performance in a rising market.
- During the quarter, the Fund decreased its weighting to South East Asian nations and India due to concerns regarding volatility and growth outlooks in the geographies.
- In the short term, we believe several political and economic risks persist in the U.S. (the government shutdown, debt ceiling crisis, Federal Reserve [Fed] governor appointment and impending Fed tapering) that will likely impact Asian markets.
- In China, growth has been a bit stronger than we expected, with the domestic economy picking up in recent months. The market may respond well to expected reform and restructuring measures as announced later this year.
- We believe that an ongoing urbanization trend, excellent demography and a high savings ratio will continue to strongly drive the Asian economy for the foreseeable future. As more Asians become middle class consumers, we believe consumption and infrastructure investment themes bode well for opportunistic investing.
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.
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. International investing involves additional risks including currency f uctuations, political or economic conditions affecting l the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in a single region involves greater risk and potential reward than investing in a more diversified fund. 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.