Waddell & Reed

Quarterly Fund Commentary

Ivy Emerging Markets Equity Fund (prospectus)
March 31, 2014

Frederick Jiang, CFA , CPA
Jonas M Krumplys

Market Sector Update

  • Emerging markets (EM) declined slightly during the quarter and modestly underperformed global stock markets, which had a small gain. That began to change as the quarter ended, with EM shares gaining and outperforming developed markets, and this momentum continued into the second quarter.
  • The strongest performance in EM was in Indonesia, India and the Philippines. Improving macroeconomic factors supported these markets, which helped strengthen exchange rates, lower bond yields and raise equity prices. China, Hong Kong, Japan and Mexico were among the weakest markets.
  • The Federal Reserve (Fed) during the quarter dropped its link between interest rates and a 6.5% unemployment rate threshold, saying it instead would consider a range of factors to determine how long to keep rates low. It again reduced the pace of its bond-buying program, taking it to $55 billion per month in another step toward reducing economic stimulus while maintaining aggressive monetary policy.


Portfolio Strategy

  • The Fund reported a small negative return in the first quarter (before the effect of sales charges) and was down slightly more than EM funds overall, as measured by its benchmark index.
  • We began to take advantage of the flexibility in the Fund’s mandate during the quarter, adding exposure to more EM countries and limited exposure to developed markets with positions in the U.S., Japan and Europe. The Fund is overweight in holdings from countries in the Association of Southeast Asian Nations and India, approximately index-weighted in northern Asia (South Korea and China) and underweight in Latin America, eastern Europe, the Middle East and Africa.
  • Top contributors to performance in the quarter included holdings from Taiwan, Indonesia and the Philippines. Fund performance was hurt by positions in several industries, including those related to the internet, healthcare and dairy. The Fund ended the quarter with 95% of net assets in equities, 4% in cash and 1% in gold bullion.



  • We think elections, fiscal reforms and central bank monetary policies are likely to remain the keys to EM stock market performance. Elections are likely to mean new leaders in Indonesia and India, and potentially in Brazil, but we think the status quo will be maintained in Turkey and South Africa. These countries have been labeled the “Fragile Five” because of high current account deficits, slowing economic growth and high inflation. Their central banks have had mixed success in addressing these issues.
  • We think there will be opportunities for fiscal reforms after the elections, which may allow faster economic growth and lower inflation. We are most optimistic about what new leaders can bring to Indonesia and India, and thus are overweight both markets.
  • Fiscal reforms already are under way in many countries, including China, Mexico and Japan, but investors have been disappointed by the pace of reform in those three countries. The performance of their stocks and currencies reflect that view; we remain underweight in those markets.
  • The pace at which yields rise on U.S. Treasuries also will be a critical driver of emerging market debt and equities in the coming year.


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

On Feb. 11, 2014, Ivy Pacific Opportunities Fund was changed to Ivy Emerging Markets Equity Fund and its strategy was changed to reflect a concentration in emerging market equity securities. Performance prior to such time in part reflects the Ivy Pacific Opportunities Fund’s former strategy to invest primarily in Pacific region equity securities, and the Fund’s performance may have differed if the Ivy Emerging Markets Equity Fund’s current strategy had been in place.

On March 17, 2014, Ivy Asset Strategy New Opportunities Fund merged into Ivy Emerging Markets Equity Fund. The Ivy Asset Strategy New Opportunities Fund has been liquidated and has terminated operations as a management investment company

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. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. 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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