Waddell & Reed

Quarterly Fund Commentary

Ivy Emerging Markets Equity Fund (prospectus)
March 31, 2015

Jonas M. Krumplys, CFA
Frederick Jiang, CFA , CPA

Market Sector Update

  • Emerging market equities had a strong start to the year, led by China, despite a strong U.S. dollar which typically is a negative factor. The rally in China’s equities continued as the government pursues efforts to open the country’s markets to the world.
  • Emerging market equities are trading at deep valuation discounts to developed markets, relative to historical averages, after underperforming for four years. This valuation gap may narrow if the dollar stops gaining, which in turn largely depends on the U.S. Federal Reserve’s next moves on interest rates.
  • Financially fragile markets including Russia, Argentina, Venezuela and Hungary had double-digit gains in their equities markets in the quarters, rebounding from the troughs of prior quarters. Brazil was hit by a corruption scandal in its largest employer and borrower, Petrobras. Credit rating companies downgraded Petrobras, causing Brazil’s currency to drop sharply.

Portfolio Strategy

  • The Fund had a positive return for the quarter and outperformed its benchmark index (before the effect of sales charges).
  • The Fund benefited from stock selections as well as overweight positions in China’s market, which was the largest contributor to performance in the quarter. We reduced positions in ADRs and in Shanghai, and increased holdings in Hong Kong. Chinese shares in Hong Kong are trading at a discount to the U.S. Nasdaq market and to Shanghai. We think they will benefit from relaxation of capital market controls in China.
  • Performance also was helped by stock selections and an overweight position in India. We reduced the India weight slightly because of delays in reforms and the capital-expenditure cycle. However, we remain positive on the long-term potential of Indian equities.
  • Relative performance was hurt holdings in South Korea and an underweight position in Russia. In South Korea, Fund positions had a meaningful pull-back after a strong fourth-quarter 2014. In Russia, the market rallied and we increased positions gradually.


  • In the short term, we think emerging markets will continue to be driven by macro factors such as “normalization” of the U.S. Fed funds rate, China’s opening of capital accounts, progress on reforms in India and stabilization of energy markets.
  • We think commodity prices are likely to remain weak as supply growth and inventories remain out of balance with demand. This scenario may benefit commodity consumers such as China, India, Taiwan and South Korea and hurt commodity exporters such as Brazil, Malaysia, South Africa and Russia. As a whole, emerging market equities tend to benefit from weak commodity prices because consuming countries account for two-thirds of the emerging market index.
  • We think the U.S. Dollar Index is an important indicator of emerging market equities. That index has rallied 33% from the low in second-quarter 2011. We continue to watch the index closely for indications of a short-term peak, as a softening would bode well for emerging market equities..
  • In longer term, we believe that emerging market economies are likely to deliver faster earnings growth than most developed countries, based on demographics and progress in modernization. Emerging market equities are trading at a discount to developed market equities, which we think offers potential opportunities for the Fund.


The opinions expressed in this commentary are those of the Fund’s managers and are current through March 31, 2015. 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.

As of 03/31/2015, Petroleo Brasileiro S.A. (Petrobras) was 0.79% of net assets in the Fund.

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 f uctuations, l 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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