Waddell & Reed

Quarterly Fund Commentary

Ivy Emerging Markets Equity Fund (prospectus)
September 30, 2014

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

Market Sector Update

  • Global equity markets retreated in the third quarter after a strong performance in the second quarter. Markets in Europe and Japan declined the most while those in Asia performed relatively well, with China taking the lead among major markets. Global economic growth showed signs of weakness and investor sentiment turned more risk averse.
  • China’s market rallied in anticipation of its planned opening to foreign investors in November, when they will be able to trade Shanghai A-share stocks through the Hong Kong Stock Exchange in a program known as “through train.” Shanghai is one of the top five markets globally in total market capitalization and daily trading volume, but foreign access had been restricted.
  • Russia’s equity market index declined roughly 18%, hurt by the situation in eastern Ukraine and economic sanctions on Russia. Brazil also had a double-digit market decline in the quarter. Brazilian markets focused on October’s presidential election. Many were not convinced the pro-business candidate would win and took profits on cyclical stocks.
  • Currencies in South Africa, South Korea, India and Mexico decreased in value against the U.S. dollar.


Portfolio Strategy

  • The Fund had a negative return in the quarter, although performance was slightly better than the benchmark index (before the effect of sales charges).
  • Holdings in Shanghai markets were key contributors, as they benefited from investor interest in the through train program. The Fund also gained ground in South Africa because of its limited exposure to currency weakness.
  • Holdings in South Korea were the biggest detractors, based on depreciation of the currency and concerns about a major Korean auto manufacturer’s land purchase in Seoul that raised questions about corporate governance. Stock selections in internet companies in China and semiconductor companies in Taiwan also hurt performance. Positions in Brazil also were hurt by currency depreciation.
  • During the quarter, we increased weightings in China and Hong Kong because of what we consider attractive valuations and a positive outlook for those markets. We continued to maintain underweight positions in Eastern European and Africa because of high geopolitical risks as well as economic slowing.



  • In the short term, we think emerging markets will be driven by a number of macro factors including the outlook for U.S. Federal Reserve policy, government stimulus and economic reform in China, instability in the Middle East and the outcome of the Brazil election.
  • With economic slowing in China and weakness in the eurozone and Japan, commodity-driven economies may continue to be under pressure. Local currencies in countries that are less healthy in fiscal terms may see further pressure if the U.S. dollar continues to gain.
  • In the longer term, we believe that emerging market economies are likely to deliver faster earnings growth than most developed countries, thanks to the demographics of these countries and progress in modernization. Emerging market equities are trading at a discount to developed markets, which we think can offer longer term opportunities.


The opinions expressed in this commentary are those of the Fund’s managers and are current through Sept. 30, 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 insuredor 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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