Market Sector Update
- Small caps outperformed mid- and large-caps in the third quarter, and growth outperformed value as the Russell 2000 Growth Index climbed double digits.
- The best performing sectors for the index were energy, technology, health care and consumer staples. In energy, the political turmoil in the Middle East has kept a premium on oil prices, which has benefited domestic oil and gas producers and service companies. Health care and technology strength reflected the shift to growth stocks, with the biotechs surging in the quarter and continuing their very positive performance year-to-date. Technology was led by consumer internet stocks, IT services and enterprise software.
- Consumer discretionary and financials were the laggards for the quarter. These sectors reflected the interest-rate sensitive components of the financial services sector and a finicky consumer putting pressure on retailers, restaurants and other consumer discretionary groups.
- The Fund modestly underperformed the benchmark for the quarter due to the technology sector. Our aversion to invest in the stronger performing yet more volatile consumer internet space coupled with our investments in the slightly lagging semiconductor and communications equipment area caused the underperformance. We think the semiconductor and communications equipment area remains fundamentally attractive groups for the intermediate term.
- Fund performance was led by energy, consumer staples, financials and health care.
- In health care, the Fund’s participation in the biotech surge was a combination of a strong rebound from Incyte Corp. and participation in a biotech swap, which provided an index-like exposure to all of the biotech and pharmaceutical stocks in the index. The purpose of the swap was to gain exposure to a very volatile but attractive industry that has a large index weight.
- The Fund is currently overweight technology with an emphasis in the enterprise and SAAS (software as a service) software, semiconductors and IT services.
- The Fund performed significantly well in the energy sector. Positioning has shifted to midstream and downstream capital spending beneficiaries; however, Bonanza Creek Energy Inc. and Dril-Quip Inc. offered nice contributions during the quarter.
- We believe the momentum in the growth stocks seems sustainable over the upcoming quarters once we get over the hump of the dysfunctional political budget process. Economic momentum continues to be slow and steady.
- The Federal Reserve’s delay in the taper has pulled interest rates back some, which will continue to provide a foundation of credit support for the important housing and auto sectors.
- We think the Fund is positioned to perform well in an environment of improving economic health and a moderate rise in interest rates.
*Incyte Corp., Bonanza Creek Energy Inc. and Dril-Quip Inc. (2.1%, 1.0% and 1.1% of net investments at 09/30/2013, respectively.)
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.
Russell 2000 Growth Index is an unmanaged index comprised of securities that represent the small-cap sector of the stock market. It is not possible to invest directly in an index.
Risk Factors. As with any fund, the value of the Fund’s shares will change, and you could lose money on your investment. Investing in small-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.
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.