Waddell & Reed

Quarterly Fund Commentary


Ivy Small Cap Growth Fund (prospectus)
June 30, 2014


Manager(s):
Timothy J. Miller, CFA

Market Sector Update

  • 2014 has marked tough sledding for small-cap growth stocks after a banner year in 2013.
  • The correction that started in early March 2014 continued downward in the second quarter through the first half of May, with the Russell 2000 Growth Index falling more than 12% from peak to trough.
  • The market then turned around and registered a sharp rally through the end of second quarter.
  • Small-cap growth stocks, however, remain well below the performance of large- and mid-cap stocks year-to-date.
  • Keeping in mind the gains recorded in 2013, it is not shocking that there has been a period of digestion for the smallgrowth stocks so far this year. Valuation multiples were stretched coming into the year and economic data has been sluggish and modestly disappointing. Combined with mixed signals coming out of the Federal Reserve, markets have cooled their enthusiasm for higher risk, small-cap growth stocks. *Finisar Corp., Channel Advisor Corp., Vail Resorts, Inc., OpenTable, Inc. and MICROS Systems, Inc. (0.77%, 0.70%, 2.41%, 1.25% and 1.62% of net investments as of 06/30/2014, respectively). Rubicon Technology is no longer a holding of the Fund.

Portfolio Strategy

  • Overall Fund performance for the quarter slightly lagged the benchmark as a drag from technology and financials offset gains by industrials and consumer discretionary. Finisar Corp., Rubicon Technology, and Channel Advisor Corp. were among the detractors. Overall exposure to technology was reduced during the quarter.
  • The most noteworthy move made in the first half of 2014 was the elimination of the Fund’s exposure to small-cap biotech/pharmaceutical stocks. This was accomplished via a sale of the biotech swap held by the Fund as well as the sale of the individual biotech/pharmaceutical stock holdings. For most of second quarter, this move was quite beneficial, however, biotechs rallied sharply in June, which partially reversed the Fund’s advantage.
  • The Fund’s exposure to financials tends to perform better in a stable to rising interest rate environment. During the quarter the reverse occurred as the 10- year treasury yield trended downward for most of the period. We expect any steady improvement in the U.S. economy to put more upward pressure on rates over the next 12 months.
  • Consumer sector winners included auto retail stocks and Vail Resorts, Inc.
  • Energy was also strong in the quarter and the fund had gains from the takeouts of OpenTable, Inc. and MICROS Systems, Inc.

Outlook

  • We believe the Fund is positioned to perform better with an improving economy and modest upward pressure on interest rates.
  • The largest Fund overweights are in industrials and financials, with the latter comprised of banks that should see margins rise as interest rates rise, and a few specialty finance and asset management companies.
  • Health care exposure remains well below the benchmark with most of the deficit due to lack of exposure to biotechs and small-cap pharmaceutical stocks.
  • The consumer sector has been out of favor, but many companies in this sector face very easy comparisons in the second half of the year and should benefit from an improving employment environment. The Fund has added a number of restaurants and apparel/retail names for the second half.


The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2014. 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 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 a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. 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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