Waddell & Reed

Quarterly Fund Commentary


Ivy Small Cap Growth Fund (prospectus)
June 30, 2015


Manager(s):
Timothy J. Miller, CFA

Market Sector Update

  • Second quarter 2015 performance from the small-cap sector continued to outperform mid- and large-cap indexes, but some signs of transition are emerging in the complexion of the market.
  • For the first time in many quarters, we actually experien a rising trend in interest rates, albeit off of a very depressed level on April 1. This trend favored banks and finance company stocks in the quarter, which were among the best performers.ced
  • On the other hand, the relentless rise of the biotech stocks was unimpeded and continues to exhibit “bubble-like” characteristics. Nevertheless, biotechs and health care were the outliers on the positive side this past quarter and remain dramatically above the index year-to-date.
  • On the flip side, energy continues to struggle amid global supply/demand fears and those stocks generated losses for the quarter.

Portfolio Strategy*

  • The Fund modestly lagged the benchmark for the quarter due to a correction in its consumer discretionary stocks.
  • This group had outperformed nicely year-to-date but fell under some pressure as poor spring weather dampened sales momentum.
  • In addition, crude oil prices actually rose a bit throughout the quarter, which also put some pressure on expectations for the group. Zumiez and Kate Spade were the primary culprits in the quarter, offset on the positive side by strong gains at Oxford Industries and Carters, Inc.
  • Fund positions in financials were quite strong in the quarter, led by SVB Financial, Bank of the Ozarks, and Cathay General Bancorp.

Outlook

  • The 2015 strategy will lean a bit more conservatively and focus on the strongest core positions in the Fund.
  • Small caps tend to be primarily domestic businesses, and as such, will benefit from the strength of the U.S. economy and be less impacted by the rising dollar.
  • The factors favoring the consumer sector appear to remain in place and could be favorably boosted by a rising wage trend as well.
  • Technology, specifically software, will also remain an area of focus, with an emphasis on the growth companies that are showing progress in the profitability and cash generating characteristics of their models. Health care device companies and service companies also remain an area of focus.
  • The most dominant variable over the next year will be the direction of interest rates. The market’s perception that the bottom has been reached and a rising trend is forthcoming will shake up the highest valued, riskiest portion of the market and favor the better quality core positions in the portfolio as well as the overweight position in the bank stocks.

Top 10 holdings (%) as of 06/30/2015: DexCom, Inc. 4.1, Ultimate Software Group Inc. 3.3, Vail Resorts Inc. 3.2, SVB Financial Group 2.9, Cepheid 2.9, Bank of the Ozarks Inc. 2.8, Jack Henry & Associates, Inc. 2.4, Watsco, Inc. 2.4, AMN Healthcare Services 2.2 and WisdomTree Investment 2.0.

The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2015. 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.

The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Risk factors. 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 wellestablished 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 f nancial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully i before investing.

Financial Advisor Opportunities
Corporate Careers