Waddell & Reed

Quarterly Fund Commentary

Ivy Small Cap Growth Fund (prospectus)
March 31, 2015

Timothy J. Miller, CFA

Market Sector Update

  • First quarter 2015 continued the upward trend for small-cap growth stocks that was triggered by the unprecedented decline in domestic interest rates and an improving U.S. economy.
  • Small caps outperformed both mid caps and large caps, and small-cap growth was much stronger than small-cap value.
  • The risk-on, low-interest rate environment sparked another surge in the biotech stocks, as they more than doubled the performance of the rest of the index.
  • It is somewhat unusual for small caps to outperform this late in the cycle, but the macro factors of low interest rates and a sharply rising dollar were the drivers. The U.S. dollar issue has created an earnings headwind for mid- and largecap companies and is minimized for mostly domestic small caps.
  • On a sector level, the best performing groups in the benchmark this quarter were utilities, health care and energy.

Top 10 holdings (%) as of 03/31/2015: Vail Resorts Inc. 3.4, Ultimate Software Group Inc. 3.4, DexCom, Inc. 3.3, Cepheid 2.6, SVB Financial Group 2.5, Jack Henry & Associates, Inc. 2.5, Watsco Inc. 2.4, Bank of the Ozarks Inc. 2.2, Sonic Corp. 2.1 and HNI Corp. 2.1.

Portfolio Strategy

  • The Fund modestly lagged the benchmark (Russell 2000 Growth Index) for the quarter as the drag from underexposure to biotechs was not fully offset by the other sectors.
  • Outperformance occurred in consumer discretionary, consumer staples and technology; with modest underperformance from energy, financials and industrials.
  • Energy had a nice recovery bounce in the quarter after the sharp correction in the second half of 2014. The Fund’s exploration and production companies participated, but were slightly offset by losses at Matrix Service Corp. In industrials, another energy-related construction company, Primoris Services, also fell sharply. In both cases earnings have been revised downward but we believe the stocks have been oversold.
  • Consumer discretionary continues to perform well given the favorable trends of low interest rates, rising employment, rising wages and low gas prices. Among the contributors were Vail Resorts, Burlington Stores, and Sonic Corp.
  • Financials was boosted by a big gain from WisdomTree Investments, but the banks continue to languish facing the overhang of low rates. Outperformance in the technology was driven by Ultimate Software, Manhattan Associates and Jack Henry.


  • The strategy for 2015 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 should benefit from the strength of the U.S. economy and be less impacted by the rising dollar.
  • The factors favoring the consumer sector remain in place and could be favorably boosted by a rising wage trend as well.
  • The software sector 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 model. Health care device companies and service companies also remain an area of focus.
  • We believe the most dominant variable over 2015 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.

The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 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. 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 f nancial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully i before investing.

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