Market Sector Update
- Small caps closed some of the large 2014 performance gap vs. the rest of the market in the fourth quarter, but it wasn’t enough to catch up for the full year.
- The Russell 2000 Growth Index, the Fund’s benchmark, rose 9.7% for the quarter. For the full year, the index was up only 4.9%, significantly underperforming the large-cap growth and mid-cap growth indices.
- The late charge in the Russell 2000 Growth Index was led by health care, in particular biotechnology holdings, consumer discretionary and real estate investment trusts.
- The major outlier for the quarter was energy, which experienced a significant decline during the period. During the quarter, major macro influences on the markets included the relentless decline in the 10-year Treasury bond and the sharp reduction in the prices of crude oil, natural gas and retail gasoline.
- The Fund outperformed its benchmark for the period ended Dec. 31, 2014, before the effects of sales charges.
- Positive sector contribution was generated from consumer discretionary, energy, materials and consumer staples. Offsetting some of these gains were shortfalls in technology and industrials.
- As mentioned in our last quarterly review, we raised the weighting in the consumer sector for a number of reasons. The consumer balance sheet is in good shape, employment data is improving, and the consumer pocketbook is getting a boost from the sharp reduction in gasoline prices.
- Low mortgage rates are also providing some stimulus for housing demand and a small degree of mortgage refinance cash flow.
- Accordingly, increased Fund exposure to restaurants, retail stores, hotels and leisure names worked out well in the quarter.
- On the energy front, the Fund managed to limit the direct exposure to the energy correction, hence the significant positive contribution from that sector. Some of that benefit, however, was nullified by the “indirect” energyexposed names in the Fund such as Texas banks, energy-related transport, and industrial/construction companies with significant energy business.
- The domestic exposure of most of the Fund’s small caps should play out well in 2015 as the U.S. economy appears to be one of the strongest in the developed world.
- A rising U.S. dollar and rising interest rates could be a boost for the Fund due to its current consumer and financials overweight positions.
- It is difficult to predict where and when the oil price market settles in, but the strategy of the Fund will be to focus on the best-positioned domestic exploration and production companies. These stocks have been hit hard, and the companies with the best balance sheets and acreage positions may be attractive candidates for the portfolio.
The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 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.
The 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 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.