Waddell & Reed

Quarterly Fund Commentary

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

Timothy J. Miller, CFA

Market Sector Update

  • Third quarter market turmoil pressured small-cap stocks the worst of the broad market indexes. The Russell 2000 Growth Index (Fund’s benchmark) fell 13% for the quarter, which also dragged year-todate returns into negative territory.
  • Global economic concerns, political tension in the Middle East, and consternation over Federal Reserve (Fed) policy all combined to weigh on the market. Then a zinger from the Hilary Clinton campaign attacking pharmaceutical pricing pushed the biotech stocks “over the edge,” which had a negative spillover effect on the entire health care sector.
  • But the worst performing sector was energy, as the aforementioned economic worries cast doubt over global oil demand trends, which resulted in a sharp correction in crude prices and a collapse in energy sector stocks. The beneficiaries of the crude oil correction were somewhat muted given the general fear pervading the market.
  • Domestic economic data during the quarter showed some moderation but continued to point to a slow and steady pace of growth in the U.S.

Portfolio Strategy*

  • The Fund had been leaning more conservatively going into the quarter. It returned negative performance but performed better than the benchmark, before the effects of sales charges. The Fund is in positive territory year-to-date.
  • Fund performance came from the technology, health care, industrials and consumer discretionary sectors. Financials and consumer staples were detractors.
  • A small biotech swap position was a drag but was more than offset by the cash return held by the Fund. (Note: the Fund invests in derivative instruments, primarily total return swaps, futures on domestic equity indexes and options, both written and purchased, in an attempt to increase exposure to various equity sectors and markets or to hedge market risk on individual equity securities.).
  • Major stock contributors in technology were from companies with stable, recurring revenue models and strong market positions such as Ultimate Software, Jack Henry, SS&C Technologies and Tyler Technologies.
  • Our emphasis on the health care services names panned out with stable contributions from Amsurg and AHS. A similar strategy worked in the consumer sector.
  • Financials underperformed primarily due to exposure to market sensitive stocks, while the banks were a mixed bag in the quarter. Continued downward pressure on the yield curve is keeping the banks from outperforming.


  • The Fund’s near-term strategy won’t deviate much given the volatility in the global economies and markets. The Fund will maintain its emphasis on quality, consistency, balance sheet strength and strong market positions when it comes to stock selection.
  • The largest sector deviations from the benchmark include a significant underweight in health care, an overweight position in the banks and financials, an emphasis on software and services in technology, and a modest overweight in the consumer discretionary sector

*Top 10 holdings (%) as of 09/30/2015: Ultimate Software Group Inc. 3.7, Vail Resorts Inc. 3.4, Jack Henry & Associates, Inc. 2.7, SVB Financial Group 2.6, Watsco, Inc. 2.6, DexCom, Inc. 2.5, Bank of the Ozarks Inc. 2.5, AMN Healthcare Services 2.4, Manhattan Associates 2.1 and Monro Muffler Brake 2.1.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 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.

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