Waddell & Reed

Quarterly Fund Commentary

Ivy Small Cap Growth Fund (prospectus)
March 31, 2014

Timothy J. Miller, CFA

Market Sector Update

  • First quarter 2014 started out looking like a continuation of the trends in 2013. The risk-on trade was in full swing led by small-cap pharmaceutical, biotech and software stocks. A minor correction took place in late January but the market powered ahead to new highs by early March. At this point small-cap indexes were up over 50% on a two-year basis and the initial public offering window was open to an onslaught of supply.
  • The markets made a quick, sharp reversal through the end of March following comments by the Federal Reserve suggested that interest rates could possibly rise sooner than expected. Market leaders became the laggards as momentum turned downward. For stocks where valuation was excessive, the corrections were more severe.


Portfolio Strategy*

  • For the quarter, the Fund outperformed the benchmark before the effects of sales charges. Performance was led by the consumer discretionary, energy and financials.
  • In the consumer space, strong gains by Chuy’s Holdings Inc., Kate Spade & Company, Del Frisco’s Restaurant Group and Sonic Corp. led the way. Further investment in this sector is anticipated over the balance of 2014.
  • Energy performance was driven by continued success in the downstream spending theme and exploration and production companies in the Permian Basin. Financials were led SVB Financial Group and Bank of the Ozarks Inc.
  • The technology sector sold off sharply in March and the Fund’s positions lagged the benchmark for the quarter. The technology sell-off was most pronounced in the software space where the Fund has exposure. Confidence in the growth models for the Fund’s larger software positions keeps us invested in this space.
  • The most noteworthy change made during the quarter was a significant reduction in exposure to the small-cap biotech and pharmaceutical sector. This was accomplished via a sale of the biotech swap as well as the sale/reduction of individual biotech stock holdings. Most of these changes were accomplished before the sharp correction which provided some protection in March. Proceeds from these sales were redeployed in the consumer, energy and industrial sectors.


  • The quarter-end correction has helped to peel off some of the excess valuation overlaying small-cap stocks.
  • We believe the direction over the next 12 months will be affected by the magnitude of the domestic economic recovery and its attendant impact on interest rates.
  • We believe the Fund may benefit from a healthy economy and even rising interest rates. The manager thinks earnings growth should be strongest from technology, industrials, consumer staples and consumer discretionary.


*Chuy’s Holdings Inc., Kate Spade & Company (previously known as Fifth & Pacific, Co, Inc.), Del Frisco’s Restaurant Group, Sonic Corp., SVB Financial Group and Bank of the Ozarks Inc. (1.3%, 1.5%, 1.1%, 1.2%, 3.2% and 2.2% of net investments at 03/31/2014, respectively.)

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

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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