Waddell & Reed

Quarterly Fund Commentary

Ivy Tax-Managed Equity Fund (prospectus)
June 30, 2014

Bradley M. Klapmeyer, CFA

Market Sector Update

  • Second quarter 2014 equity performance was solid across most investment styles, geographies and capitalization ranges. U.S. large-cap stocks were particularly strong during the period, outperforming small caps, bonds and global equities.
  • Despite a seemingly unending string of global macroeconomic, financial and geopolitical concerns, markets continue to show amazing resilience.
  • Even with all of the recent turmoil, investors have taken comfort in the knowledge that companies are in very good financial shape, the banking system has healed, systemic risk has been greatly reduced and substantial slack still exists in most global economies, thereby minimizing near term inflation threats.
  • As we have noted before, much of the recent market advance has been driven by price-to-earnings (P/E) multiple expansion associated with declining risks as earnings growth remains relatively modest.


Portfolio Strategy*

  • The Fund generated strong returns and outperformed the benchmark for the quarter before the effects of sales charges.
  • From an attribution standpoint, strong stock selection drove performance in the period. Technology was particularly strong with solid performance from FleetCor Technologies, Adobe Systems and Applied Materials. Positive performance by consumer discretionary was primarily a result of exposure to JD.com, a company benefiting from an increase in on-line retailing in China. Health care stock selection was driven by continued strong performance in Gilead Sciences, Universal Health Services and HCA Holdings.
  • These factors more than offset the drag from overweighting the relatively weak performing consumer discretionary sector and some weak individual performances including global gaming stalwarts Las Vegas Sands Corp. and Wynn Resorts Ltd., which lagged due to a slowdown in Macau gaming activity.
  • As you may recall, first quarter ended with an abrupt and substantial decline in many growth stocks. This continued into April, providing an opportunity to add to select positions where the sell-off did not seem justified given current fundamentals and valuation levels.
  • As the market rebounded throughout the second quarter, it is notable that the growth companies with the best margins, profits and cash flows have come back the most.



  • Looking ahead, we see the usual mix of bright spots and caution flags in our observations about the economy. Favorable underlying trends include steady improvement in the labor market, solid spending on large ticket items such as aircraft and autos, and booming capital spending in the energy sector.
  • However, the housing recovery appears to be stagnating as consumers react to the significant rebound in prices and access to credit remains somewhat constrained. Furthermore, while consumer spending and confidence is generally solid, it remains challenged at the lower income cohorts.
  • We see the recent uptick in merger and acquisition activity as a potential sign of growing business confidence, but it has largely been driven by tax considerations and cost synergies up to this point.
  • Overall, the trajectory of the economy appears to be on the familiar 2.5-3.5% growth track we have grown accustomed to – disappointing those who expected a stronger snap back after the weather-induced gross domestic product decline of the first quarter.
  • All told, these various pockets of strength and weakness appear supportive of continued modest profit growth with minimal risk of serious inflation, resulting in a favorable backdrop for growth stock investors. Thank you for your continued support.


*FleetCor Technologies, Adobe Systems, Applied Materials, JD.com, Gilead Sciences, Universal Health Services, HCA Holdings, Las Vegas Sands Corp. and Wynn Resorts Ltd. (1.5%, 2.2%, 1.8%, 2.3%, 4.7%, 2.0%, 2.5%, 3.6% and 1.8% of net investments as of 06/30/2014, respectively).

The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 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 mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. 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. While the Fund seeks to minimize tax distributions to shareholders, it may realize capital gains and earn some dividends. 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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