Waddell & Reed

Quarterly Fund Commentary

Ivy Tax-Managed Equity Fund (prospectus)
December 31, 2013

Sarah C. Ross, CFA

Market Sector Update

  • Stocks posted another strong quarter ofperformance, capping off the best year for broad market equity returns since 1997.
  • Stocks benefited from declining risk premiums and growing confidence that the global economy has moved beyond the economic and banking crisis and is transitioning to a more “normal” economic environment. This “normal” environment is one where investor fears of systemic risk have faded into the background and the focus is on the increasingly solid footing of the global economic expansion. This is characterized in the U.S. by slow, but steady revenue growth, high and sustainable levels of profitability, and abundant cash flow for much of corporate America.
  • For many markets, this de-emphasis of macroeconomic concerns simply means higher valuations across industries, sectors and capitalization ranges, regardless of investment style. It has also provided a more favorable environment for active managers as stock correlations have declined to more normal levels. This environment proved beneficial.

Portfolio Strategy*

  • The Fund outperformed its Russell 1000 Growth benchmark for the quarter, before the effects of sales charges. Favorable performance was largely driven by strong stock selection in consumer discretionary, industrials and health care. In addition, the Fund benefited from an underweight in consumer staples, as that sector was a notable laggard during the quarter.
  • Outperformance in consumer discretionary was led by holdings in Las Vegas Sands Inc. and Wynn Resorts Ltd. Outperformance in industrials was primarily driven by exposure to railroad companies and aerospace.
  • Railroad holdings such as Canadian Pacific Railway LTD. and Kansas City Southern are beneficiaries of the resurgent U.S. energy industry, growing auto production in Mexico and a generally improving U.S. economy.
  • Precision Castparts Corp. and The Boeing Company are benefiting from a strong new product cycle and massive order backlogs in commercial aircraft, driven by more fuel efficient designs and the low cost of financing.
  • Finally, strong stock selection in health care was the result of exposure to the biotech firms Gilead Sciences Inc. and Biogen Idec Inc. Other strong performers included MasterCard Inc., Pentair Inc. and Time Warner Cable Inc.
  • Negative contributors included poor stock selection in consumer staples and technology.


  • Generally speaking, U.S. corporate balance sheets remain rock solid. As a result, managements continue to actively return cash to shareholders through increases in dividends and share repurchases. Returns on equity are quite high for growth stocks so they should, in theory, be able to return more capital to shareholders and we continue to see management teams move in that direction.
  • Key problematic geographies such as Europe have stabilized and are showing positive surprises to profitability with the potential for continued improvement. While China’s growth rate remains uncertain, the absolute rate of growth in the region is high enough that most multinationals can continue to do well there. We expect many leading multinationals to benefit over the next couple of years as former headwinds become tailwinds.
  • These factors, combined with modest U.S. economic and profit growth, should provide a favorable backdrop for the equity market. We continue to emphasize growth companies operating in large or fast growing markets that we believe can possess sustainable competitive advantages and generate superior margins and high returns on capital.


**Las Vegas Sands Inc., Wynn Resorts Ltd., Canadian Pacific Railway Ltd., Kansas City Southern, Precision Castparts Corp., The Boeing Company, Gilead Sciences Inc., Biogen Idec Inc., MasterCard Inc., Pentair Inc. and Time Warner Cable Inc. (3.8%, 1.4%, 2.0%, 2.1%, 1.7%, 1.7%, 4.1%, 2.3%, 4.1%, 2.2% and 2.2% of net investments as of 12-31-2013).

The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2013. The managers' 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.

Russell 1000 Growth Index is an unmanaged index comprised of securities that represent the large-cap sector of the stock market. It is not possible to invest directly in an index.

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.

Financial Advisor Opportunities
Corporate Careers