Waddell & Reed

Quarterly Fund Commentary


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


Manager(s):
Bradley M. Klapmeyer, CFA

Market Sector Update

  • Third quarter equity performance was clearly more volatile across styles and capitalization ranges. Large-cap indices posted gains and outperformed notable declines in the mid- and small-cap indices. Within the large-cap world, both growth and value styles managed gains, with growth modestly outperforming value.
  • Market volatility started early in the quarter as the expectation for a higher rate environment began to re-emerge. Those fears were ultimately tempered and the index managed to add to a strong year-to-date gain despite the continued cloud from global macroeconomic, financial and geopolitical concerns.
  • Even with all of the recent turmoil, investors appear to be taking 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 such, the market is seemingly anticipating a pick-up in underlying growth.

Portfolio Strategy*

  • The Fund generated good returns and outperformed the benchmark for the quarter before the effects of sales charges.
  • From an attribution standpoint, both strong stock selection and sector allocation drove the performance in the period. Health care was strong from a stock selection standpoint and also benefited from the overweight position. Solid performance was seen from Gilead Sciences, HCA Holdings, and from a new position in Allergan. Strong earnings growth and pipeline advantages continue to fuel health care performance.
  • Positive performance was also attributed to stock selection in industrials and technology, with standout gains from the Fund’s rail exposure and from tech holding Twitter. Rails are benefiting from the booming energy sector as well as tightness in the trucking market.
  • These factors more than offset the drag from weak individual stock performance in the consumer discretionary sector. The global gaming stalwarts Las Vegas Sands Corp. and Wynn Resorts Ltd., continued to lag due to a slowdown in Macau gaming activity. Year-to-date winners, such as CBS Corp, JD.com and Harman, all saw weaker share performance during the quarter.

Outlook

  • 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.
  • The economy is likely to remain at its current slow growth pace of 2.5-3.0%. However, the market is on watch for a multitude macro and economic concerns: 1) timing of the Federal Reserve’s move to a “less accommodative” monetary policy, 2) the strength of the U.S. dollar and how that flows through to earnings of domestic equities, 3) the recent weakness commodities prices, including oil, and 4) sustained macro weakness out of Europe.
  • Most of these items will be digested in expectations over the next six months and once fully understood should allow domestic large-cap equities to continue their gains. The Fund will look for opportunities to add exposure as needed.
  • Recent data from retailers suggest continued improvements after a harsh winter and a mild summer. The holiday season is set up to positively surprise consumer discretionary names given the combination of lower gasoline prices (more discretionary income) and lean inventory positions.

 


*Top 10 holdings as of 09/30/2014: Apple, Inc. 4.0%, Gilead Sciences, Inc. 3.4%, Visa, Inc. 3.4%, MasterCard, Inc. 3.2%, HCA Holdings, Inc. 2.7%, Union Pacific Corp. 2.6%, NIKE, Inc. 2.6%, SBA Communications Corp. 2.5%, Amazon.com, Inc. 2.5% and Allergan, Inc. 2.5%.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 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. Tax-management strategies may alter investment decisions and affect portfolio holdings, when compared to those of non-tax-managed mutual funds. Market conditions may limit the Fund’s ability to realize tax losses or to generate dividend income that is taxed at favorable Federal income tax rates. In addition, the Fund’s tax-managed strategy may cause the Fund to hold a security in order to achieve more favorable tax-treatment or to sell a security in order to realize tax losses, which could result in losses that exceed any benefits of the tax-managed strategy. The Fund’s ability to utilize various tax-management techniques may be curtailed or eliminated in the future by tax legislation or regulations. 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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