Waddell & Reed

Quarterly Fund Commentary

Ivy Tax-Managed Equity Fund (prospectus)
December 31, 2014

Bradley M. Klapmeyer, CFA

Market Sector Update

  • Fourth quarter 2014 equity performance remained volatile across styles and capitalization ranges. The quarter saw a bounce in the small- and mid-cap indices, which outperformed large-cap indices. Within the large cap world, both growth and value styles managed similar gains.
  • Market volatility started early in the quarter as oil prices begin to turn lower and continued to track to new lows throughout the measured period. The market also continues to debate the intentions of the Federal Reserve (Fed) around interest rate policy.
  • Despite these moving macro pieces, the market appears to be taking the volatility in stride, deferring to see the positives – lower oil is seen as conducive to a healthier U.S. consumer and sustained lower inflation also means the Fed can keep an accommodative policy for a longer period of time.
  • Investors also remained comforted by excellent execution at the corporate level with generally strong free-cash-flow, clean balance sheet and strong operating margins.

Portfolio Strategy*

  • The Fund lagged its Russell 1000 Growth Index benchmark for the period ended Dec. 31, 2014.
  • Stock selection was a detractor of performance while sector allocation was a modest contributor. Underperformance was driven by stock selection in industrials and consumer discretionary as the Fund was unable to keep up with gains in those sectors.
  • Industrials performance was weighed down by an overweight to oil-sensitive equities, including weakness from Canadian Pacific, Pentair and Flowserve.
  • Consumer discretionary weakness was attributed to an overweight position in casinos and online retail. Continued weakness out of Macau drove downside for both Las Vegas Sands and Wynn Resorts. Amazon and JD.com underperformed on stock-specific concerns. Limited Brands was a notable standout in terms of upside during the quarter.
  • Positive performance was attributed to stock selection in technology and underweight positions in energy and materials.


  • Looking ahead, the economy is likely to remain at its current slow-growth pace. However, the market is rightfully on watch for a multitude of macro/economic concerns, 1) timing of the Fed’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 in commodity prices, particularly oil, 4) increasing yields in the high yield market indicating heightened stress, again, particularly in energy sector, and 5) sustained macro weakness out of Europe.
  • The U.S. economy could lose support of the energy sector as energy-related investment in the U.S. could weaken materially into 2015. An offset is a bigger pool of discretionary dollars in consumers’ pockets.
  • However, the potential ripple effects caused by a lower oil price have not likely been fully appreciated by the markets in the near-term, especially with the domestic markets near alltime highs. Price-to-earnings ratios are generally not as compelling at current levels meaning the market is more dependent on earnings growth. The Fund will look for opportunities to add exposure to favorable three year growth stories if dislocations take place.

*Top ten holdings as of 12/31/2014: Limited Brands, Inc. 4.1%, Apple, Inc. 3.9%, Visa, Inc. 3.3%, MasterCard, Inc. 3.0%, Allergan, Inc. 3.0%, NIKE, Inc. 2.7%, Amazon.com, Inc. 2.6%, salesforce.com, Inc. 2.5%, Verisk Analytics, Inc. 2.5% and Gilead Sciences, Inc. 2.5%

The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2014. 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 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.

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