Waddell & Reed

Quarterly Fund Commentary

Ivy Tax-Managed Equity Fund (prospectus)
September 30, 2015

Bradley M. Klapmeyer, CFA

Market Sector Update

  • To say that 3Q2015 equity performance was weak would be an understatement. No style or market-cap range was spared from the weak performance during the quarter. Within the large-cap style, the growth index performed slightly better than value, but both were quite weak.
  • Unfortunately, the weak market performance in the quarter washed away year-to-date market gains, with every major U.S. index now in negative territory. The Russell 1000 Growth Index (Fund’s benchmark) is holding up relatively well to other styles.
  • The market continues to seem lost and at this point a better descriptor would be “unsure.” Global equity declines were initiated by weakness in China, both economic and in a major stock market correction, which only worked to fan the flames of global macroeconomic growth concerns.
  • Refocusing back on the U.S., the market has shifted from selling off ahead of a Federal Reserve (Fed) hike to interest rates, to now questioning if delays in the timing of a hike signal that domestic growth is more tentative than perceived or more susceptible to the ripples from global macroeconomic issues.

Portfolio Strategy*

  • The Fund underperformed the benchmark for the quarter.
  • From an attribution standpoint, both stock selection and sector allocation were contributors to the underperformance, with neither being a notable call out on an aggregate level.
  • Both stock selection and relative weight in health care and consumer staples were the main detractors. Specific to health care, the sector’s poor performance relative to the benchmark was magnified in the Fund due to a material overweight position. Furthermore, stock selection was a notable detractor. The sector moved lower during the quarter as it became apparent that drug price inflation was likely to be an election cycle issue.
  • Aratana Therapeutics was a stock specific notable detractor as its progress in companion animal therapeutics disappointed versus expectations. Long term, this stock appears to be a unique asset in a blossoming category.
  • For consumer staples, the Fund was underweight in a sector that generally performed well during the market weakness. Furthermore, stock selection contributed to the underperformance.
  • There were some favorable factors that worked to mitigate the underperformance in health care and consumer staples. Stock selection in industrials, consumer discretionary and technology were notable positive contributors.


  • It is unlikely that the volatility in the market will settle anytime soon. The disruptions that have been blamed for sluggish performance earlier in the year have generally played out, yet there has not been a notable reversion to higher growth, which can only imply there other gating factors still at work.
  • The list of market concerns has evolved somewhat but still remains familiar, 1) timing of the Fed’s move to a “less accommodative” monetary policy, 2) emerging market slowdown and the impact that has on sales growth of U.S. based companies with a global presence, 3) continued ripple effects from a step-down in energy investment, and 4) potential for layoffs in the domestic market as global U.S. companies hesitate on investment.
  • In terms of addressing prior watch items, the ISM manufacturing index and other domestic transport volume indictors remain depressed.
  • Regarding valuations, the recent market weakness has made market valuations, as measured by price-toearnings ratios, more approachable but not yet attractive.
  • The Fund will continue to seek the strong, sustainable and defensible growth stocks that can be owned to maturity value.


*Top 10 holdings (%) as of 09/30/2015: Amazon.com, Inc. 4.6, Actavis plc 4.1, Apple, Inc. 3.8, Salesforce.com, Inc. 3.4, Limited Brands Inc. 3.4, Verisk Analytics, Inc. 3.1, Shire Pharmaceuticals Group 3.1, Visa, Inc. 3.0, Facebook, Inc. 3.0 and Adobe Systems, Inc. 2.9.

The opinions expressed in this commentary are those of the Fund’s managers and are current through Sept. 30, 2015. 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.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Risk factors. 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 f nancial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully i before investing.

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