Waddell & Reed

Quarterly Fund Commentary


Ivy Value Fund (prospectus)
December 31, 2013


Manager(s):
Matthew T. Norris, CFA

Market Sector Update

  • Equity markets ended the year on a strong note driven by optimism over gradually improving economic fundamentals.
  • The Russell 1000 Value Index advanced 10%, driven by particularly strong returns in industrials and technology. Traditionally defensive, higher-yielding sectors such as utilities, telecommunications and health care were relative underperformers.
  • The domestic economy continues to exhibit stable growth, albeit at low levels, with persistently encouraging trends in employment statistics and the housing industry. Lingering concerns over fiscal spending and monetary accommodation were addressed to the satisfaction of the markets. In addition, the Fed announced a schedule for tapering asset purchases that placated investor concerns. With these overhangs removed from the outlook, the markets rallied into year end.

Portfolio Strategy*

  • The Fund outperformed the benchmark in the fourth quarter, before the effects of sales charges.
  • Technology was a large contributor to Fund performance as positions in Western Digital Corp. and Xerox Corp. exhibited particularly strong returns. In addition, holdings in Marathon Petroleum Corp., Time Warner Inc. and McKesson Corp. were notable contributors.
  • Offsetting this strength was weak relative performance in energy as positions performed poorly. The Fund’s underweighting of industrials was a drag on its relative return.
  • We continue to focus on identifying companies that we believe are trading substantially below their intrinsic values. We see compelling value in energy and financials based on our proprietary intrinsic value work though we modestly reduced the weighting in each during the quarter.
  • We also reduced our weighting in health care, which is now a modest overweight relative to the benchmark, and increased technology exposure by initiating a position in Western Digital.
  • We continue to search for companies where we believe the cash flows are underappreciated by the market with visible catalysts to recognize that disparity over the next 12 months.

Outlook

  • Looking ahead, we believe global growth will improve modestly in 2014 as clarity around fiscal spending and monetary policy improve; as strengthened balance sheets and higher consumer and corporate confidence readings begin to translate into higher consumer and corporate spending; and the lagged effect of historical stimulus continues to provide a persistent tailwind to growth.
  • We continue to be encouraged by modest inflation rates and subdued inflation expectations, which provide an environment conducive for central banks to provide support to local economies if needed. In addition, we see encouraging signs from the U.S. housing market as well as growing domestic energy production as significant positives. While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding high-quality, growing companies whose stocks are trading materially below what we consider fair value.

 


*Western Digital Corp., Xerox Corp., Marathon Petroleum Corp., Time Warner Inc. and McKesson Corp. (4.4%, 4.2%, 3.0%, 4.1% and 2.2% of net investments as of 12-31-2013).

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

Russell 1000 Value 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. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. 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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