Waddell & Reed

Quarterly Fund Commentary

Ivy Value Fund (prospectus)
June 30, 2015

Matthew T. Norris, CFA

Market Sector Update

  • Uncertainty would be an excellent word to describe the world outlook and equity markets during the 2Q 2015. This led to roughly flat performance for the Russell 1000 Value Index.
  • The list of factors to consider each day is extensive, but includes potential rising U.S. interest rates, possible default of sovereign Greece debt, plunging oil prices, China’s economy and extreme market volatility, and inconsistent domestic economic statistics callused wide swings in investors’ perceptions.
  • As economic cycles age, growth investing often outperforms value for a period as investors search for growth amongst an aging expansion. This has been true since the middle of 2014. The growth index is currently outperforming the value index. This occurs as investors gravitate to a very narrow list of companies they believe will have outsized earnings growth regardless of the macro factors. This is always shortterm in nature and usually ends poorly for the investors chasing the high-flying companies.
  • We believe value investing will begin to outperform again when interest rates rise or the U.S economy slows. Unforeseen outside influences can also create a change in mindsets.

Portfolio Strategy*

  • The Fund underperformed its Russell 1000 Value Index benchmark for the period ended June 30, 2015. From a sector standpoint, the single greatest detractor was the Fund’s technology exposure, where company holdings in the flash memory space hurt performance. Micron Technology, Inc., SanDisk Corp. and Western Digital Corp. all provide various memory solutions in the personal computer market, a market which is currently experiencing sluggish sales growth.
  • Energy and health care were positive contributors to Fund performance during the measurement period. Our exposure to the oil refiner Marathon Petroleum Corp. continues to do well, and key holdings in the health care space, Humana, Inc. and HCA Holdings, Inc., also performed well.
  • We continue to pursue a strategy of buying inexpensive stocks and diversifying our picks among economic sectors to reduce long-term volatility. Our focus is on high free-cash-flow yielding industrial companies, and low price-to-book ratios for financial companies. Currently we have found more ideas in the areas of consumers, insurance and technology. Areas we are under-represented in, due to a lack of quality ideas, include real estate, industrials and telecommunications. Our investments in these areas can and will shift when opportunities present themselves.


  • We think 3Q 2015 should be interesting. The Federal Reserve is now pulling back on certain stimulus measures that it implemented during the recession, and has signaled an intent to raise interest rates; although the timing seems to be a moving target.
  • A continued increase in U.S. housing activity could be a welcome sign, as that would create loan demand at banks.
  • While the economic forces listed above are clearly important factors, our first approach is from the company level. We seek to find quality, growing companies whose stocks are trading notably below what we consider fair value. Often times this is due to shortterm negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate.
  • Areas of emphasis at this time include insurance, technology, consumer discretionary and consumer staples. We are currently finding little to no opportunity in real estate, telecommunications and industrials.

The opinions expressed in this commentary are those of the Fund’s manager and are current through June 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.

Russell 1000 Value 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. The value of the Fund’s shares will change, and you could lose money on your investment. 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. 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. 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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