Market Sector Update
- Third quarter saw a modest upward move in equity markets driven by optimism over gradually improving economic fundamentals.
- The index advanced during the quarter, driven by particularly strong returns in materials, industrials and consumer discretionary. Traditionally defensive, higher-yielding sectors such as consumer staples, utilities and telecom services were relative underperformers.
- The U.S. economy continues to exhibit stable growth albeit at low levels with persistently encouraging trends in employment statistics and the housing industry.
- The quarter ended with the increasingly familiar concerns over the sustainability of fiscal spending and monetary accommodation. We believe these are transient events that, while disruptive, are unlikely to derail an economic recovery.
- We also believe a rise in interest rates is warranted by underlying economic growth and are watching inflation expectations to determine the likelihood of a successful transition from aggressive monetary stimulus to a normally functioning economy.
- The Fund performed in line with the benchmark for the quarter, before the effects of sales charges.
- Health care was a large contributor to the strategy’s performance as positions in HCA and Amgen Inc. exhibited particularly strong returns. Xerox Corp., Dow Chemical Company and Lam Research Corp. were also notable contributors.
- Offsetting this strength was weak relative performance in consumer discretionary and energy as multiple positions performed poorly.
- We see compelling value in health care, energy and financial based on our proprietary intrinsic value work and have added to weightings in health care and financials during the quarter.
- Energy weightings were reduced, but the Fund maintains a significant overweight position relative to the benchmark. We continue to search for companies where we believe the cash flows of the business are underappreciated by the market with visible catalysts to recognize that disparity over the next 12 months.
- Looking ahead, we believe global growth will continue to be sluggish as uncertainties over fiscal spending and monetary policy weigh on both consumer and corporate confidence.
- 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 their 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 for the economy.
- While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding highquality, growing companies whose stocks are trading materially below what we consider fair value. This approach has served investors well over time and our confidence in it has not waned.
*HCA Holdings Inc., Amgen Inc., Xerox Corp., Dow Chemical Company and Lam Research Corp. (2.7%, 2.1%, 4.2%, 3.1% and 2.1% of net investments at 09/30/2013, respectively.)
The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 30, 2013. 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.
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.