Waddell & Reed

Quarterly Fund Commentary

Ivy Value Fund (prospectus)
September 30, 2015

Matthew T. Norris, CFA

Market Sector Update

  • 3Q2015 saw the market drop and the Russell 1000 Value Index (Fund’s benchmark) end up down 8.4%. A number of factors concerned equity investors, including the future path of U.S. interest rates, falling oil and commodity prices, worries over the growth rate of Chinese gross domestic product (GDP) and inconsistent domestic economic statistics.
  • As economic cycles age, growth investing often outperforms value for a period as investors search for growth amongst an aging expansion. This can occur as investors gravitate to a very narrow list of companies they believe will have outsized earnings growth regardless of macro factors. This is always short term in nature and usually ends poorly for investors chasing the high-flying companies.
  • Valuation spreads (the difference between a “cheap” stock and an “expensive” one) have now widened. History tell us this is likely unsustainable over the long run and value should catch up in performance in time. We believe value investing will begin to outperform again when interest rates rise or the U.S. economy slows.

Portfolio Strategy*

  • The Fund experienced negative returns for the period ended Sept. 30, 2015 but performed better than its benchmark before the effects of sales charges.
  • Fund performance was helped by merger activity. Both MolsonCoors and Coca-Cola Enterprises rose double-digit percentages when they were in or associated with corporate mergers.
  • The energy sector was also a positive contributor to performance. A large underweight helped, as the energy was down nearly 18% for the quarter. We currently hold only three stocks in the area, which while also negative, collectively outperformed the sector. Marathon Petroleum was the leading name for the quarter.
  • We continue to focus on investing by researching one company at a time, and finding names that are trading substantially below our estimate of their true value.
  • An illustrative example would be Allstate Insurance, a company whose core product is auto insurance. We believe this is a well-run, growing firm. As gasoline prices declined over the past year, the average miles driven per car in the U.S. increased. With this increase in driving, accidents also increased. This situation caused a short-term drop in earnings, and we believe the market overreacted by selling the stock at an all-time high of around $72 to a low of around $54. We purchased Allstate at $58 with a belief that the intrinsic value of this company is approximately $70 per share.


  • We think 4Q2015 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 would be a welcomed sign, as that could also create loan demand at banks.
  • While the economic forces listed above are clearly important factors, our first approach is at 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 and consumers. We find little to no opportunity in real estate, telecommunication and industrials. Energy is an area we have been notably underweight, but are now starting to sense more opportunities in that sector.

The opinions expressed in this commentary are those of the Fund’s manager 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.

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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