Market Sector Update
- The S&P 500 Index recorded its first
annual decline since 2008. The U.S.
Treasury 20-year yield reached 2.27% by
- The U.S. Federal Reserve (Fed)
increased short-term rates in December
and stated its intent for more rate hikes
in 2016 if economic data allow. Many
other central banks remained in an
easing, economic-stimulus mode as the
year ended. We remain concerned
about the market and economic impact
when central bankers face the possibility
that the policy tools relied upon
historically to support and stimulate
growth have lost their potency.
- China’s currency was granted Special
Drawing Rights status by the
International Monetary Fund. China also
announced it will adjust its currency
from a dollar peg to a trade-weighted
“basket” of currencies, believing it was a
better reflection of the yuan’s valuation.
China gradually weakened the currency
further during December.
- Commodity prices fell again, with oil
unable to hold brief moves higher.
- The Fund had a positive return for the
quarter (before the effect of sales
charges) but trailed the positive return of
its all-equities benchmark index.
- The largest allocation was to equities at
about 65%. The Fund had about 9.9%
in fixed-income securities, about 3.3%
in gold bullion and about 22% in cash.
Top sectors were consumer
discretionary, information technology
and health care.
- Microsoft was the largest contributor to
performance followed by Galaxy
Entertainment and AIA Group. We
exited Galaxy Entertainment in the
quarter. The largest detractor was our
total investment in Formula One
(parent company listed as Delta Topco
Ltd.), based on updated forecasts;
followed by Media Group Holdings
(lower valuation for boxing investment);
and Plains Group Holdings (energy).
- We increased cash and maintained the
fixed-income allocation. We think a
more defensive position and more
liquidity are prudent. We kept exposure
to companies we think have stronger
prospects for growth and increased it to
those tied to the U.S. economy.
- We may hold a higher level of cash now
than over the past several years, as we
need to be increasingly selective and
confident in a truly unique fundamental
- We think the unintended consequences
of global central bank policies are a
primary risk and expect increased
market volatility as a result. The
headwinds include a relatively stronger
U.S. economy, tighter Fed and stronger
U.S. dollar; increasing leverage;
slowing growth in China and the
government’s market intervention;
geopolitical events; low inflation; and
questions around fixed-income liquidity,
particularly in high yield.
- The collapse in commodity prices
produced a manufacturing recession,
but the duration is uncertain. WTI
crude oil, the U.S. benchmark, has
fallen 40% in the last six months. Oil
demand was strong in 2015 and
supply fell from producers outside the
Organization of Petroleum Exporting
Countries. We think supply and
demand are likely to begin to balance
later in 2016.
- We think corporate growth will be
challenged and focus where we think
growth will occur. Many 2015 holdings
remain core holdings in 2016. Our
highest conviction names are in
secular growth, with strong balance
sheets and the option of share
repurchases, dividends or acquisitions.
The opinions expressed in this commentary are those of the Fund's managers and are current through Dec. 31, 2015. 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.
Top 10 Equity Holdings as a percent of net assets as of 12/31/2015: AIA Group Ltd., 2.34%; Microsoft Corp., 2.30%; Home Depot, Inc., 2.25%; Citigroup, Inc., 2.19%; Actavis plc, 2.18%; Coca-Cola Co.,
2.12%; Kraft Foods Group, Inc., 1.90%; Cognizant Technology Solutions Corp., Class A, 1.87%; JPMorgan Chase & Co., 1.80%; Philip Morris International, Inc., 1.74%.
The S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. It is not possible to invest directly in an index.
Investors should consider the investment objectives, risks, charges and expenses of a portfolio and the variable insurance product carefully before investing. The portfolio and variable
insurance product prospectuses contain this and other information, available by calling your financial advisor, visiting www.ivyfunds.com or contacting the applicable insurance company.
Please read the prospectuses or summary prospectuses carefully before investing.
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. The Fund may allocate from 0 to 100% of its assets between stocks, bonds and short-term instruments of issuers around the globe, as
well as investments in precious metals and investments with exposure to various foreign securities. International investing involves additional risks, including currency fluctuations, political or economic
conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed-income securities are subject to interestrate
risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated
bonds. The Fund may focus its investments in certain regions or industries, thereby increasing its potential vulnerability to market volatility. The Fund may seek to hedge market risk on various securities,
increase exposure to various markets, manage exposure to various foreign currencies, precious metals and various markets, and seek to hedge certain event risks on positions held by the Fund via the
use of derivative instruments. Such investments involve additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the
underlying asset from which the derivative’s value is derived. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic
conditions, sudden political events, and adverse international monetary policies. Markets for commodities are likely to be volatile and the Fund may pay more to store and accurately value its commodity
holdings than it does with the Fund’s other holdings. 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 mutual funds offered by Waddell & Reed, call your financial advisor or visit us online at www.waddell.com. Please read the prospectus or summary
prospectus carefully before investing.