Waddell & Reed

Quarterly Fund Commentary


Ivy Asset Strategy Fund (prospectus)
December 31, 2014


Manager(s):
Michael L. Avery
Cynthia P. Prince-Fox
Chace Brundige, CFA

Market Sector Update

  • U.S. equities closed the year with gains across the broad market indexes, again reaching record-high levels late in the quarter. Global equities in general also finished the quarter slightly higher.
  • Crude oil prices plunged worldwide during the quarter on forecasts of reduced global demand along with OPEC’s unwillingness to cut production. Prices reached levels not seen since 2009. The decline pressured stocks and raised concerns that the price tumble, if sustained, could stall economic growth in some regions.
  • The U.S. Federal Reserve said it is likely to hold rates near zero at least through the first quarter of 2015, noting it would be “patient” in its approach to raising rates. The European Central Bank indicated it would consider additional monetary stimulus to support the eurozone, but took no action by year end. Central banks in Japan and China also took easing actions in the quarter.
  • U.S. economic indicators continued to show steady growth, and the U.S. remained the leader among developed countries. Economic growth forecasts for Europe were revised lower in the quarter.

Portfolio Strategy

  • The Fund had a small negative return in the quarter, compared with a positive return for its all-equities benchmark index.
  • The Fund ended the quarter with about 76% of its assets in equities, mainly in the U.S. Of the top five sectors in the Fund, the largest was information technology followed by consumer discretionary, financials, health care and energy.
  • The consumer discretionary sector was the largest detractor from performance versus the index. The Fund’s cash allocation as well as investments in gold also detracted from performance. A strong U.S. dollar and the low-rate/lowinflation environment pressured gold, and our elevated cash position is based on our view of the macroeconomic and market uncertainties after an extended period of monetary stimulus.
  • Energy and information technology contributed to relative performance. The Fund was underweight energy versus the index and had solid stock selection in the sector. Stock selection in information technology also supported the Fund’s relative returns.

Outlook

  • Central banks outside of the U.S. have either implemented or indicated an intent for more accommodative monetary policies as economic stimulus. We believe this looser-money bias will continue and work to weaken their currencies.
  • We remain concerned about investors' large allocation to fixed income as we near seven years with interest rates near zero. Uncertainty about what may follow and the implications of investors seeking yield via complex, more risky credit securities raise concerns for when rates rise.
  • The Fund’s equities represent companies we believe have relatively unlevered balance sheets, growth that will generate free cash flow and increase dividends or share buybacks, and a business model that can generate acceptable revenue growth.
  • This fits our theme focused on a growing global middle class with greater discretionary income. We are optimistic about consumer sectors and industries. We have increasingly sought opportunities in technology that helps companies be more efficient or productive and individuals communicate or transact more effectively. We believe there is significant growth potential in ecommerce in China and India.

 


The opinions expressed in this commentary are those of the Fund's managers and are current through Dec. 31, 2014. 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. Cynthia Prince-Fox and Chace Brundige, CFA, became portfolio managers on the Fund on Aug. 4, 2014.

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 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 interest-rate 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 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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