Waddell & Reed

Quarterly Fund Commentary

Ivy Asset Strategy Fund (prospectus)
June 30, 2014

Michael L. Avery
Cynthia P. Prince-Fox
Chace Brundige, CFA

Market Sector Update

  • U.S. equities continued to reach record highs in the broad market indexes during the quarter. Global equities in general also gained.
  • The U.S. economy is showing some pickup in activity after a first quarter slowed by a severe winter. We think U.S. gross domestic product (GDP) growth in the second half could be 2.5-3.0% after being nearly flat in the first half.
  • The European Central Bank (ECB) in June announced reductions in interest rates and the availability of an additional 400 billion euro for low-cost loans to companies having difficulty getting credit. The ECB also said it is considering using quantitative easing (QE) by purchasing asset-backed securities in the European market.
  • GDP in Japan was somewhat stronger than expected, as was economic growth in India. A change in India’s leadership also made many investors more optimistic about the prospects for economic reform and growth there. China’s economy showed signs of slowing, but we still believe the growth in the emerging middle class there will move China toward an economy driven by domestic consumption.


Portfolio Strategy

  • The Fund posted a small positive return in the quarter (before the effect of sales charges), but underperformed its allequities benchmark.
  • We have been re-concentrating the portfolio, based on our views of the market environment. There were around 100 equity names in the Fund as 2014 opened and that declined to less than 70 by June 30. We have reviewed each holding in this process, which contributed to the Fund’s increased cash. The cash may remain elevated in the current market as we remain selective in our investments. The Fund has about 61% of assets in equities, mainly U.S.; around 6% in gold; about 4% in fixed income; and 29% in cash.
  • The largest sector in the Fund remains consumer discretionary at about 31% of assets. Financials and information technology again followed. We continue to believe active management and careful stock selection – essential to our investment process – will be critical in the current environment.
  • We have slightly reduced the Fund’s gold holdings, which also added to cash. We still think a position is warranted in the event market psychology changes and investors become less confident about central bank stimulus in the global economy.



  • Equities have continued to reach new records and we still think they are attractive relative to other asset classes. However, the steady market gains raise concerns about valuation levels at this point in the cycle. We still are in a lowgrowth, low-inflation and low-rate global economy, which we think is an inadequate foundation for sustainably higher valuations.
  • We believe the companies in the Fund can generate a high level of cash flow with relatively unlevered balance sheets; return capital to shareholders via higher dividends or share repurchases; or offer a good or service with a unique factor or pricing power in a slow, competitive environment.
  • We think there is a question of how quickly markets will anticipate and adjust to the prospect of an increase in interest rates. The Federal Reserve over the last five years has kept interest rates artificially low, so we believe that even a small hike will represent a significant change for the economy and markets.
  • We still expect slow economic growth and low inflation in the U.S. this year. Over the long term, we think areas that can generate above-average real GDP growth are likely to be in Asia in general and China, India and Southeast Asia in particular.


The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2014. 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.

Ryan Caldwell, who had served as co-portfolio manager of the Fund since 2007, left the company effective June 15, 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. Such hedging involves 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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