Waddell & Reed

Quarterly Fund Commentary

Ivy Balanced Fund (prospectus)
March 31, 2014

Cynthia P. Prince-Fox

Market Sector Update

  • In 2013, the best performing industries were mostly in consumer discretionary, industrials and financials. Utilities and health care have been the leading sector performance year to date.
  • We witnessed a similar move in first quarter 2013 as a double-digit gain in the broad index was led by utilities, consumer staples and health care. However, at that time, we viewed the move as a broader trend out of bonds and into high dividend paying stocks. While that trend is likely still at work, the Federal Reserve (Fed) has further tapered its stimulus program and hinted at a preference to increase rather than decrease the federal funds rate.
  • While forecasting when rate hikes will begin and how quickly they will rise is difficult, the markets will stay focused on the unemployment rate, inflation and industrial production to provide guidance as to when these hikes could possibly occur.
  • In a world that is very data dependent, distortions caused by winter storms in the first quarter will likely cause further confusion on the underlying strength of the economy, and thus, less clarity as to what themes will play out for the rest of 2014.


Portfolio Strategy*

  • While the Fund posted a modest positive return, both the equities and fixedincome portfolios lagged their benchmarks. Fixed income performed better than equities, so allocations also played a role in total performance. Top equity contributors were Brown-Forman Corp. and PNC Financial Services Group Inc.
  • Detractors came from Amazon.com Inc. as well as the portfolio’s 0% exposure to utilities, the best performing sector in the benchmark.
  • Underperformance of the fixed-income portfolio was due to duration as the Fund is almost two years shorter duration than its benchmark. Longterm rates rallied in January and held onto most of the gains through the rest of the quarter.
  • We believe the Fund may benefit from steepness in the yield curve and improvement in credit spreads rather than changes in long-term interest rates. An overweight in credit helped to mitigate that underperformance but was not enough to fully offset it. Despite the rally in rates and flattening of the yield curve, the intermediate part of the curve remains steep. We still prefer not to make substantial bets on the direction of long-term interest rates.


  • The main driver of market correction during the quarter was the peaking of global industrial production following five quarters of acceleration. The momentum peak is the result of a moderation in developed market growth and, more importantly, in Chinese growth.
  • We believe that once this period of slowing momentum ends, the market will likely shift its focus on the risks of Fed tightening. In addition, there was much discussion about this year’s never-ending winter and how markets will interpret weakness in the headline numbers. We think we will most likely witness a bounce back in second quarter, with a lot of noise in the numbers.
  • While there is never any shortage of things for investors to worry about these days -- and the first quarter was no exception -- we will continue to focus on the long-term potential of investments we make in the portfolio.


*Brown-Forman Corp., PNC Financial Services Group Inc. and Amazon.com Inc. (1.7%, 1.8% and 1.3% of net investments at 03/31/2014, respectively).

The opinions expressed in this commentary are those of the Portfolio's manager and are current through March 31, 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.

Risk Factors. As with any mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. 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. The lower-rated securities in which the Fund may invest may carry greater risk of nonpayment of interest or principal than higher-rated bonds. In addition to the risks typically associated with f xed-income securities, loan participations in which the Fund may invest carry other risks, including the risk of insolvency i of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. Dividend-paying investments may not experience the same price appreciation as non-dividend-paying instruments. Dividend-issuing companies may choose not to pay a dividend, or it dividend may be less than what is anticipated. 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. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

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.

Financial Advisor Opportunities
Corporate Careers