Waddell & Reed

Quarterly Fund Commentary


Ivy Balanced Fund (prospectus)
September 30, 2014


Manager(s):
Matthew A. Hekman

Market Sector Update

  • Equity and fixed-income markets were flat to up modestly in the third quarter. The index advanced slightly in the quarter, driven by particularly strong returns in health care and technology. Sectors that weighed on index performance were energy, utilities and industrials.
  • The 10 year Treasury yield was virtually unchanged at approximately 2.5% if measured at the beginning and end of the third quarter; however, it ranged during the quarter from over 2.6% to below 2.35%.
  • The domestic economy continues to exhibit stable growth albeit at low levels with persistently encouraging trends in employment statistics and the housing industry.
  • Ongoing geopolitical events in Eurasia and the Middle East, weak economic statistics from Europe, Asia and Latin America and concerns over the threat from a potential Ebola outbreak all served to temper enthusiasm for risk assets.
  • Finally, the Federal Reserve (Fed) has continued on its announced schedule for tapering asset purchases and provided an outlook on future fed funds rate increases that caused some concern over medium-term economic growth potential.

 

Portfolio Strategy*

  • The equity portion of the Fund underperformed its benchmark for the quarter. Technology was the primary detractor to Fund performance.
  • Factors that contributed positively to overall performance included the Fund’s lack of exposure to the negative performing utilities sector and strong individual performances from Southwest Airlines, and consumer discretionary names such as Limited Inc., Ulta Salon and Home Depot.
  • The fixed-income portion of the Fund underperformed its benchmark mainly due to its positioning in the intermediate part of the yield curve and to a lesser extent it’s overweight in credit.
  • Concerns over normalization of Fed policy caused a pickup in volatility especially in riskier parts of the credit markets. We used this volatility as an opportunity to purchase a number of higher quality high yield names at dislocated prices. While our core strategy of rolling down the intermediate part of the yield curve remains unchanged, we will opportunistically take advantage of market dislocations when we feel they provide substantially better risk adjusted returns.
  • The Fund remains unchanged with a target allocation of 75% equities and 25% fixed income.

 

Outlook

  • Going forward, we believe global growth will improve modestly in 2014 as clarity around fiscal spending and monetary policy improve; strengthened balance sheets and higher consumer and corporate confidence readings begin to translate into higher consumer and corporate spending; and the lagged effect of historical stimulus continues to provide a persistent tailwind to growth.
  • We continue to be encouraged by modest inflation rates and subdued inflation expectations which provide an environment conducive for central banks to provide support to their local economies if needed.
  • As the domestic economy gradually improves, the Fed will begin to raise interest rates, though the timing of that inflection point is elusive.
  • While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding high quality, growing companies whose securities are trading at a reasonable valuation with visible catalysts to drive relative outperformance over the next 12 months.

 


*Top 10 holdings as of 09/30/2014: PNC Financial Services Group, Inc. 2.0%, Union Pacific Corp. 1.9%, JPMorgan Chase & Co. 1.9%, Limited Brands, Inc. 1.9%, Apple, Inc. 1.7%, Boeing Co. 1.6%, Citigroup, Inc. 1.6%, Southwest Airlines Co. 1.6%, Cummins, Inc. 1.6% and Applied Materials, Inc. 1.5%.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 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.

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 its 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.

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