Waddell & Reed

Quarterly Fund Commentary

Ivy Balanced Fund (prospectus)
June 30, 2014

Matthew A. Hekman

Market Sector Update

  • Second quarter produced an unusual combination of strong performance by both the equity and fixed-income markets.
  • At the start of the quarter, several measures of volatility declined to low levels, indicating a sense of calm in the market, an unlikely feat in the face of rising interest rate expectations and heavy geopolitical events in Europe, Ukraine and the Middle East.
  • The focus quickly moved to the weak 1Q gross domestic product report which suggested that the economy wasn’t “taking off” as quickly as hoped for, helping to drive the 10-year treasury yield down nearly 50bps since the start of the year.
  • As rates moved lower, utilities were again in the top three best performing sectors for the quarter. Increased geopolitical uncertainty and rising domestic production helped to drive energy stocks to the top performing sector for the quarter and year-to-date.


Portfolio Strategy*

  • The Fund’s targeted allocation goal of 75% equities and 25% fixed income remains unchanged. We continue to believe this is the correct allocation target, given our thought that we will ultimately find ourselves in a rising rate environment. The equity portion finished ahead of its benchmark with strong stock selection in energy, consumer staples and health care.
  • The fixed-income portion of the Fund modestly underperformed its benchmark this quarter due to its shorter duration. A continued overweight in credit was able to mitigate a large portion of the underperformance from duration but unable to make up the entire shortfall. We continue to focus the portfolio to benefit from yield curve roll down in the intermediate part of the curve.
  • Within the equity portfolio, ConocoPhillips participated with the strong move in energy stocks and was one our best performing stocks for the quarter.
  • Technology was the third best performing sector within the equity benchmark, resulting in strong performance of several of the Fund’s tech holdings.
  • On the downside, Pentair and Pall Corp. detracted from performance.



  • As mentioned in past quarterly updates, it is difficult to forecast the timing of when the Federal Reserve will began to raise rates. In addition, distortions caused by winter storms during the first quarter and the subsequent rebound (although muted) are causing confusion on the underlying strength of the economy.
  • We believe “turning points” to watch will be core inflation stabilizing and inflecting, a rebound of global industrial production and continued progress in employment here in the U.S. Markets generally like broad stories to invest behind.
  • Given the duration of this earnings recovery, the investment playbook may look different than past cycles. As an example, a rising rate cycle has typically been favorable for early cycle stocks, this time may be different. We will look to incorporate any change in views of the macro variables, while remaining focused on the long-term investments that we make in the Fund. 


*ConocoPhillips, Pentair Inc. and Pall Corp. (1.59%, 0.69% and 0.93% of net investments as of 06/30/2014, respectively). Tyco is not a holding of the Fund.

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.

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 fixed-income securities, loan participations in which the Fund may invest carry other risks, including the risk of insolvency 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.

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