Waddell & Reed

Quarterly Fund Commentary


Ivy Dividend Opportunities Fund (prospectus)
December 31, 2013


Manager(s):
Cynthia P. Prince-Fox

Market Sector Update

  • While the partial shutdown of the federal government halted the flow of official economic statistics, markets marched upward as investors anticipated the shutdown would be short-lived and the debt ceiling would be lifted.
  • After months of speculation about the timing of reducing quantitative easing, the Federal Reserve (Fed) finally began the process of slowing its balance sheet growth. Stocks reacted quickly after the “taper” turned out to be just as dovish as it could have been, nudging down from $85 billion to $75 billion per month.
  • The Fed’s tapering decision would appear to be supported by data that suggests the economy has strong underlying momentum. Most important would be employment gains of 200,000 per month in October and November, strong retail sales, a large rebound in October home sales and industrial production returning to its pre-recession peak.

Portfolio Strategy*

  • The Fund underperformed the Russell 1000 Index benchmark in the fourth quarter, primarily due to adverse stock selection.
  • Sector selection was mostly positive due to zero exposure to the two worst performing sectors for the quarter, utilities and telecom. Cisco Systems Inc. and Seadrill Ltd. were notable detractors from performance.
  • Cisco announced earnings in November and noted that it had experienced a sudden broad-based slowdown across its entire business, which resulted in a significant guide down for the coming quarter. While a number of macro issues were cited, the magnitude was particularly surprising given that global growth had been weak, but not disastrous. For now, we have reduced the position size and look for price support given a strong capitol return program in the form of dividends and share repurchases. We believe Cisco is refocused/well-positioned to capitalize on the major secular technology trends.
  • Seadrill Ltd., an offshore drilling contractor, announced earnings that were below expectations. The company’s management cited several negative dynamics that will likely persist into the coming year. While the stock offers an attractive dividend yield, we are concerned that the company may have to issue more stock to support the dividend and have exited the position.
  • Significant positive contributors were The Boeing Company and Bristol-Myers Squibb Company.

Outlook

  • As we look toward a new year, we believe markets will keep a close eye on central bank actions and search for any signs of ongoing strength (or weakness) in global economies.
  • The dividend growth strategy remains the focus of the Fund. As noted in the third quarter commentary, dividends surged during that period and fourth quarter also reflected a strong trend as current payout ratios (dividends paid divided by earnings) remained low by historical standards.
  • Fund positioning remains focused on investment themes and is geared toward what we consider to be dominant, high-quality companies that are exposed to positive secular trends.

 


*Cisco Systems Inc., The Boeing Company and Bristol-Myers Squibb Company (1.6%, 2.2% and 2.8% of net investments as of 12-31-2013). Seadrill Ltd. is no longer a holding.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 2013. 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.

Russell 1000 Index is an unmanaged index comprised of securities that represent the large-cap sector of the stock market. It is not possible to invest directly in an index.

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. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. 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 f nancial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully i before investing.

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