Waddell & Reed

Quarterly Fund Commentary


Ivy Dividend Opportunities Fund (prospectus)
December 31, 2015


Manager(s):
Christopher J. Parker, CFA

Market Sector Update

  • Equities rallied strongly in 4Q, largely regaining ground lost in 3Q. Concerns regarding ongoing global growth and the impact of spastic policies in China on the global economy led to a weak quarter. These issues haven’t been resolved per se, but investors appear to have become comfortable that the magnitude impact on economic growth and earnings is not sufficiently dramatic to warrant a steep sell-off.
  • Overall, this set of factors provided sufficient relief to drive an increase in the Russell 1000 Index, the Fund’s benchmark, in the quarter, with all sectors performing positively except energy.
  • Positive performance in the quarter was quite broad. Utilities were up slightly, but substantially underperformed the broader index as investors were less sanguine about the sector in an environment of interest rates rising – with lift-off finally occurring at the Federal Reserve’s December 2015 meeting.
  • Materials, technology and health care were the strongest performing sectors.

Portfolio Strategy*

  • The Fund outperformed its benchmark and peer group in the quarter, before the effect of sales charges.
  • Sector allocation did not have a meaningful performance effect on results with the exception of the Fund’s underweight in technology relative to the index and holdings of cash in a rising market environment.
  • Stock selection during the quarter was a strong contributor to returns and performance was positive in all sectors except energy. Stock selection in technology, consumer discretionary and health care had the substantial positive impact on performance.
  • From an individual stock perspective Applied Materials, Teva Pharmaceuticals, McDonald’s Corp., Microsoft and Medtronic were the greatest positive contributors. Energy Transfer Equity, Union Pacific, Anadarko Petroleum, Abbvie and Corrections Corp of America all were notable detractors from relative performance.

Outlook

  • Our outlook for equities overall is cautious. As of year-end, valuations for most sectors were somewhat elevated relative to history. In spite of only modest appreciation in equities, most valuation metrics have not substantially improved as overall earnings have been anemic over the past year.
  • A combination of a more sluggish than expected global economy, pressures from both the accounting and competitive impact of an appreciating dollar, along with the diminishing ability of corporations to realize operating leverage at low levels of revenue growth have combined to fuel minimal earnings growth – earnings are expected to fall for the coming quarter.
  • The outlook for U.S. economic growth remains subdued as the impact of a stronger dollar, and lower spending in the energy is expected to persist in the next few quarters. Further, we believe the likelihood that central bankers in either China and/or the U.S. have made a policy error is a non-trivial matter. Such an error may not be a major headwind to domestic earnings growth, but in our view would lower the odds of a broad re-acceleration in U.S. economic growth and corporate earnings growth needed to drive equity markets considerably higher.

  • *Top 10 Holdings (%) as of 12/31/2015: Teva Pharmaceutical Industries Ltd. 4.5, Pfizer, Inc. 4.5, Citigroup, Inc. 3.9, Medtronic Inc. 3.8, Microsoft Corp. 3.8, JPMorgan Chase & Co. 3.8, McDonald's Corp. 3.3, CVS Caremark Corp. 2.7, Applied Materials Inc. 2.8 and Bristol-Myers Squibb Co. 2.9.

    The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 2015. 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.

    The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is not possible to invest directly in an index.

    Risk factors. 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 financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.

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