Waddell & Reed

Quarterly Fund Commentary


Ivy Dividend Opportunities Fund (prospectus)
March 31, 2014


Manager(s):
Cynthia P. Prince-Fox

Market Sector Update

  • The Russell 1000 Index seems to be struggling to latch onto a coherent investment theme so far this year. In 2013, outperforming industries were mostly in consumer discretionary, industrials and financials. This is largely in line with what we would expect of a primarily cyclical, optimism-driven rally.
  • So far, this year’s lead sector performers have been utilities and health care, historically viewed as defensive bets. We witnessed a similar move in first quarter 2013 as strong gains were 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 fed 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 start to occur.
  • In a world that is still 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*

  • The Fund modestly outperformed its benchmark of the quarter, before teh effects of sales charges. Top individual contributors included Applied Materials, Inc. and Wynn Resorts Ltd.
  • Detractors from Fund performance included a lack of exposure to utilities, the best performing benchmark sector, and ownership of Kansas City Southern. Kansas City Southern’s exposure to the “near sourcing” phenomenon of more manufacturing and auto production moving to Mexico from other low-wage countries was what attracted us to the original investment. The stock had been an excellent performer, although we had begun to reduce position size based on valuation. We exited the remaining shares during the quarter.

 

Outlook

  • 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 expect a bounce back in the 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.

*Applied Materials and Wynn Resorts (2.2% and 2.9% of net investments as of 03-31-2014). Kansas City Southern is no longer a holding.

The opinions expressed in this commentary are those of the Fund’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.

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 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