Waddell & Reed

Quarterly Fund Commentary

Ivy Small Cap Value Fund (prospectus)
June 30, 2015

Kenneth G. Gau

Market Sector Update

  • Woody Hayes, a great football coach at Ohio State (1950s to 1970s), is often credited with the expression “three yards and a cloud of dust,” which explained his slower, grind it out type of run heavy offense. In many ways we believe this term could be used to explain the current market environment in which we reside; one where we should expect net positive yardage yet in smaller chunks, and one where positive yards will not necessarily be gained on every play (as the market is no longer inexpensive and we are further along in the economic recovery).
  • Continuing along with this analogy the Russell 2000 Value Index lost a little yardage in 2Q2015, yet we believe that as we finish the year we will continue to march the ball forward, but at a little stronger pace as we see a better economic backdrop in the second half of the year.
  • In terms of sector performance, health care continued to be the leadership group in the 2Q2015, and is by far and away the best performing group year to date. On the negative side, two groups really stood out in the quarter, materials and utilities.

Portfolio Strategy

  • Gross of fees, the Fund performed in line with its benchmark in 2Q2015. While stock selection provided a modest benefit in the quarter most of it was offset with sector allocation.
  • In terms of sectors, financials, utilities and materials provided the greatest outperformance while consumer discretionary, energy and consumer staples were the greatest laggards.
  • At the stock level, six securities contributed greater than 30 basis points to performance (LifePoint Health, Western Alliance Bancorporation, SVB Financial Group, Cytec Industries, Nutrisystem, and PRA Group), and two detracted greater than 30 basis points (Scotts Miracle-Gro and Carmike Cinemas).
  • Overall, we felt like the Fund performed solidly considering two stock specific issues that provided about a 120 basis point headwind during the quarter. Carmike Cinemas provided roughly a 80 basis point headwind after it became apparent they were unlikely to be acquired due to Department of Justice focus on the exhibitor market, and Scotts Miracle Gro provided roughly a 40 basis point headwind after it became apparent that this year’s lawn and gardening season would be disrupted by massive flooding in Texas and water restrictions in California (these are the two biggest markets in the U.S.).


  • Much like where we finished in 2014, we are still of the belief that the bull market run that began in March 2009 remains in a sustained uptrend as we are just starting to more clearly see the fruits of an economic recovery.
  • We also believe that there are a number of positive tailwinds for the consumer in 2015, ranging from improving employment (both job creation and rising wages), a recovery in housing, a benefit from falling energy prices, and continued benefits from an extended period of Federal Reserve (Fed) accommodation.
  • Interestingly, it is likely that it will be this economic strength that will ultimately lead to greater market volatility (which surprisingly we have yet to see much of) as investors and the Fed grapple with the need for tightened monetary policy.
  • What we believe will further complicate this debate are the global implications of a strengthening dollar, diverging global monetary policies and increased geopolitical risks. No one is suggesting that this transition will be easy, but with volatility, opportunity often arises for those that are resourceful and disciplined.
  • We will continue to work diligently for what we hope will be another prosperous year in 2015.


*Top 10 holdings (%) as of 06/30/2015: B&G Foods, Inc. 4.4, Matson, Inc. 3.6, Webster Financial Corp. 3.1, Cytec Industries, Inc. 3.1, Krispy Kreme Doughnuts, Inc. 2.9, First Horizon National Corp. 2.9, Western Alliance Bancorporation 2.8, Carmike Cinemas, Inc. 2.8, Masonite International Group 2.7 and SVB Financial Group 2.6.

The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 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 2000 Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It is not possible to invest directly in an index.

Investors should consider the investment objectives, risks, charges and expenses of a portfolio and the variable insurance product carefully before investing. The portfolio and variable insurance product prospectuses contain this and other information, available by calling your f nancial advisor, visiting www.ivyfunds.com or contacting the applicable insurance company. i Please read the prospectuses or summary prospectuses carefully before investing.

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. 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. Investing in small-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. 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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