Waddell & Reed

Quarterly Fund Commentary

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

Kenneth G. Gau

Market Sector Update

  • In last quarter’s commentary we suggested that we are in slower grind it out market where we should expect forward progress, but with greater volatility and the potential for occasional setbacks (as the market is no longer inexpensive and we are further along in the economic recovery). Clearly the magnitude of the setback in the 3Q was unexpected as the Russell 2000 Value Index (Fund’s benchmark) was down 10.73%, but it is also important to keep in perspective that there hadn’t been a 10% broader market pullback since 2011, which by historical standards is a long period of time.
  • What was behind the market sell off was a combination of concerns about global growth (emerging markets), uncertainty regarding central bank monetary policies (especially the Federal Reserve as we near the suggested liftoff), suggested changes in policies of U.S. presidential candidates seeking party nominations, and geopolitical concerns (Syria).
  • Within the index pressure was felt across the board in the 3Q, with no sector posting a positive return. The least negative groups were utilities, financials and consumer staples, which were all down less than the index, and the worst groups were energy, materials, and industrials, which more materially underperformed on the downside.

Portfolio Strategy*

  • Before the effects of sales charges, the Fund significantly outperformed its benchmark in the quarter ended Sept. 30, 2015, and built on its lead versus the index year to date. Stock selection provided positive contribution in the quarter while sector allocation was a detractor.
  • In terms of sectors, consumer staples, materials and energy provided the greatest positive performance while financials, consumer discretionary and health care were the greatest laggards.
  • At the stock level, three securities contributed greater than 50 basis points to performance (B&G Foods, Flotek Industries and Cytec Industries), and two detracted over 50 basis points (Greenhill and Krispy Kreme).
  • Overall, we felt pretty satisfied that the Fund did a good job of protecting on the downside over this choppy 3Q, but also believe that we are well situated for a market recovery if it were to occur.


  • Going forward our message remains the same in that we continue to believe that the bull market run that began in March 2009 is not over and that we have yet to experience all of the fruits of the domestic economic recovery. With that said, the damage seen in many sectors of the market in the 3Q is not going to be fixed overnight. There are still a number of debates that need to be hashed out between the bulls and the bears, and both sides have plenty of fodder for the time being which will likely lead to further choppiness.
  • The good news is that market expectations have been significantly reset, and as with any market correction, opportunities always arise from uncertainty for those that are patient and disciplined. We feel confident in our approach, will continue to work diligently, and believe the Fund is well positioned for the current environment.


*Top 10 holdings (%) as of 09/30/2015: Flotek Industries 4.7, Bank United 3.6, B&G Foods, Inc. 3.6, Krispy Kreme Doughnuts, Inc. 3.4, LifePoint Hospitals 3.1, Matson 3.0, Diamond Foods 2.8, Monro Muffler Brake 2.8, Masonite International Group 2.7 and Southwest Gas 2.7.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 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.

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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