Market Sector Update
- Small-cap equities had a solid quarter as concerns regarding a possibly premature reduction in the Federal Reserve’s (Fed) stimulative policies were assuaged by the Fed’s decision to maintain its previous pace of asset purchases.
- Generally speaking, sectors with a more offensive tilt outperformed during the period.
- Health care generated the greatest returns and biotech shares in the index were especially strong performers.
- Industrials, energy and technology all rose slightly during the period.
- Financials, utilities and telecom were laggards.
- Within financials, REITs (real estate investment trusts) underperformed notably while banks outperformed as sectors that are viewed as bond proxies generated weak performance. Those stocks viewed as positively correlated to rising short-term interest rates outperformed (such as commercial banks).
- While the absolute performance of the Fund was positive, before the effects of sales charges, Fund performance lagged its benchmark for the period.
- From an allocation perspective the Fund’s cash position was a drag on results, while an underweight in financials was the largest contributor to returns. An underweight in utilizes helped results while an underweight in technology was a drag on relative performance.
- Stock selection was a negative during the period with particularly weak results in financials, energy and information technology more than offsetting favorable performance in materials and consumer discretionary.
- From a stock-specific perspective, Boise Cascade Co. was the greatest positive contributor to returns. Nexstar Broadcasting Group, Visteon Corp., Foster Wheeler Ltd. and Dana Holding Corp. all had solid performance.
- The greatest detractors were Stage Stores Inc., McDermott International Inc., Spansion Inc. and Triumph Group as each experienced poor results and provided weaker-than-expected nearterm outlooks.
- Following a long stretch of robust appreciation on the part of small caps, it is becoming increasingly difficult to find genuinely undervalued opportunities to invest in, especially those that don’t come with a higher-risk profile or lower quality business position than we would prefer.
- In addition, we think the bar for especially positive results in small cap is higher now than it has been in the past couple of years.
- Earnings expectations for the balance of this year and next year appear difficult to achieve without a pick-up in overall economic growth.
- Valuations are not overly aggressive, though overall they are slightly above long-term averages on most metrics.
- This doesn’t necessarily imply negative returns, though we believe the pace of appreciation from current levels is likely to be slower going forward than has been the case in the past six to eight quarters.
*Boise Cascade Co., Nexstar Broadcasting Group, Visteon Corp., Foster Wheeler Ltd., Dana Holding Corp., Stage Stores Inc., McDermott International Inc., Spansion Inc. and Triumph Group (1.1%, 2.6%, 2.1%, 2.5%, 2.4%, 1.6%, 1.5%, 0.8% and 1.5% net investments at 09/30/2013, respectively.)
The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 30, 2013. The managers' 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.
Risk Factors. As with any 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. 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 financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.