Waddell & Reed

Quarterly Fund Commentary

Ivy Small Cap Value Fund (prospectus)
September 30, 2014

Kenneth G. Gau

Market Sector Update

  • Historically September and early October have proven to be the weakest parts of the year for equity markets, this was once again the case this year. In addition to the typical seasonal swoon, the markets felt further pressure due to a combination of concerns regarding slowing global growth, escalating geopolitical risks, the end of quantitative easing 3 (QE3), implications from diverging global monetary policies, and a prolonged period where the market advanced without a meaningful correction.
  • Within the quarter there was increased volatility and a substantial reversal of what had been working during the first half of the year. While not one sector in the benchmark was up in the quarter, the divergences within sectors was pronounced as energy, industrials and utilities were clear laggards, and financials was the best performer on a relative basis.
  • Energy was the worst performing sector due to a sharp decline in oil prices related to slowing global demand and a rising dollar.
  • Industrials, like energy, suffered due to concerns over weakening global growth (especially outside the U.S.), but the decline was less severe as the prospect for a domestic recovery remained within many industries.
  • Utilities and financials also declined due to rising interest rates fears.

Portfolio Strategy*

  • The Fund performed better than the benchmark in the quarter, before the effect of sales charges, but was down on an absolute basis.
  • Sector allocation (including cash) was largely neutral. An overweight position in energy and underweight position in financials served as drags on performance. Having some cash and limited utilities exposure almost served as a complete offset.
  • Stock selection was particularly strong in the quarter and was a positive contributor in all sectors with the exception of materials, which only lagged by several basis points.
  • On an individual stock basis the greatest positive contributors within the quarter were Saia, Inc., LifePoint Hospitals, Inc., Atlas Pipeline Partners, L.P., Western Refining, Inc., and Community Health Systems, Inc. The greatest detractors were Key Energy Services, Inc., Manitowoc Company, Inc., Marten Transport, Ltd., Insight Enterprises, Inc. and Dana Holding Corporation.


  • After the sell-off of this past quarter we are cautiously optimistic for the remainder of 2014. We believe that the market correction narrowed the valuation gap relative to larger cap indexes, which should make small caps more attractive in a relative sense. This situation has also served to uncover some opportunities on an absolute basis.
  • We continue to believe that the bull market run that began in March 2009 is still in a sustained uptrend as we are just starting to see the fruits of an economic recovery. We also think that we have entered the later stages of the recovery where upside will need to be generated through earnings growth rather than multiple expansion.
  • With the Federal Reserve expected to end QE3 in October, and interest rates rising at some point in the not too distant future, it is fair to assume that greater market volatility will ensue. With this volatility there should be greater opportunity for bottom-up stock pickers and we will continue work diligently looking for opportunities.


*Top ten holdings as of 09/30/2014: Portfolio Recovery Associates, Inc. 3.4%; Armstrong World Industries, Inc. 3.0%, Atlas Pipeline Partners L.P. 2.9%, Teradyne, Inc. 2.8%, LifePoint Hospitals, Inc. 2.8%, Western Alliance Bancorporation 2.7%, Matson, Inc. 2.6%, Saia, Inc. 2.5%, Carmike Cinemas, Inc., 2.5% and SunCoke Energy Partners, L.P. 2.2%.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 30, 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.

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.

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