Waddell & Reed

Quarterly Fund Commentary

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

Kenneth G. Gau

Market Sector Update

  • Small-cap equities had a positive second quarter, though one marked by a fair amount of volatility. The index was up for the quarter driven primarily by a strong performance in the month of June as fears regarding an economic slowdown eased somewhat.
  • As was the case with the first quarter the dispersion of sector performance was not especially wide, with a few noteworthy exceptions.
  • First, utilities were up during the quarter as investors sought stability and income on concerns that subpar economic growth would keep interests lower for longer than expected.
  • Secondly, energy was once again a strong performer as small cap exploration and production and services companies benefited from a combination of stronger than expected prices for oil and gas and rising levels of exploration and development activity over during the first six months of 2014.
  • Consumer discretionary and health care also outperformed the index. Materials, consumer staples and telecommunications declined during the quarter. Industrials and information technology were positive, but lagged the index.


Portfolio Strategy*

  • The Fund outperformed the benchmark during the quarter before the effects of sales charges.
  • Sector allocation (excluding the impact of cash) was largely neutral, with an overweight in energy and an underweight in financials largely offsetting the Fund’s sizable underweight position in utilities.
  • Stock selection was positive with industrials, consumer discretionary and technology as all added value. Stock selection in financials, energy and utilities had a negative impact on performance during the period.
  • On an individual stock basis the greatest positive contributors to performance were Carmike Cinemas, Inc., Saia, Inc., Con-way, Inc., Insight Enterprises, Inc. and Lifepoint Hospitals, Inc. The greatest detractors from a performance perspective were JGWPT Holdings, Inc., Stage Stores, Inc., Texas Capital Bancshares, Inc., Kraton Performance Polymers, Inc. and Continental Building Products, Inc. 



  • Our outlook for small caps remains somewhat cautious. From a top-down perspective the valuation gap relative to large caps has improved somewhat, though most absolute valuation metrics remain at or slightly elevated compared to long-term norms.
  • In our opinion, consensus earnings estimates remain too optimistic barring a notable acceleration in economic growth during the second half of the year. We are not bearish, though we do believe that from a highlevel perspective returns in small-cap equities are likely to be mediocre in the near-term.
  • From a bottom-up perspective this was the first quarter in quite some time that the Fund did not initiate any new equity positions. We increased allocations to numerous names that we still find very attractive, but were not able to find any new investments that met our criteria. This was not the result of a reduction in effort but rather a reflection that it is currently increasingly difficult to find investments that meet our valuation, risk and quality criteria.
  • We will continue to work diligently to uncover attractive opportunities, though at present we feel that maintaining our discipline will prove more advantageous.


*Carmike Cinemas, Inc., Saia, Inc., Con-way, Inc., Insight Enterprises, Inc., Lifepoint Hospitals, Inc., JGWPT Holdings, Inc., Stage Stores, Inc., Texas Capital Bancshares, Inc., Kraton Performance Polymers, Inc. and Continental Building Products, Inc. (2.5%, 2.6%, 1.9%, 1.7%, 2.4%, 0.5%, 1.0%, 1.2%, 1.3% and 0.8% of net investments as of 06/30/2014, respectively).

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