Waddell & Reed

Quarterly Fund Commentary


Ivy Small Cap Value Fund (prospectus)
December 31, 2013


Manager(s):
Christopher J. Parker, CFA

Market Sector Update

  • Small-cap equities capped an especially strong 2013 with an exclamation point during the third quarter. The Russell 2000 Value Index rose during the quarter as economic data demonstrated strength and a minimal lingering impact from the partial government shutdown during the period.
  • In addition, investors became increasingly more comfortable with the Federal Reserve’s initial moves to curtail its asset purchase program (which was ultimately announced at its December 17 meeting) and with the potentially reduced macro risk profile that comes from the proposed Ryan-Murray budget agreement. This agreement marks yet another event that reduces the overall systemic risk in the economy and lowers the probability of government driven economic disruptions for the foreseeable future.
  • Materials and industrials were two of the strongest performing sectors during the quarter, which is consistent with a view of accelerating global economic growth. Health care was also a strong performer.
  • Generally speaking, more defensive sectors such as consumer staples, utilities and telecommunications lagged. Energy also lagged.

Portfolio Strategy*

  • Although the Fund exhibited strong returns for the quarter, it underperformed the benchmark. The Fund’s cash balance during the period was the reason for the underperformance. Sector selection was a slight positive to relative performance while stock selection was a slight drag.
  • The Fund’s overweight position in materials and underweights in consumer staples, telecommunications and utilities all helped relative performance. Favorable stock selection in industrials and materials were positive contributors while poor results in health care and financials were detractors.
  • On an individual stock basis, Foster Wheeler Ltd., Carmike Cinemas Inc., Terex Corp. and Nexstar Broadcasting Group Inc. were the strongest contributors to performance during the quarter. Dana Holding Corp., Atlas Pipeline Partners, L.P., Synchronoss Technologies Inc. and Express Inc. were the weakest performers as each experienced double-digit declines during the period.

Outlook

  • Over the past two years, the Russell 2000 Value Index increased roughly 50%, while earnings for the index grew at a considerably slower pace. As a result, the valuation of the asset class as whole, and most sectors, no longer appear as compelling as in the recent past – and generally speaking are at a slightly above long-term medians.
  • We believe U.S. economy fundamentals are progressing in the right direction. As a result most areas within small-cap equities continue to be on the upswing with a pickup in growth (albeit probably modest) most likely for the coming months. In our view, this implies less robust performance likely in the coming year, and a greater focus on improving in specific subsectors of the economy and individual companies.

 


*Foster Wheeler Ltd., Carmike Cinemas Inc., Terex Corp., Nexstar Broadcasting Group Inc., Dana Holding Corp., Atlas Pipeline Partners, L.P., Synchronoss Technologies Inc. and Express Inc. (2.6%, 2.2%, 2.0%, 1.8%, 1.9%, 1.6%, 0.8% and 0.6% of net investments as of 12-31-2013).

The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 2013. 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. Russell 2000 Value Index is an unmanaged index comprised of securities that represent the small-cap.

Russell 2000 Value Index is an unmanaged index comprised of securities that represent the small-cap sector of the stock market. It is not possible to invest directly in an index.

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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