Waddell & Reed

Quarterly Fund Commentary

Ivy Small Cap Value Fund (prospectus)
December 31, 2014

Kenneth G. Gau

Market Sector Update

  • 2014 finished off strong with the Russell 2000 Value Index up for the quarter. This was the sixth consecutive year in which the index has generated a positive return in the 4Q, a feat unmatched in any other quarter.
  • Most of the quarter’s performance (and enough to drive a positive return for the year) came in the second half of December, after the Federal Reserve (Fed) made some reassuring comments in its meeting on December 17th at a traditionally seasonally strong part of the year.
  • While the benchmark index performed well as a whole, there was clearly a wide dispersion between what performed and what didn’t. Once again like in the third quarter, energy was by far the worst performing sector. Health care, utilities and consumer staples were the leadership sectors in the quarter.

Portfolio Strategy*

  • The Fund underperformed the benchmark in the quarter. While disappointing, we view it as somewhat of a claw back from the outsized relative performance from the third quarter. All said, we are pleased with Fund performance for the calendar year.
  • Sector allocation in the quarter was responsible for roughly two thirds of the Fund’s underperformance versus the benchmark as the combination of having some cash, being underweight utilities and real estate investment trusts (REITs) while being overweight oil and gas consumables provided a headwind.
  • Stock selection also served as a headwind in the quarter with the clearest underperformers being in consumer discretionary, health care and financials.
  • On the individual stock basis the greatest contributors in the quarter were Matson, Inc., Boulder Brands, Inc., Spansion Inc., Lands’ End, Inc. and Marten Transport, Ltd. The greatest detractors were Atlas Pipeline Partners, L.P., Carmike Cinemas, Inc., Armstrong World Industries, Inc., Abercrombie & Fitch Co., and Atlas Energy, LP.


  • After a very strong finish in 2014 we still believe that the bull market run that began in March 2009 remains in a sustained uptrend as we are just starting to more clearly see the fruits of an economic recovery, and historically the third year of a presidential cycle has provided nice returns.
  • What we believe could be different in 2015 is a much higher level of volatility as investors and the Fed grapple with the prospect of an impending rise in interest rates against a complicated backdrop caused by a stronger dollar, diverging global monetary policies and increased geopolitical risks.
  • With volatility comes opportunity for those who are opportunistic and disciplined. We will continue to work diligently and believe that 2015 could be another prosperous year.


*Top 10 holdings as of 12/31/2014: Smart Balance, Inc. 4.2%, Portfolio Recovery Associates, Inc. 4.0%, Scotts Miracle-Gro Co. 3.9%, Krispy Kreme Doughnuts, Inc. 3.6%, Matson, Inc. 3.2%, Manitowoc Co., Inc. 2.8%, Western Alliance Bancorporation 2.6%, Saia, Inc. 2.4%, Carmike Cinemas, Inc. 2.4% and First Horizon National Corp. 2.4%.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 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.

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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