Market Sector Update
- International and U.S. equity markets were higher but volatile during the quarter. The month of July experienced gains stemming from optimism regarding a global recovery, August was down due to potential Federal Reserve (Fed) tapering and emerging market foreign exchange weakness, while September rebounded on global recovery and anticipated less Fed tapering this fall.
- Global markets climbed the wall of worry (of what can go wrong) with the European market having the best performance in local currency. The dollar weakened approximately 4% versus the majority of major international currencies, which aided foreign stock performance converted back into U.S. dollars.
- In our opinion, the European Central Bank’s position of backing euro countries and banks is key in stabilizing the markets and is the glue keeping the European Union markets relatively stable.
- As in the last quarter, a belief that Japan’s prime minister will continue to push for constructive change to the Japanese economy via structural reform of regulation and taxation helped that market. In addition, continued Japanese monetary easing in an effort to increase inflation and keep the yen weaker helped drive the Japanese market higher.
- The Fund outperformed the benchmark (before the effects of sales charges) for the quarter. Strong stock selection was the primary contributor to relative outperformance with holdings in the utilities, energy and telecommunication services sectors posting the largest relative gains. The largest drag to relative outperformance was the utilization of currency hedges to the U.S. dollar as the dollar fell versus major international currencies.
- As the quarter progressed, we became more confident of European economic stabilization, real change materializing in Japan and continued steady, but slow growth in the U.S. As a result, we increased our weightings to cyclical sectors, such as industrials and consumer discretionary, at the expense of consumer staples and financials.
- The Fund’s largest sector overweights include consumer discretionary and financials where we continue to find companies that we believe provide good dividend yield and growth prospects. We also are overweight telecommunications where we expect high dividend yields and stock appreciation. Consumer staples continue to be our largest underweight due to high relative valuation, low dividend yield and slowing earnings momentum due to a stronger U.S. dollar relative to emerging market currencies.
- We think global growth will improve over the next 12 months to a range of 2.5 to 3.0% with the U.S., Europe and emerging markets rebounding relative to 2013. We expect Europe to grow faster in 2014 as austerity measures become less of a drag on gross domestic product (GDP). We believe the U.K. is positioned to grow faster than Europe as housing incentives and a better banking market offset its government’s austerity measures designed to reign in its structural deficit.
- We estimate approximately 2.5% growth in the U.S. despite spending cuts, making it one of the better performers in developed markets. However, in the near term, we are concerned that political deadlock could negatively influence the dollar and GDP growth over the next few months.
- We remain very constructive on changes in Japan, but are hedging the yen back to the dollar in an effort to alleviate risk. Japan seeks a weak yen in an effort to boost its export sector.
- We remain focused on solid dividend yields and continue to look for stocks that we consider high quality, which means they offer sustainable growth and are positioned well in their industries throughout the world.
The opinions expressed in this commentary are those of the Fund's managers 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. Dividend-paying investments may not experience the same price appreciation as non-dividend-paying instruments. Dividend-paying companies may choose to not pay dividends, or dividends may be less than was anticipated.
Risk Factors. As with any mutual fund, the value of the Fund’s share 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. International investing involves additional risks, including currency fluctuations, political or economical conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected. 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.