Quarterly Fund Commentary
Ivy Micro Cap Growth (prospectus)
June 30, 2010
Manager(s):
Market Sector Update
Equity markets pulled back considerably during an action-packed quarter as investors digested the growing list of global economic risks and a downshift in economic momentum. On the one hand are considerable risks including the euro zone sovereign debt crisis; China's attempt to engineer its own economic soft landing; and the combination of anti-growth policies from Washington D.C., a mounting debt load and Congress's lack of focus on the deteriorating long-term health of the government. On the other hand, monetary policy remains supportive; the U.S. economic recovery appears to be sustainable in spite of hitting a soft patch; consumers are spending (albeit cautiously); businesses are investing and hiring; credit markets are fragile but healing; and corporate earnings results are great. Consensus outlooks nonetheless turned less positive. Investors rationalized that although the worst of the crisis has passed, a more sluggish recovery, or even a double-dip recession, lies ahead. By the end of the quarter many stock indices finished at or near 2010 lows.
Portfolio Strategy
Investments in the industrials, energy and information technology sectors added to fund returns while consumer stocks lagged the broader market for the period. Stock selection was additive in the industrials, energy and health care sectors. The energy sector's short-to-intermediate term outlook was negatively impacted by the disaster in the Gulf of Mexico. Regardless, we have maintained many of our energy-related investments and continue an overweight target in the sector, with particular emphasis on oil and gas drilling, service, exploration, production, infrastructure building and associated technologies. We continue to hold materials and processing positions in anticipation of what we see as a rewarding time for these stocks. Many health care companies have become important contributors to performance as they are experiencing high relative profitability, attractive valuations and improving profit margins. We continue to maintain an overweight target for the Fund versus comparable benchmarks in this sector.
Outlook
We expect companies in the Fund to continue seeing higher forecasted long-term earnings growth rates versus comparable benchmarks. We continue to encounter compelling investment candidates in foreign-based companies that exhibit the positive characteristics our portfolio managers look for in all investment candidates. Historically, during economically slow periods, investors recognize the attractiveness of true growth stocks. As the current consolidation phase continues, history tells us that investors have in place a positive setting for growth equity portfolios where growth is scarce and a premium is paid for companies expanding at a more rapid pace than the overall economy. The Fund remains actively and optimistically positioned.