Quarterly Fund Commentary
Ivy Dividend Opportunitites Fund (prospectus)
June 30, 2010
Manager(s):
David P. Ginther, CPA
Market Sector Update
The second quarter of 2010 was volatile for U.S. equities as a confluence of events weighed on equities. Among the largest factors impacting market performance were intensifying concerns that Europe would lead the world into a second global recession in three years or at least spur a double-dip recession, and anxiety about slowing economic growth in China. The U.S. economy also remains a top concern for investors as recovery slowed perceptibly during the first half of the year, especially in the second quarter. The U.S. unemployment rate currently hovers near 10 percent, and the beleaguered housing sector continues to struggle, particularly after government stimulus ended in the second quarter, which additionally restrained performance. Another major event impacting the market was the April 21 oil rig explosion and subsequent massive oil spill in the Gulf of Mexico, which continues to generate ominous headlines on a daily basis. These and other factors collectively have weighed on investor confidence. As one would expect in such an environment, and with little on the horizon generating hope, investors have experienced a crisis in confidence, remaining largely on the sidelines and waiting for direction.
Portfolio Strategy
Our strategies during the second quarter were most impacted by the Gulf oil spill, given the Fund's significant exposure to the energy sector. The market reacted almost immediately-in our view, actually overreacted-to the explosion. This response was not surprising, especially given the gravity of the headlines, the loss of human life and the black eye the event has given the industry as a whole. BP, of course, will take the hardest hit in terms of stock value, cleanup and reparation. The Fund was not exposed to BP, but did hold stock of other firms that were meaningfully involved. We sold down the Fund's position in one firm significantly but still maintain a small exposure. Other Energy Fund holdings fell on the news but have subsequently rebounded. In our view, the spill did not affect the fundamentals of the firms we're still holding--just the sentiment surrounding them. Given our confidence in their long-term viability, we took advantage of their price declines to increase the Fund's exposure to both.
Other factors that impacted Fund performance included its positioning for growth, which in retrospect was a bit premature. The economy is still growing, but at a more tepid pace, and we have reigned in our expectations somewhat.
Outlook
Despite the challenging issues that persist, we remain optimistic. We don't see signs of impending recession, such as dwindling demand or rising inventories. Commodities prices are down a bit, but it's been a measured decline rather than a plunge. Banks are recapitalizing and corporate earnings are steadily improving. That's positive news, but at this point, many American businesses are sitting on a lot of cash. Their capital expenditures aren't where we'd like them to be; corporations are suffering the same crisis of confidence as individual investors. While that is understandable, we do not think it will continue indefinitely. In addition, interest rates remain accommodative and are likely to remain low for some time, and we don't see inflation on the horizon, at least for the time being. Our greatest concerns at this point are U.S. unemployment, which has failed to show signs of any significant improvement, and slowing expectations for growth outside the United States. Although substantial problems remain and dwindling confidence is driving volatility, we see the glass as half full, rather than half empty. We are hopeful about finding good opportunities at attractive prices in the months ahead, especially once the Gulf oil spill is under control.