QUARTERLY FUND COMMENTARY

POSTED 03.31.14
Ivy Mid Cap Growth Fund

Market Sector Update

  • Mid-cap growth stocks rose in the first quarter with a very strong February bookended by the weak months of January and March.
  • The strength in February, much like the strength at the end of 2013, was characterized by very risk-oriented investing in high- or even hyper-growth areas of the equity market and economy.
  • In the index, utilities was the strongest sector. Health care, consumer staples, telecommunications and materials were also outperformers. Financials was particularly weak, posting a decline in the quarter.

Portfolio Strategy*

  • While the Fund underperformed the benchmark for the quarter, it solidly outperformed in both January and March, the months in which the index lost value. The January and March outperformance wasn’t enough to balance the benchmark’s strong February performance, a period of riskon market activity that saw a return of interest in hyper-growth companies. The performance of the health care sector is the best example of this market activity. That sector rose 6.2% in the quarter, even after losing 6.5% in the month of March, with much of this return resting on biotechs.
  • The largest contribution to underperformance came from industrials, where there were several weak names. Underperformance in health care was also a significant detractor from returns versus the benchmark. There were a number of strong names in the group, including Varian Medical Systems, Inc. and Intuitive Surgical, Inc., but the lack of significant exposure to biotechs was an opportunity cost.
  • Materials outperformed in the benchmark and the Fund’s underexposure to that group detracted from performance.
  • We saw strong outperformance in both technology and financials, which made a strong positive contribution to performance. Most of the technology names, many of which have struggled in the past 12-18 months, had positive returns. The Fund’s financial services names generated positive returns. Energy was another area of outperformance.

Outlook

  • While we have been frustrated over the past year by what we consider very risk facing behavior within segments of the market – behavior we believe has driven valuations and expectations on many stocks to unsustainable highs – we have remained steadfast in the fundamental economic underpinnings supporting corporate earnings/cash flow, and the associated opportunity to discount these at higher stock prices where there is valuation support within the market.
  • Currently, the Fund is overweight health care, technology and consumer discretionary; neutral energy, financials and industrials; and underweight materials, consumer staples, telecommunications and utilities.
  • We continue to like technology and industrials for their exposure to constructive economic conditions and because both areas are taking advantage of innovation opportunities. We have increased exposure in consumer discretionary as we see valuation opportunities developing across a number of interesting Greenfield growth and distrusted growth names after a disappointing holiday shopping season. We have been slowly adding to biotech exposure and now own four names.
  • We are currently managing the Fund’s cash exposure at a low level and using equity options in a small way for hedging purposes as we deem necessary or using those options to add or reduce exposure to individual positions.

*Varian Medical Systems, Inc. and Intuitive Surgical, Inc., (2.2% and 1.6% of net investments at 03/31/2014, respectively).

The opinions expressed in this commentary are those of the Portfolio's manager and are current through March 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.

Risk Factors. As with any mutual 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. Investing in mid-cap growth 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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INVESTMENT TEAM

Kimberly A. Scott, CFA
Portfolio Manager

Fund Details