QUARTERLY FUND COMMENTARY

POSTED 12.31.14
Ivy Mid Cap Growth Fund

Market Sector Update

  • The fourth quarter of 2014 closed out another solid year for U.S. equity markets.
  • The most significant occurrence was the rapid decline in energy-based commodities and equity securities that have fundamentals linked to energy prices.
  • On the contrar y, sectors that benefited from lower energy prices produced solid performance relative to the benchmark index. Consumer discretionary increased as the stock market anticipated better results and consumers benefited from a shift in spending from the gas pump to other discretionary items.
  • Consumer staples increased for reasons similar to consumer discretionary, but also from a likely benefit on lower packaging and shipping costs resulting from the lower commodity prices.
  • A quality bias also returned to the benchmark index during the quarter. The best performance came from both the highest quintile of return on assets and return on equity. We believe this was driven by a multitude of factors (emerging market pressures, a less accommodative Federal Reserve), but the most significant factor was the increase in high-yield spreads brought on by the lower energy prices and its impact on energy companies using the
    high-yield market to finance growth.

Portfolio Strategy

  • The Fund outperformed the benchmark for the period ended Dec. 31, 2014 before the effects of sales charges. Solid stock selection drove the outperformance offsetting a sector allocation headwind.
  • During the quarter, the Fund held large overweight positions across consumer discretionary and materials; slight overweight positions in energy and industrials; near benchmark allocation in consumer staples, slight underweight positions in telecommunications, technology and utilities; and significant underweight positions in health care and financials versus the benchmark. The Fund also carried an average of 3% in cash as we were met with strong inflows during the quarter.
  • Positive relative performance can be attributed to industrials (our best performing group) and consumer discretionary. HNI Corporation and KAR Auction Services drove the lion’s share of the performance.
  • Our overweight position and strong stock selection helped to produce strong relative performance in consumer discretionary. Strong performance was more broad-based in that sector with solid contributions from key holdings.
  • We experienced underperformance in some sectors, most acutely seen in energy and financials.

Outlook

  • The Fund outperformed the benchmark for the period ended Dec. 31, 2014 before the effects of sales charges. Solid stock selection drove the outperformance offsetting a sector allocation headwind.
  • During the quarter, the Fund held large overweight positions across consumer discretionary and materials; slight overweight positions in energy and industrials; near benchmark allocation in consumer staples, slight underweight positions in telecommunications, technology and utilities; and significant underweight positions in health care and financials versus the benchmark. The Fund also carried an average of 3% in cash as we were met with strong inflows during the quarter.
  • Positive relative performance can be attributed to industrials (our best performing group) and consumer discretionary. HNI Corporation and KAR Auction Services drove the lion’s share of the performance.
  • Our overweight position and strong stock selection helped to produce strong relative performance in consumer discretionary. Strong performance was more broad-based in that sector with solid contributions from key holdings.
  • We experienced underperformance in some sectors, most acutely seen in energy and financials.

 


The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2014. 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.

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 stocks may carry more risk than investing in stocks of larger, more well-established companies. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund typically holds a limited number of stocks (generally 35 to 50). As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a large number of securities. 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 f nancial 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