Market Sector Update

• Despite what has seemed like weekly commentary surrounding the possibility of widespread tariffs and trade disputes, the broader markets as defined by the S&P 500 Index, the Fund’s benchmark was able to grind higher and eke out almost a 3.5% return during the second quarter. This is impressive simply from the fact that the “noise” level within the markets continues to rise well above anything we experienced throughout all of 2017.
• It is unlikely the trade dust ups will die down anytime soon in our opinion as the “opening shots” recently have been fired with the U.S. implementing tariffs on $34 billion worth of Chinese goods exported to the U.S. with another $16 billion scheduled to go into effect at the end of July. China retaliated by implementing tariffs on $34 billion worth of U.S. goods, primarily targeting agricultural products and automotive.
• In addition, the trade rhetoric unfortunately is also ongoing with several key allies and partners of the U.S., including Canada, Germany and Mexico. The Trump administration is using a similar approach to try to create a more level playing field as it relates to several key industries, specifically the automotive industry, which is one of his targeted areas.
• As we look beyond this key issue, the U.S. economy is really on strong footing and has been for some time now. Couple this with the Tax Cuts and Jobs Act of 2017 that is putting more money into the hands of consumers, we are poised for an acceleration in real gross domestic product (GDP) after a lackluster first quarter performance.
• It’s almost unfathomable at this point in the economic cycle —almost nine years and counting — the U.S. economy would be creating jobs at nearly 200,000 per month. Perhaps even more surprising is the robust labor market is an “acceleration” from the roughly 175,000 per month clip for all of 2017.
• The U.S. Federal Reserve (Fed) has maintained its discipline of raising rates gradually and the data has warranted another rate hike during the second quarter. This brought the number of rate hikes to two for 2018 and the Fed is targeting two additional rate hikes before the year is done. It is unlikely new Fed Chairman Jerome Powell wants to be held responsible for raising rates too quickly, so we believe he will err on the side of caution over the intermediate time frame, and gradually raise rates.

Portfolio Strategy

• The Fund outperformed its benchmark for the quarter, based on Class I shares.
• Our top five contributors for the quarter were Apple (AAPL), Microsoft (MSFT), Teledoc (TDOC), Under Armour (UAA) and Tactile Systems (TCMD). Of that list, only MSFT was a repeat top performer from the prior quarter. Conversely, the Fund’s worst performers were Starbucks (SBUX), Applied Materials (AMAT), Acadia Pharmaceuticals (ACAD), Lockheed Martin (LMT) and Incyte (INCY).
• Our top three biggest sector weights were information technology, consumer discretionary and health care, with consumer discretionary moving just ahead of health care.Technology accounted for almost 27% of the portfolio and was a key driver of strong performance during the quarter. Many of our holdings in this sector are still reasonably valued and will participate in various long- term secular trends for the foreseeable future. We suspect these trends are well in place and these top holdings will continue to deliver consistent top and bottom line results. These top three sectors account for just over 60% of the Fund’s assets, a level similar to the first quarter.
• Our biggest underweight relative to our benchmark remains the financials, which has been the correct call so far year to date. Valuations are reasonable, and the regulatory backdrop has significantly improved, but the stocks continue to lag. We suspect some of this is tied to a flattening yield curve and a Fed that continues to raise rates, despite the 10-year Treasury that seems to have a lid on it around the 3% level.
• We remained fully invested for the most part throughout the quarter and finished the period with a cash position near 2%.

Outlook

• As we head into the back half of 2018, many investors and strategists may be asking themselves what the end game and goal of the Trump administration with these tariffs and trade rhetoric. If getting the “best possible deal” translates to the U.S. gaining more stable footing versus the rest of the world in terms of trade imbalances, then obviously that will be a very good thing for equities.
• The uncertainties lie in the time frame for implementation and the responses from our trading partners. On the surface, it does make sense to us to renegotiate relationships and partnerships that seem unbalanced, given the fact that China is a much different trading partner than they were just a decade or two ago. However, if the U.S. continues to impose tariffs on more goods and countries, then all bets are off, and we are likely to see a broad sell off in equities.
• The current strength in the equity markets as well as the recently passed tax cuts have given Trump more flexibility and cover to push a little harder than otherwise would be the case if we were in an economic slowdown.
• As the second quarter earnings season gets underway, we are expecting strong results that could mirror last quarter. The biggest difference is we suspect that a lot of management teams will be more cautious as it relates to the back half of the year and will rightly so blame the uncertainty surrounding the tariff talks. This will provide them the cover needed to temper investor expectations and estimate revisions.
• We could see some moderation in consumer confidence and spending if consumers grow weary of the headlines and uncertainties tied to the back and forth trade talks. However, this should be modest tightening, not an overall collapse in consumer spending.
• As always, we will look to take advantage of this increased volatility to our advantage and look to add to existing positions on pullbacks and remain disciplined on the prices we pay for our investments.

The opinions expressed are those of the Fund’s manager regarding Class I shares and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. It is not possible to invest directly in an index.

Top 10 holdings (%) as of 06/30/2018: Microsoft Corp. 5.5, Apple, Inc. 5.1, Walt Disney Co. 3.3, Broadcom Ltd. 2.5, JPMorgan Chase & Co. 2.3, Citigroup, Inc. 2.0, Mcdonald's Corp. 2.0, Bank of America Corp. 2.0, Biomarin Pharmaceutical 1.8, Gilead Sciences, Inc. 1.8.

The Waddell & Reed Accumulative Fund merged into the Ivy Accumulative Fund on Feb. 26, 2018.

Risk factors: 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. These and other risks are more fully described in the Fund’s prospectus. Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which may be obtained at www.waddell.com or from a financial advisor. Read it carefully before investing.