Ivy Mid Cap Growth Fund

Ivy Mid Cap Growth Fund
09.30.17

Market Sector Update

  • Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Fund’s benchmark), gained 5.28% in the third quarter of 2017. The index has not posted a quarterly decline since third quarter 2015.
  • Outperformance within the index came from the technology, Industrials, energy and financials sectors – all relatively cyclical sectors. The telecommunications and utilities sectors also outperformed, but their representation within the index is very small.
  • The consumer discretionary, health care, consumer staples, real estate and materials sectors all underperformed. Outperformance within our Fund was somewhat more narrow, with the technology, consumer discretionary and energy sectors besting the index.

Portfolio Strategy

  • The Fund slightly underperformed its benchmark in the third quarter, but leads the Russell Midcap Growth Index on both a year to date and a trailing 12-month basis, before the effect of sales charges. The financials and industrials sectors were the leading relative detractors to the Fund.
  • The financials sector made the largest negative contribution to relative returns in the quarter. We significantly underperformed this outperforming group. Our exposure to banks was the biggest source of underperformance, a group that saw broad weakness as the interest rate spread narrowed. We were also underweight the strongly performing capital markets stocks.
  • The Fund’s industrials exposure also made a negative contribution to relative returns. We were underweight this outperforming sector. Most of our stocks in this group performed very competitively in the quarter, with the exception of Westinghouse Air Brake Technology, whose underperformance related to disappointing demand from its rail customers and a poor quarterly report dragged down the group within our portfolio. Westinghouse Air Brake Technologies Corp. makes technology-based equipment for the freight and transit rail industry, and turned in a strong performance in the second quarter.
  • Relative strength during the quarter came from health care, consumer discretionary, consumer staples and technology.
  • The health care stocks made the strongest positive contribution to relative performance in the quarter. The group underperformed the index, but outperformed the health care sector within the index. Strength in Acadia Pharmaceuticals Intuitive Surgical , Align Technology and Abiomed , a new holding within the Fund, led the outperformance versus the sector. Weakness in a few names, including Edwards Lifesciences, Pacira Pharmaceuticals, and Alkermes prevented the health care sector within the Fund from outperforming the index. Of these names, we have sold Alkermes given our concerns about the strategic value of some of their drugs and the nature of their markets.
  • The Fund’s consumer discretionary names made a positive contribution to relative performance, as did our consumer staples stocks. The Fund was overweight the consumer discretionary sector, and very slightly outperformed the index, while solidly outperforming the sector within the index. BorgWarner, Tractor Supply and Polaris Industries all posted strong returns. These names have been laggards in recent years, so their performance gains are encouraging. Weak names within the group included Tiffany & Co., Under Armour and Chipotle Mexican Grill.
  • Consumer staples outperformance versus the group within the index was led by Blue Buffalo Pet Products; the stock has risen as the company is broadening distribution of its natural and organic pet foods to the food, drug and mass market channels. Snyder’s-Lance saw a nice rebound in price in the third quarter after its management team outlined a comprehensive and credible plan to improve the returns on its business. Conversely, the stock of Sprouts Farmers Markets, a recent addition to the Fund, was weak in the quarter on fears of market share and profitability challenges associated with Amazon’s ownership of Whole Foods Market.
  • The Fund’s technology exposure also contributed positively to relative performance, and was the strongest performing sector within the portfolio in the quarter. The Fund slightly underperformed the sector within the benchmark, but was overweight this outperforming sector, which led to the positive performance contribution. Most of the names turned in strong performances, including GrubHub, Inc., ServiceNow, Inc. and Electronic Arts. Square, Inc., the fast-growing credit card payment processing company for small and medium business, which is a recent addition to the Fund, gained in price, after a strong increase in the previous quarter. We like the future prospects for revenue and earnings growth for Square. Pandora Media, Inc. turned in another disappointing performance in the third quarter. However, we think the picture for the company has begun to clear, as Liberty Media made a strategic investment in Pandora in the second quarter, and important changes in the management team have begun to unfold. We continue to like this asset and are confident that better management of the company and its strategy for the future should be value enhancing for our shareholders.

Outlook

  • The Fund’s outlook since last quarter is largely unchanged. We believe economic growth in the U.S. and around the world is solid. This is the first relatively coordinated global expansion we have seen in many years.
  • U.S. corporate profits appear strong and continue to improve. Consumers are employed and confidence looks strong. The upward move in interest rates is contained at this point, but could become a source of concern depending on the number of moves and the level of increase in interest rates, particularly given the historically high market valuation.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Sept. 30, 2017, 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 Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Top 10 holdings (%) as of 09/30/2017: Intuitive Surgical, Inc. 3.7, Zoetis, Inc. 3.4, Fastenal Co. 3.3, CoStar Group 2.9, Electronic Arts, Inc. 2.9, Polaris Industries, Inc. 2.7, CME Group 2.5, BorgWarner, Inc. 2.4, Tractor Supply Co. 2.4 and ServiceNow, Inc. 2.4.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more well-established companies. 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. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.