Ivy Mid Cap Growth Fund

Ivy Mid Cap Growth Fund

Market Sector Update

  • Mid-cap growth stocks gained 6.81% in the fourth quarter of 2017, and the Russell Midcap Growth Index, the Fund’s benchmark, has still not posted a quarterly decline since the third quarter of 2015. Every sector in the index delivered a positive return.
  • Outperformance within came from the utilities, industrials, financials, consumer staples, consumer discretionary and telecommunication sectors – very broad participation across sectors. The real estate, technology, materials, energy and health care sectors all underperformed, but still managed to deliver solid positive returns for the quarter.

Portfolio Strategy

  • The Fund outperformed its benchmark for the period ended Dec. 31, 2017, before the effects of sales charges. The Fund’s consumer staples, consumer discretionary and technology sectors delivered particularly strong absolute and relative returns for the quarter.
  • Our consumer discretionary names made the strongest positive contribution to performance in the quarter. Many companies within this sector began to find their footing again late in 2017 after a number of difficult years when the internet and e-commerce began in earnest to impact their business models. While many stocks in our consumer discretionary exposure continued to struggle into the end of the year, we saw strength in many names, which lead to better performance than the sector in the index. Strong names included Polaris Industries, a maker of off-road vehicles and snowmobiles that had struggled for several years related to unfortunate weather conditions, poor consumer demand and self-inflicted operational problems; Lululemon Athletica, a yoga and active wear retailer; and Dunkin’ Brands Group, famous for donuts and coffee. Many forces have come together to improve the picture for the stocks of consumer discretionary companies, including low valuations, a strong U.S. economy, and progress for some in strengthening business models to compete in a fast-changing environment. We have divested a number of companies where we think competitiveness is challenged, and added or continue to hold a group of names that we see as differentiated and able to function competitively to serve consumers. The Fund is now overweight the consumer discretionary sector, after being below index weight for much of 2017.
  • Our consumer staples stocks made a strong positive contribution to performance, with our names outpacing the index. A buyout offer for Snyder’s-Lance by Campbell Soup Company kicked off the performance parade in this group, with Lance rising in value in the quarter.
  • Our technology names continued a string of strong positive relative performance in the fourth quarter, having outperformed in each quarter of 2017. We were underweight this underperforming sector last quarter, but stock picking drove performance. GrubHub, Inc. (the online restaurant food ordering and delivery service) and MercadoLibre, Inc. (the online commerce platform for Latin America) turned in strong performances and made solid positive contributions to the Fund’s relative return. Pandora Media, the online radio and music streaming service, was a notable detractor from performance of both the technology sector and the Fund overall for the quarter. The company underwent a number of important transitions in 2017, including a new CEO and CFO, a capital investment from Sirius XM Holdings, and steps to improve and accelerate innovation and the monetization of their service. 2018 is a pivotal year for the Pandora and its exposure in our Fund. We will be following and assessing its progress closely.
  • Our financials sector made the largest negative contribution to the relative return in the quarter. The Fund significantly underperformed this outperforming group. Our exposure to two names, First Republic Bank, a high-quality private banking and wealth management firm, and Oaktree Capital Group, LLC, an alternative investment asset manager primarily focused on debt, was the biggest source of underperformance. The Fund was also underweight the strongly performing capital markets stocks, an opportunity cost for the Fund in the quarter.
  • Our industrials exposure also contributed negatively to relative performance. Our names outperformed the index, but underperformed the industrials group within the index. We were overweight this outperforming group, which was a small positive offset. Names of note included Fastenal Company, an industrial goods distributor, which has seen its performance improve dramatically with stronger economic growth and industrial demand; and TransUnion, a credit information and risk management solutions company.


  • The market’s strength in 2017 was impressive, and the returns consistent, with gains in every month of the year. Strong corporate earnings borne of the ongoing recovery post the energy sector-led downturn in 2014 and 2015, buoyant business and consumer confidence, and economic growth worldwide underpinned the market’s move. Tax reform was the turbo booster. We see no near term change in the potential for these same factors to drive positive returns in the market as we begin 2018. Economies are still growing synchronously around the world, businesses are optimistic, which usually feeds on itself in terms of generating more activity, and consumers are employed and enjoying wage gains. A corporate profit picture that is already firm will be enhanced by the tax legislation passed by the U.S. Congress at the end of 2017. We expect the market to continue to move higher, but we also understand that we must consider valuation levels as we invest the portfolio, and also monitor interest rates, yield spreads and credit conditions for clues about excesses or concerns that can build in the economy and potentially impact the market as the business cycle progresses.
  • The Fund continues to express a more economically constructive and optimistic view, with a more assertive progrowth, less defensive stance – although slightly less so than earlier in 2017. We are overweight the consumer discretionary, financials and industrials sectors. We still have a healthy exposure to technology, but have moved to an underweight position, having seen valuations increase dramatically in this sector, and enjoyed significant appreciation in our names. We are also overweight the consumer staples and health care sectors, more from a stock selection standpoint, rather than a defensive posture, as there are names in these groups where we expect solid growth and stock appreciation over time. We are very slightly underweight energy, underweight materials, and, as mentioned, underweight technology, although this weight could increase once again given the many interesting investment opportunities across that sector. We have no exposure to the telecommunications, real estate and utilities sector, which represent a combined 3.3% of the index.
  • While our portfolio represents an economically constructive point of view, our approach is essentially balanced based on stock selection as opposed to overt sector allocations. From a broader macroeconomic factor perspective, we expect a stable-to-rising rate environment to be generally positive for our approach, related to our focus on very profitable business models and sound capital structures. The time of quantitative easing was a challenge to our returns, as lower and lower interest rates played to the benefit of the stocks of companies with lesser quality business models and/or capital structures. We expect the change in trend to favor our investment style.

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 Dec. 31, 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 12/31/2017: Fastenal Co. 3.7, Intuitive Surgical, Inc. 3.1, CoStar Group 2.9, Polaris Industries, Inc. 2.9, Zoetis, Inc. 2.9, Tractor Supply Co. 2.8, GrubHub, Inc. 2.5, MercadoLibre, Inc. 2.5, CME Group 2.5 and Tiffany & Co. 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.