Ivy Science and Technology Fund

04.05.13

Market Sector Update

  • The first quarter of 2013 proved to be historic, with the major U.S. equity market indices breaking through their all-time high closing marks. Consumer confidence, corporate profits, housing activity, auto sales, and bank loan activity all improved. The positive performance continued despite ongoing U.S. budget deficit discussions and renewed concerns late in the quarter regarding European sovereign debt.
  • In general, U.S. stocks outperformed their international counterparts, despite currency adjustments to the stronger dollar. Most of Europe remained in recession primarily due to a number of negative events – the Cypriot financial crisis, inconclusive election results in Italy and countries reporting slowing economic growth.
  • Asian fundamentals demonstrated mixed improvement in the quarter – South Korean markets were hurt by currency moves that negatively affected exporters as well as heightened tensions with neighboring North Korea, but Japanese data is on the mend from a very low base and markets reacted favorably to the weakened yen.
  • U.S. technology stocks performed well in the quarter but lagged relative to most other sectors. Some of the technologyrelated industries that contributed the most to performance in the quarter were information technology services, software and semiconductors.

Portfolio Strategy

  • The Fund significantly outperformed its benchmark and peer-group average during the quarter. Strong stock selection accompanied by broad exposure across sectors relative to the Fund’s benchmark contributed to relative performance.
  • An overweight position in health care meaningfully contributed to performance, as the sector was one of the best performing in the quarter. We maintained slightly less than a 20% exposure to health care and believe this is one of the sectors with the greatest opportunity for innovation and growth going forward.
  • While the Fund was underweight the information technology sector relative to the benchmark, strong security selection in that sector was the largest contributor to the quarter’s performance.
  • The Fund maintains its broad allocation across sectors, with less than two-thirds of equities in technology names, roughly 20% in health care, 7.5% each in industrials and telecommunications, and smaller amounts in consumer discretionary, materials, energy and consumer staples.
  • At quarter-end, the Fund had approximately 80% of assets in U.S. equities, 12% of assets in international stocks, and the residual in cash. The Fund's cash exposure was the largest drag on returns.

Outlook

  • There is still economic uncertainty with a fiscal drag in the U.S. from higher taxes and lower government spending. Additionally, we think questions surrounding the strength of China’s economy and the lack of stability in the eurozone may affect investor confidence. Despite these concerns, we maintain a positive outlook surrounding economic growth.
  • In mixed economic environments, we believe there are many potential investment opportunities – especially in scarce resources, mobility and biotechnology – around the world that we will be able to take advantage of employing are geographic, sector and market cap flexibility.
  • We continue to focus on bottom-up fundamental security analysis when seeking investment opportunities, but remain cognizant of the macroeconomic environment to aid in security selection.

The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2013. 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 companies involved in one specif ed sector may be more risky and volatile i than an investment with greater diversification. These and other risks are more fully described in the Fund's prospectus.

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.