Ivy Small Cap Core Fund

Ivy Small Cap Core Fund
12.31.17

Market Sector Update

  • 2017 progressed nicely as economic data and earnings growth has shown an acceleration that appears will at least carry through first quarter 2018 and hopefully, when combined with the prospects of greater de-regulation and tax reform, will help markets continue to grind higher.
  • Surveys such as consumer confidence and the Purchasing Managers’ Index continued to flash positively, and in some cases at record highs; which will hopefully translate into further improved economic activity.
  • The passage of tax reform should be a positive for consumers and corporations heading into 2018 as increased cash flow should lead to more discretionary spending, corporate buybacks and merger and acquisition activity.

Portfolio Strategy

  • The Fund outperformed the Russell 2000 Index (its benchmark) in the fourth quarter and finished the year slightly ahead of its benchmark, before the effects of sales charges.
  • Stock selection and sector allocation were positive in the quarter. Stock selection was strongest in consumer discretionary and financials, while energy and health care were the weakest.
  • Health care, industrials, technology and materials were the strongest sectors for 2017 while consumer discretionary and consumer staples led in fourth quarter.
  • In terms of individual stock performance during the quarter, we had two holdings that contributed greater than 50 basis points and six that contributed greater than 25 basis points.
  • From a negative performance aspect, we had three holdings that detracted greater than 50 basis points and five that detracted greater than 25 basis points. In total, these contributors and detractors netted to a slightly negative contribution of roughly 25 basis points. At the top of the portfolio, the 10 greatest average weights in the quarter detracted 220 basis points from performance.

Outlook

  • 2017 was characterized by low volatility and consistent returns throughout the year. Economic data largely surprised to the upside, inflation was held in check and political reform was largely beneficial (tax reform). This will surely be a difficult act to follow.
  • Heading into 2018, we continue to be hopeful that deregulation, tax reform and strong gross domestic product growth will spur another leg to the rally; however, we are cognizant of a more hawkish Federal Reserve, difficult comparison and high historical valuations.
  • Regardless of how the market begins 2018, we remain committed to the Fund’s process of identifying quality underappreciated companies, and believe we have good balance in the portfolio’s construction that should stand to perform well versus our peers and benchmark independent of the environment over time.

The opinions expressed are those of the Fund’s manager 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 2000 Index is an index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. It is not possible to invest directly in an index.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in small-cap growth and value stocks may carry more risk than investing in stocks of larger, more well-established companies. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. Value stocks are stocks of companies that may have experienced adverse developments or may be subject to special risks that have caused the stocks to be out of favor and, in the opinion of the Fund’s manager, undervalued. Such security may never reach what the manager believes to be its full value, or such security’s value may decrease. The Fund typically holds a limited number of stocks (generally 40 to 60). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger 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.