Ivy Small Cap Core Fund

09.30.17

Market Sector Update

  • 2017 has progressed nicely as economic data and earnings growth has shown an acceleration that appears will at least carry through year end and hopefully, when combined with the prospects of greater de-regulation and possible 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.
  • While the political landscape has continued to be rockier than we would have liked, it is still pretty early into the new administration. As always, it is important not to let personal politics leach into the investment process; it is imperative to stick to the facts and the numbers, which we remain committed to.
  • While it is true that the failure to repeal and replace the Affordable Care Act was disappointing, and calls into question what progress can be made during the Trump administration, there still seems to be enough movement to keeps hope alive for now. This is something we continue to monitor as it will heavily influence whether recent economic and market strength will be able to be sustained into 2018.

Portfolio Strategy

  • The Fund underperformed the Russell 2000 Index (its benchmark) in the third quarter and now has fallen slightly below its benchmark year to date.
  • Stock selection was negative in the quarter, and drove the majority of the relative underperformance, which was led by materials and health care. Sector allocation had a negligible impact, but being overweight the more defensive consumer staples group was the biggest detractor.
  • Technology and health care continue to lead the market year to date (with health care being the biggest leader by a wide margin); however, the more cyclical sectors, industrials, materials and energy, were more prominent contributors to returns in the third quarter.
  • In terms of individual stock performance during the quarter, we had three holdings that contributed greater than 50 basis points and nine that contributed greater than 25 basis points.
  • From a negative performance aspect, we had three holdings that detracted greater than 50 basis points and eight that detracted by greater than 25 basis points. In total, these contributors and detractors netted to a slightly positive contribution of roughly 25 basis points. At the top of the portfolio, the 10 greatest average weights in the quarter contributed roughly 250 basis points to performance in the quarter. Considering the success at the top of the portfolio, and a net positive contribution from the biggest movers, this relative underperformance in the quarter is clearly frustrating. With that said we still remain confident in the Fund’s positioning and hope to more than recover the shortfall in the fourth quarter.

Outlook

  • Heading into fourth quarter, we continue to be hopeful that the Trump administration will deliver on its promises, which should spur an additional leg of economic growth, but fully recognize that political promises often fall short.
  • Considering the strong market momentum exhibited exiting the third quarter, we would not be surprised to see the market drift higher into the traditionally seasonally favorable fourth quarter.
  • Regardless of how the market finishes in 2017, 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 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 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.

IVY INVESTMENTS® refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS℠ , and the financial services offered by their affiliates.

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 can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.