Ivy Small Cap Growth Fund

Ivy Small Cap Growth Fund
12.31.17

Market Sector Update

  • Fourth quarter 2017 capped a year of improving economic growth as the most recent real gross domestic product data was more than 3%. Earnings growth was rewarded by investors and valuation multiples were supported by the continued low level of interest rates. Auto sales continued to surprise on the upside, housing data strengthened throughout the year, and employment growth remained strong.
  • The fiscal achievement of the year came in December as the administration and Congress signed legislation to significantly reduce corporate and individual tax rates. The market responded favorably to the news and marched to new highs as the year ended. Small caps were rewarded in this environment, with the Russell 2000 Growth Index (Fund’s benchmark) gaining 4.6% during the fourth quarter, adding to a strong year finishing up 22.2%.

Portfolio Strategy

  • The Fund outperformed the benchmark for the quarter and delivered strong performance for the year, before the effects of sales charges. Strong stock selection within consumer discretionary (specialty retail), technology (software) and industrials (air freights and logistics) overcame adverse stock selection in health care (equipment and services). Taken together, the biotechnology and pharmaceuticals industries were detractors for the year, but neutral for the quarter.
  • Sector weightings remained relatively constant during the quarter. We made additions within consumer discretionary as attractive candidates emerged in specialty retail. We replaced names within technology, industrials and health care with stocks deemed to have greater investment return potential and/or lower market capitalizations.
  • We believe the current economic cycle offers advantages to companies with incremental operating leverage as well as strong secular growth. This belief has contributed to our overweight positions in technology, particularly within software, consumer discretionary, restaurants and specialty retail, and industrials across industries. Consistent with historical positioning, we remain underweight health care. After a spectacular run in biotechnology in 2017, we expect more modest performance in 2018 and maintain a very limited exposure to biotechnology and pharmaceuticals.

Outlook

  • The Fund’s strategy will continue to be driven by a disciplined focus on the growth companies that meet our criteria: they serve large market opportunities, have a defensible leadership position, strong management, and a financial model that will deliver high returns on invested capital. While the lion’s share of these companies are in the technology, health care and consumer growth areas of the market, they also exist in some of the cyclical areas of the economy such as industrials, energy and financials.
  • For the coming year, the current macroeconomic factors should continue to be a tailwind for the markets. This momentum should boost the cyclical growth areas such as industrials, financials and energy. The Fund has good exposure in all of these sectors with a focus on the high-quality growth companies.
  • In the traditional growth areas, technology and the consumer sectors are more of a focus, whereas health care is an underweight position. After a strong run by the biotechnology stocks in 2017, we expect more modest performance in 2018.
  • The Fund’s health care focus is on products and services that benefit from moves away from hospitals and toward new technologies that aid more minimally invasive procedures that can be utilized in office or home settings. In technology, software will continue to be an overweight for the Fund along with the highest quality semiconductor and technology services names. The consumer sectors surprised many over the holidays with good results. They have easier comparisons in 2018, so we will focus on new ideas in this area.

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 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. 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 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.