Ivy Small Cap Value Fund

04.05.13

Market Sector Update

  • The year got off to a strong start for U.S. equity markets, in general, and small caps, in particular.
  • As the quarter progressed, the consumer has ultimately shown some weakness from higher taxes and the impact of the sequester, though other bright points, such as housing, were able to offset this impact and allowed the market to hold most of its early gains.
  • The strength was quite broad as well, with seven out of 10 sectors experiencing double-digit increases and only telecommunications being down for the period. Even more traditionally defensive sectors, such as consumer staples and utilities, barely lagged the benchmark, while most of the more cyclical sectors performed well.
  • Materials was perhaps the anomaly as this normally cyclical sector was up only about half as much as the benchmark on issues with respect to weak overseas demand.

Portfolio Strategy

  • Driven by favorable stock selection, the Fund outperformed its benchmark, before the effect of sales charges, during the period.
  • The Fund benefitted from being overweight consumer discretionary and underweight information technology.
  • An overweight position in materials was a drag on performance as end markets in this sector demonstrated weakness during the fourth quarter of 2012 reporting season and throughout the first quarter of 2013.
  • The Fund also suffered from its underweight position in financials as the strength in real estate investment trusts (REITs), in particular, persisted during the quarter.
  • Stock selection was generally strong during the period, adding value in each sector except consumer discretionary and energy. Stock selection was especially strong in health care, materials and informational technology during the period and was also quite favorable in industrials and financials.

Outlook

  • As we move into the fifth year of recovery post the great recession, we believe the U.S. economy, corporate earnings and the stock market show increasing resiliency to the fiscal and economic crosscurrents that have buffeted and retarded progress over the past few years.
  • Key parts of the U.S. economy appear to be on a sustainable path to recovery. Over the past year, the housing market has clearly turned the corner and shifted from being a net drag to now a net positive in terms of economic activity.
  • Recent non-residential construction is showing signs of life, which we feel serves as evidence of a progressing recovery in the domestic energy and manufacturing sectors.
  • The Fund’s focus remains on taking advantage of misunderstandings and dislocations when we see them, whether it be on a company-specific, sector-specific or market-specific basis to create value for shareholders.

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 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. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Investing in small-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. 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.

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.