Ivy Value Fund

04.05.13

Market Sector Update

  • First quarter 2013 saw a strong upward move in equity markets driven by optimism over gradually improving economic fundamentals.
  • The U.S. economy continues to exhibit stable growth, albeit at low levels, with persistently encouraging trends in employment statistics and the housing industry. However, the quarter ended with the familiar concern over global fiscal imbalances again coming to the forefront with Cyprus, the latest European country requiring financial assistance. In addition, regulators elected to have depositors bear some of the losses, which sparked concern over the precedent set for future action and resulted in a flight to quality as evidenced by a significant drop in the U.S. Treasury yield.
  • The Russell 1000 Value Index advanced in the quarter, driven by particularly strong returns in technology and staples. Traditionally pro-cyclical sectors such as materials and industrials were relative underperformers, while less cyclically sensitive sectors such as health care and utilities embellished index performance with each sector enjoying positive performance.

Portfolio Strategy*

  • The Fund outperformed the Russell 1000 Value benchmark (before the effects of sales charges) in the first quarter.
  • Energy was the primary driver of relative outperformance, as a number of holdings exhibited particularly strong performance. In addition to these positions, holdings in HCA Holding, Inc., Xerox Corporation and Target Corporation were notable contributors.
  • Offsetting this strength was weak relative performance in financials and consumer discretionary as positions in Capital One and Time Warner Cable, Inc. performed poorly. Other notable detractors were Oracle Corporation and Dow Chemical Company.
  • We continue to focus on identifying companies that we believe are trading substantially below their intrinsic value. We see compelling value in energy and health care based on our proprietary intrinsic value work and have added to our weightings in each of these sectors during the quarter.
  • A notable deletion from the portfolio was AT&T Inc., which resulted in a higher cash balance at quarter end. We are looking to redeploy those proceeds in companies where we believe the cash flows of the business are underappreciated by the market with visible catalysts to recognize that disparity over the next 12 months.

Outlook

  • Looking ahead, we believe global growth will continue to be sluggish as uncertainties over fiscal spending and monetary policy weigh on both consumer and corporate confidence. We continue to be encouraged by modest inflation rates and subdued inflation expectations which provide an environment conducive for central banks to provide support to their local economies if needed.
  • In addition, we see encouraging signs from the U.S. housing market as well as growing domestic energy production as significant positives for our economy.
  • While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding high quality, growing companies whose stock is trading materially below what we consider fair value. This approach has served investors well over time, and our confidence in it has not waned.

*HCA Holdings, Inc., Xerox Corporation, Target Corporation, Capital One Financial Corporation, Time Warner Cable, Inc., Oracle Corporation and Dow Chemical Company (2.5%, 2.3%, 3.5%, 3.3%, 3.2%, 1.6% and 2.4% of net investments at 03/31/2013, respectively.) AT&T Inc. is no longer a holding.

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.

Russell 1000 Value is an unmanaged index comprised of securities that represent the large cap sector of the stock market. It is not possible to invest directly in an index.

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. 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. 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.