Market Sector Update
- The Russell Mid Cap Growth Index (Fund’s
benchmark) posted a slight positive return
in 4Q2016, capping a year of modest
positive performance.
- Outperformance within the index came
from the financials, industrials,
technology, materials and consumer
discretionary sectors. Financials was the
strongest performing group by far, as
expectations for an improved regulatory
and earnings outlook following the U.S.
Presidential election drove greater
investment in the group.
- Underperformance in the index came
primarily from health care, as concerns
about potential significant changes to the
Affordable Care Act (ACA) from the Trump
administration created considerable
uncertainty for many health care stocks.
- Real estate, utilities, energy,
telecommunications and consumer
staples sectors all also underperformed
the index in the fourth quarter. The
perceived defensiveness of many of
these sectors was less compelling to
investors who began to think more
positively about prospects for economic
growth post election.
Portfolio Strategy
- The Fund slightly underperformed its
benchmark in 4Q2016 with technology
and health care among the weakest
sectors. Technology exposure made the
greatest negative contribution to the
Fund’s return in 4Q2016. We were
overweight this outperforming sector, but
lack of ownership of NVIDIA Corp., which
performed well for the index, was also a
deterrent, accounting for much of the
sector underperformance. Weak
performers within the Fund were all
internet and software names that
struggled in 4Q as part of a broad sell-off
of software stocks within technology.
- Health care was another weak sector for
the Fund in 4Q. Strength in Alkermes,
Zoetis and Acadia Pharmaceuticals was
offset by weakness in many of our names,
some of which was related to concerns
over potential changes in the ACA.
- The negative contribution to
performance from our industrials
exposure was related to being slightly
underweight this outperforming group
and from weakness in a few names,
including Fortune Brands Home &
Security.
- A source of strength came from financials
where the performance was even
stronger than it was in the index, given
our greater exposure to banks, which
performed very well after the U.S.
election.
- Our consumer discretionary and
consumer staples exposure made
positive contributions to the Fund’s
returns in 4Q. Many of our consumer
discretionary names began to recover
after being weak in recent quarters,
including Tractor Supply and BorgWarner.
- Other sectors that contributed positively
to returns were materials and energy,
where most of our names outperformed
the index.
Outlook
- We expect the market to deliver positive
returns in 2017 based on accelerating
economic growth around the globe, vastly
improved corporate profits in the U.S. as
compared to the last two years, and the
potential benefits of pro-growth, procyclical
policies from a Trump
administration.
- U.S. economic activity continues at a low
but stable pace, with the potential for
stronger growth as the energy industry
gets back to work, housing demand
continues to improve, and consumption in
general remains firmly tied to ongoing
strength in jobs and wage gains.
- We are slightly underweight industrials,
but intend to continue to allocate
additional weight to this sector, as we see
an opportunity for many companies to
benefit from a recovery in industrials
demand as the energy patch recovers, in
addition to benefiting from proposed
fiscal spending initiatives of the Trump
administration.
- We are underweight consumer
discretionary, consumer staples,
materials, real estate, telecommunications
and utilities. Consumer discretionary
should be a key beneficiary of firmer
economic growth and consumption, but
secular structural issues for many of the
companies, particularly in retail and
related areas, limit our enthusiasm for
much of the group at this time.
*Top 10 holdings (%) as of 12/31/2016: Fastenal Co. 3.4, Zoetis,
Inc. 3.1, Intuitive Surgical, Inc. 2.8, CME Group 2.6, Microchip
Technology, Inc. 2.5, CoStar Group 2.5, Electronic Arts, Inc.
2.4, Northern Trust Corp. 2.2, Trimble Navigation Ltd. 2.2%
and Tiffany & Co. 2.2%.
The opinions expressed in this commentary are those of the Fund’s managesr and are current through Dec. 31, 2016. The managers' views are subject to change at any time based on market and other conditions,
and no forecasts can be guaranteed. Past performance is not a guarantee of future results.
The Russell Midcap Growth Index measures the performance of the mid-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 mid-cap growth 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. 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 INVESTMENTSSM refers to the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds, and those financial services offered by its 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.