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    Quarterly Fund Commentary

    Delaware Ivy Value Fund (prospectus)
    December 31, 2016

    Matthew T. Norris, CFA

    Market Sector Update

    • Equity markets had a strong return for the quarter, as economic conditions in the U.S. appeared to be accelerating, and the conclusion of the presidential election removed a key uncertainty. The Russell 1000 Value Index return managed to push the year-to-date performance to 17.34%.
    • The large-cap value segment led the broader index for the quarter. Growth styles have been leading for the past few years, but recent events caused a shift in favor of value investing. Rising interest rates, changes in gross domestic product growth rates, and a new political administration have created volatility, which provides opportunity for value investors.
    • *Top 10 holdings (%) as of 12/31/2016: JPMorgan Chase & Co. 5.5, Citigroup, Inc. 4.3, Synchrony Financial 3.9, American International Group Inc. 3.2, Capital One Financial Corp. 3.1, Dow Chemical Co. 3.0, Energy Transfer Partners 3.0, Micron Technology, Inc. 3.0, MetLife, Inc. 2.9 and Hess Corp. 2.9.

    Portfolio Strategy

    • The Fund outperformed the Russell 1000 Value Index (its benchmark) for the quarter ended Dec. 31, 2016, before the effects of sales charges. Fund performance was largely due to individual stock selection. Our holdings in the technology sector added the most value, followed by insurance and banking. Technology was led by Micron and Western Digital. While all financials enjoyed a strong fourth quarter, we had some notable outperformers in Synchrony, MetLife and Reinsurance Group of America. On the negative side, our long-term holding in CVS Health was down, dragging on performance.
    • Value investing turned a corner early in the quarter, beginning to outperform growth. Also, recent volatility has created some new ideas for us to investigate. Careful readers will note this is a notable and welcome change from the past few years, when we struggled to find compelling ideas. Investments are selected individually, but a few themes show through.
    • The Fund is overweight financials and technology, which share certain characteristics we like. In these areas we have been able to find good companies with repeatable business models that are generating high rates of free cash flow, and low stock prices relative to our estimation of each company’s true intrinsic value. The Fund has very little representation in the areas of telecommunications, industrials and utilities. These areas simply do not offer us compelling value ideas, and the underweighting paid off this quarter as these areas were laggards.


    • After seven years and some stops and starts, the U.S. economy has recovered from the recession in 2008 and seems to have settled out in a low single-digit growth area. Recent data has been even more encouraging, with a recovery in the energy sector, improving labor market and manufacturing data.
    • The next challenge will be for the Federal Reserve to tighten money policy back up. It has indicated a path to three rate hikes in 2017. Slowing the economy and inflation via rate hikes is a difficult job. We liken it to stepping on a rolling egg to stop it without breaking it. History shows a high probability of failure – raising rates too much and helping create a recession. This is something we will watch carefully.
    • While the economic forces listed above are clearly important factors, out first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic value. Often times this is due to short-term negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time, in an effort to benefit shareholders over the long term.

    The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 2016. 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 not a guarantee of future results.

    The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe.

    Risk factors. The value of the Fund’s shares will change, and you could lose money on your investment. 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. 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.

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