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    Quarterly Fund Commentary


    Delaware Ivy Smid Cap Core Fund (prospectus)
    December 31, 2016


    Manager(s):
    Francis X. Morris
    Christopher S. Adams, CFA
    Michael S. Morris, CFA
    Donald G. Padilla, CFA
    David E. Reidinger

    Market Sector Update

    • Post the surprise result in the U.S. election in November, animal spirits were awoken in the domestic equity markets, and especially in small capitalization stocks, driven by hopes that the new administration will stimulate economic growth through a combination of lower taxes, repatriation of stranded overseas capital, fiscal stimulus and less regulation. Whether all of this will actually translate into something more tangible (economic/earnings growth) is yet to be seen, but there is an excitement in the markets that seems unlike anything that has been experienced since the recovery.
    • The Trump trade (or what this most recent rally has become known as) has completely rewritten the playbook on what is driving performance in the equity markets. In the first part of this year, defensive/bond like proxies were rewarded as it seemed like we were stuck in a lower for longer environment where interest rates and growth grinded along at low levels. Post the election, there has been a massive rotation toward cyclicals and financials as there is the belief that the actions of the new administration might be able to accelerate what seems by historic standards as a more tepid recovery.
    • With all that said, we are not delusional to believe that all is upward and onward from here, especially after such a big move in a short period of time. The market is not inexpensive, and rising interest rates and a stronger dollar can complicate further appreciation, which we have alluded to in the past.

    Portfolio Strategy*

    • The Fund underperformed the Russell 2000 Value Index (its benchmark) in the period ended Dec. 31, 2016. Fortunately coming into the 4Q2016, we had generated some outperformance, which helped soften this shortfall.
    • There were four factors that weighed on relative performance, two of which were stylistic (which we view as more structural, and likely to reoccur in similar market conditions), and two are hopefully more transitory in nature. Stylistically smaller stocks and stocks with higher betas (a measurement that reflects sensitivity of the Fund's return to fluctuations in the market index) massively outperformed in the 4Q2016, which was directly related to substantial inflows into small capitalization financial products post the election.
    • We consciously have a lower average beta within the Fund to provide less volatility in return and a greater average market capitalization so that we can hold more concentrated positions so that our best ideas can have greater contribution to performance without being liquidity constrained. During some periods these factors can work for us or against us, and sometimes tremendous stock picking can overcome performance drag due to style factors. In this quarter unfortunately both style factors and stock picking did not work in our favor.
    • In terms of stock picking, we had three big relative detractors in the quarter, and all of which resided among our top 15 holdings (Communications Sales & Leasing, Flotek and Nu Skin). In each of the cases there wasn’t a dramatic fundamental swing. One had a short report attacking it (Flotek), and the other two had been huge winners in previous quarters but got caught up in the rotation from defense to offense.
    • All together, we would attribute that roughly half of the Fund’s relative performance shortfall in the quarter was related to style factors and about half of it was related to sector positioning and stock-specific factors.

    Outlook

    • Heading into 1Q2017 we are hopeful that the Trump administration will deliver on its promises to spur economic growth, but fully recognize that political promises often fall short.
    • We also believe that 2017 could see some additional volatility as investors continue to get comfortable with a very unconventional/outsider in the White House, who has proven to be somewhat unpredictable.
    • We look for 2017 to be another year of positive yet likely more modest returns.
    • Regardless of how the market finishes in 2017, we remain committed to the Fund’s process of identifying quality undervalued companies, and believe we have good balance in the portfolio’s construction that should stand to perform well versus our peers and benchmark regardless of the environment over time.

    *Top 10 holdings (%) as of 12/31/2016: Take-Two Interactive Software, Inc. 5.1, Webster Financial Corp. 5.0, Laredo Petroleum Holdings, Inc. 4.6, Pinnacle Foods, Inc. 4.5, Communications Sales & Leasing, Inc. 4.1, AMC Entertainment Holdings, Inc. 4.1, Woodward, Inc. 3.2, Monro Muffler Brake, Inc. 3.1, Sensient Technologies Corp. 2.7 and Western Alliance Bancorp. 2.9.

    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 2000 Value Index measures the performance of the small-cap value 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. 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.

    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 may be obtained here or from a financial advisor. Read it carefully before investing.

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