Market Sector Update

• International small-cap equities experienced a positive return during the quarter, following an extremely negative return during the first quarter. The substantial increase in equity markets globally over the second quarter was aided by significant fiscal support and monetary accommodation, the rapid adjustment of a high proportion of the labor force working from home along with the early signs of progress in the reopening of major economies.
• All sectors except energy were positive for the quarter with the top performing sectors being industrials, information technology, consumer discretionary and communication services.

Portfolio Strategy

• The Fund produced positive performance and outperformed its benchmark for the period. At the country level, stock selection in the U.K., Ireland and Japan were the top contributors to relative performance, while stock selection in Australia, Sweden and France were the top detractors to relative performance.
• Top relative individual contributors to performance for the period included Games Workshop Group plc, a U.K.-based tabletop game company; Evolution Mining Ltd., an Australia-based mining company and Uniphar plc, an Irish-based health care company.
• Top relative individual detractors to performance for the period included Okamura Corp., a Japan-based commercial services company; Matsumotokiyoshi Holdings Co. Ltd., a Japan-based food and staples company and Barry Callebaut AG, Registered Shares, a Switzerland-based food products company.
• Portfolio changes within the Asia-Pacific region over the quarter included the addition of Australian Treasury Wine Estates Ltd. and WorleyParsons Ltd.; both stocks have been negatively impacted by COVID-19. We feel both stocks have strong medium-term growth prospects relative to their valuations. Treasury Wine is one of the largest wine companies globally, producing and selling a wide range of wines into China and the U.S., which are their core markets. Worley is an engineering consulting firm specializing in both energy and petrochemical projects around the world. In Japan, we added Sanwa Holdings Corp., a leading producer of storefront shutters and garage overhead doors in Japan and the U.S. We expect the company to benefit from a cyclical recovery in these markets. Macromill, Inc. a market research provider, was sold as we have lost confidence in management’s ability to navigate a changing online advertising world. Machine-tool maker OSG Corp. was also sold in favor of more attractively valued industrial companies held within the Fund.
• Portfolio changes in Europe over the quarter included the initiation of a position in Stillfront Group AB, which is a leading mobile games developer. We believe the company has a market leadership position in free-to-play browser and mobile strategy games with a loyal customer base and long game life cycles. The group is also a leading consolidator in what remains a very fragmented market, where its scale and focus on studio’s early in their development cycle enables Stillfront to acquire at perceived attractive and very accretive multiples.
• We also added LPKF Laser & Electronics AG, which is a market leading German-based engineering company developing laser machinery for use in etching, welding and scribing. We believe LPK is positioned to redefine the usage of flexible glass within the semiconductor packaging, electronic display and medical technology industries.

Outlook

• The current outlook is balanced between a stop-start reopening process in many geographies and the start of a new economic upcycle driven by improving business sentiment, the low level of interest rates and extreme amounts of fiscal stimulus. Equity markets have rebounded strongly from their March lows but the participation of cyclical sectors in this rebound has not been as great as we would expect if our view of the cycle is correct. As such, we have been increasing the cyclicality of the portfolio on a stock specific basis with a view to a broader economic recovery over the coming year.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.Past performance is not a guarantee of future results.

Effective Feb. 21, 2019, Ivy IG International Small Cap Fund was renamed Ivy International Small Cap Fund. Additionally, the name of the sub-adviser changed from I.G. International Management Limited to Mackenzie Investments Europe Limited. Mackenzie Investments Europe Limited delegates to its subsidiary, Mackenzie Investments Asia Limited, for additional portfolio management responsibilities. References to Mackenzie Investments Europe Limited include both entities.

Top 10 equity holdings as a percent of net assets as of 06/30/2020: Uniphar plc 3.1%, Games Workshop Group plc 2.3%, SCSK Corp. 2.2%, Future plc 2.2%, Logitech International S.A., Registered Shares 2.1%, TechnoPro Holdings, Inc. 1.9%, Avast plc 1.9%, Alstom 1.9% and Rubis Group 1.9%.

All information is based on Class I shares.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in small-cap stocks may carry more risk than investing in stocks of larger more well-established companies. 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.