Market Sector Update

• International small-cap equities experienced a positive return during the quarter. Equity markets continued to gain ground over the period aided by significant fiscal support and monetary accommodation combined with improving economic data and further progress in reopening the major global economies despite some setbacks.

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 Sweden, Australia and Belgium were the top detractors to relative performance. At the sector level, stock selection in communication services, industrials and heath care were the top contributors to relative performance, while stock selection in consumer staples, utilities and information technology were the top detractors to relative performance.
• Top relative individual contributors to performance for the period included Uniphar plc, an Ireland-based health care company; Future plc, a U.K.-based media company; and Games Workshop Group plc, a U.K.-based tabletop game company.
• Top relative individual detractors to performance for the period included Rubis Group, a France-based gas utilities company; Barco, a Belgium-based IT company; and ASM International, a Netherlands-based semiconductor equipment company.
• Portfolio changes within the Asia-Pacific region over the quarter included the addition City Chic Collective, a specialty women’s apparel reality serving the niche category of plus-sized fashion. City Chic’s sales in the U.S., Europe and Australia are now majority online, and we believe its strategy should allow the company to continue to take market share from its distressed traditional brick and mortar competitors. In Hong Kong, semiconductor equipment company ASM Pacific was also added to the portfolio. We expected a cyclical upturn for ASM Pacific’s key customers driven by 5G roll-out, semiconductor capital expenditure expansion and a recovery in the Outsourced Semiconductor and Test (OSAT) market.
• Portfolio changes in Europe over the quarter included the initiation of a position in Exasol, which is a German leader in next generation software-based data analytics. Its data engine enables the storage and analysis of data with unprecedented speed and scalability and offers best in class total cost of ownership. The strength of its technology has attracted a diverse range of blue-chip clients such as Adidas, Zalando and Sony. Over 70% of group revenue is recurring and customer churn is only 4%. The initial public offering of its peer Snowflake, at a much higher valuation, acted as a catalyst for the stock during the quarter.
• We also added Westwing, a leading e-commerce platform across 11 European countries focused on the home and living segment. Westwing predominately sells small furniture items and accessories via its shoppable “daily themes” online magazine. With only 5% of the segment currently online there is significant room to increase penetration versus fashion at 14% and electronics at 24%. The group acquired 350,000 new customers over the first half with growth continuing despite the reopening of bricks and mortar operators, which bodes well for the group going forward given its 80% customer retention rate.

Outlook

• The portfolio management team believes the pace of the recovery from the unprecedented shock on the global economy of COVID-19 will be the main factor affecting equity prices going forward. Such a recovery is likely to take time, requiring a difficult balancing act involving economic growth, public health and individual freedoms until such time as a vaccine is widely available, most likely in the first half of 2021. Other key issues include the outcome of the U.S. Presidential elections in early November, continued Brexit uncertainty, U.S.-China trade relations, the policy priorities of Japan’s new Prime Minister, and the possibility of further countries and regions locking down all or parts of their economies over the next six months. On balance, we are cyclically constructive as we expect the thrust of fiscal and monetary policy to remain supportive for the foreseeable future.

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 September 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 09/30/2020: Uniphar plc 4.3%, Games Workshop Group plc 2.9%, Future plc 2.9%, SCSK Corp. 2.3%, The Bank of Kyoto Ltd. 1.9%, Strix Group plc 1.9%, Steadfast Group Ltd. 1.9%, TechnoPro Holdings, Inc. 1.8% and Matsumotokiyoshi Holdings Co. Ltd. 1.8%.

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.