Q2 Outlook<br> Global economy is slow out of the gates

Activity in segments of the global economy moderated throughout the first quarter of 2019 as policy risks and decelerating trade continued to hamper growth. The overall sluggish pace of economic expansion, particularly in the eurozone, has led us to recast our global growth forecast. However, we believe headway on a number of key issues could lead to a rebound later this year.

U.S. steady in slowing global economy

We have revised our global gross domestic product (GDP) growth forecast to 3.3%, down slightly from our outlook as the year began. While we project U.S. growth around 2.5%, the waning effect of tax cuts and fiscal stimulus, the trade dispute between the U.S. and China and tighter monetary policy by the Federal Reserve (Fed) continues to weigh on economic activity.

The ongoing trade standoff between the world’s two largest economies has been a drain on both and each wants a resolution. We believe a new trade agreement between the U.S. and China will be announced in the next few months, especially as President Donald Trump eyes reelection next year.

The Fed indicated it will likely leave rates unchanged this year because of weaker global growth and tepid inflationary pressure. In a surprising move, Fed Chairman Jerome Powell also announced plans to halt the Fed’s program of reducing bonds and mortgage-backed securities holdings on its balance sheet in September. These actions could help minimize a more meaningful slowing in U.S. economic growth.

The yield curve has continued to flatten in the U.S., with portions of the curve already slightly inverted. While an inversion in the yield curve has been a precursor to every modern-era recession, this is just one indicator of economic trajectory. We do not see a downturn in the U.S. economy on the horizon.

Eurozone GDP performance has been surprisingly poor so far in 2019, although it already had been weakened by the general slowdown in global growth and ongoing trade burdens. A number of local issues, including the lack of a plan for the U.K. to leave the European Union (EU), growing unrest in France over fuel taxes and rising prices generally, and the lagging effects of government mandates on automobiles in Germany have stymied growth in the region. The European Central Bank’s (ECB) response to this weakness has been to delay its plans to raise interest rates from the third quarter of 2019 to early 2020 and to add a new round of liquidity to the banking system. The lackluster economic performance in the first quarter prompted us to downgrade our 2019 eurozone GDP forecast to 1.2%.

Global growth continues at a sluggish pace
Chart Showing Global growth continues at a sluggish pace

Source: Ivy Investments. Chart shows Ivy 2018, 2019 forecasts of annual gross domestic product growth, all based on purchasing power parity. Past performance is not a guarantee of future results. The gross domestic product growth forecasts are current through April 2019, and subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed.

When — and how — will Brexit end?

Nearly three years after the U.K.’s initial referendum, Brexit has become a political quagmire and a drag on its economy. The U.K. Parliament through early April had failed to pass a withdrawal agreement despite three attempts, leaving an already wounded Prime Minister Theresa May in further political limbo as momentum to reevaluate the “divorce” has grown.

While we continue to believe the U.K. will ultimately leave the EU with agreements that keep the two somewhat connected on key issues, the possibility of a “hard Brexit” — where the U.K. leaves the EU without a deal to clarify trade, its status with the Republic of Ireland and other issues — cannot be ruled out. Parliament’s failure to pass any Brexit legislation suggests the odds of calls for early elections have increased. We believe the thought of a change in government — especially one led by Jeremy Corbyn, the far-left leader of the Labour Party — and the increasing likelihood that the departure deadline could be significantly extended is likely to send jitters through the markets.

In our view, it is highly likely that the U.K. will fall into recession if a hard Brexit becomes reality. Such a result could send negative repercussions throughout the EU.

Emerging markets poised for a rebound

After battling through multiple headwinds in 2018 that spilled over into the first quarter of this year, emerging markets appear ripe for improvement. Along with its trade turmoil with the U.S., China has felt pressures from its decision to reduce the pace of debt accumulation in the economy. The deceleration in economic growth has caused the government to introduce fiscal stimulus, including infrastructure spending, tax cuts and stronger credit growth.

In addition, China’s property market recently has shown signs of weakness, but cities continue to move away from purchase restrictions, which we think will limit downside risks in the sector. We continue to believe that looser policy and the potential for a trade deal with the U.S. could result in stronger economic growth in China in the second half of 2019.

In India, the central bank recently reduced interest rates in response to slower growth. The upcoming presidential election will determine whether the coalition government of Prime Minister Narendra Modi can earn another term, which we believe could be a key factor in India’s long-term growth potential.

Following a record-setting recession, Brazil is showing signs of recovery as markets have strengthened in anticipation of pension reform, one of several fiscal reforms championed by new president, Jair Bolsonaro. While the legislation still faces an uphill battle to gain lawmakers’ approval, we believe pension reform could be passed sometime later this year.

Currency markets looking upward

Currency markets were mixed in the first quarter, with the U.S. dollar modestly stronger on average. The dollar’s strength came despite the Fed’s revised position on rate hikes for the remainder of 2019. While a lack of support from higher interest rates might normally be expected to undermine the dollar, the focus in currencies has shifted from interest rates to worries about global growth. That change has benefited the dollar as it tends to appreciate during times of uncertainty.

However, we expect the dollar to weaken marginally as global growth picks up throughout the year. Among developed market currencies, the pound shows potential for appreciation, assuming a Brexit accord is agreed upon in the very near term. The euro also could appreciate as growth in the eurozone begins to rebound.

The Fed’s more dovish stance on rate hikes and a weakening U.S. dollar could bode well for some emerging market currencies. We anticipate any trade agreement between the U.S. and China will include language prohibiting currency manipulation, stabilizing the yuan versus the dollar in the near term. However, we believe an uptick in economic growth in places like China and Europe will be necessary before there are any meaningful currency rallies among other emerging markets.


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Risk factors: Investment return and principal value will fluctuate, and it is possible to lose money by investing. 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. Fixed income securities are subject to interest rate risk and, as such, the net asset value of a fixed income security may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Investments in real estate may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. Debt securities, like mortgage-backed securities and asset-backed securities, are subject to additional risks due to their exposure to interest rate risk. Changes in interest rates can cause the value of these securities to be more volatile than other fixed-income securities and may magnify the effect of the rate increase on the price of such securities.

Past performance is not a guarantee of future results. The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through April 2019, 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.

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2019 Outlook — What’s ahead amid slowing growth

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The global economy was sluggish through the first quarter of 2019. Get Ivy's view on key issues that have slowed growth and the possibility of a rebound later in the year.

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- U.S. steady in slowing global economy
- When – and how – will Brexit end?
- Emerging markets poised for a rebound
- Currency markets looking upward

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Moving to a defensive position for uncertain times

A combination of asset classes may offer lower volatility — a concern for many investors today. The Fund’s sleeve structure allows us to blend three complementary fixed-income strategies while adjusting allocations as needed, based on market conditions and our outlook. In the current environment, that means taking a more defensive position.

We think low interest rates are likely to continue in the foreseeable future, based on the “dovish” policies of major central banks, slower economic growth worldwide and a market dealing with uncertainty about a wide range of issues:

  • Central bank policy: Both the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) have turned to more accommodative interest rate policies in the last three months. Europe’s loss of economic momentum was a key factor for the ECB, which cut its 2019 eurozone economic growth forecast to an annual rate of 1.1% from 1.7%. We do not expect the ECB to raise interest rates until at least March 2020. The ECB committed to providing liquidity to credit markets until 2023 through its targeted longer-term refinancing operations (TLTRO), which is a source of funding for European financial institutions. We believe Fed and ECB policies reflect the global economy, including an expectation that the U.S. is in the later stages of an economic cycle.
  • Slower global growth: Market participants widely are forecasting slower global economic growth in 2019; Ivy estimates the global growth rate this year at 3.4%.
  • Trade dispute: China’s slowing economy and the U.S.-China trade war have raised many concerns about the direction of the world’s no. 2 economy. While there is no resolution yet to the trade dispute, we think a deal ultimately could add economic stimulus, help growth inside and outside both countries, and boost business and consumer confidence. In our view, a deal thus could help prolong the current cycle.
  • Direction of dollar: The strong U.S. dollar was a global market factor in 2018. The Fed’s prediction of no rate hikes in 2019 and one in 2020 will likely cause the dollar to weaken against high yielding emerging market currencies as investors search for yield continues. Lacking a major change in global growth, the dollar should be range bound against developed currencies ( euro, yen and pound) as these countries deal with their own idiosyncratic issues.
  • North Korea: There is concern that the U.S. is losing traction on any agreement to eliminate nuclear weapons.
  • Political uncertainty: Distractions already are developing as we face the 2020 U.S. election campaigns. In addition to the presidential election, there will be voting on all 435 seats in the House of Representatives, 34 of the 100 Senate seats and a wide range of state and local elections.

Against this backdrop, credit spreads have been somewhat volatile but remain compressed. We believe the more dovish Fed — compared with its position at the beginning of 2018 — will keep a lid on credit spreads, and we think the high income sector offers value in certain sectors.

We have chosen to position the Fund defensively in this environment and in general are seeking to move to higher quality securities and longer duration overall.

Philosophy and process

Unlike single-sector funds, the Fund seeks to capture the return opportunities and risk mitigation potential of a diversified mix of fixed-income securities. It invests across a range of factors, including credit, liquidity and complexity, and combines sleeves of three fixed-income strategies.

We believe a portfolio that spans the fixed-income credit spectrum can offer higher return potential from high-yield, high-risk bonds and non-traditional credit vehicles, while using highly rated investment-grade bonds to provide fund liquidity. Flexible sleeve allocations allow for adjustments based on market conditions and our outlook, potentially creating an opportunity to mitigate risk exposure, volatility and overall Fund duration.

The Fund’s stated objective is to seek to provide a high level of current income, with capital appreciation a secondary objective. While income is not guaranteed, the Fund has continued to capture a competitive yield for shareholders. We consider it a defensive fund and have positioned it for an uncertain economic environment.

A closer look at each sleeve

Strategy Sleeve Allocation Allocation at 02/28/2019

Global Bond

Flexible  10–70%

47.5%

High Income

Flexible  10–70%

32.5%

Total Return

Target   20%

20.0%

  • Global bond strategy: Decisions are based on factors including fundamental global themes, such as country analysis, issuer analysis, including domicile, performance and credit history across economic cycles; and issue analysis, including maturity, quality and denomination. We invest primarily in a diversified portfolio of bonds of foreign and U.S. issuers.
  • High income strategy: We focus on bottom-up credit work to find companies we think can outperform throughout a business cycle. We dig into the details of the business models, covenants and competitive advantages as part of our investment decision. While doing the bottom-up analysis, we don’t turn a blind eye to the business cycle or credit spreads, and want to be sure we can be compensated for the risks we take. We ypically hold names throughout the cycle, don’t want to rely on timing the big macro calls and tend to stay away from highly cyclical sectors.
  • Total return strategy: The Fund’s sub-adviser, Apollo Credit Management, manages this sleeve. It provides access to the full breadth of the credit markets, including some nontraditional credit securities. Such securities may not have been accessible to all investors in the past, especially within a mutual fund. Apollo can explore the market for nontraditional opportunities, partner with banks to lend money to smaller companies, or underwrite loans for a select entity — all as part of seeking to generate yield while keeping duration low. As with the other sleeves, it is a long-only strategy. The managers do not pursue derivativeoriented transactions.

Near-term outlook

We see some opportunity now among emerging markets and Brazil in particular, based on reform programs announced by the new presidential administration there. Conversely, Mexico’s new administration has raised some troubling issues that make it less attractive to us now. We also have an ongoing concern about the risk of potential sanctions on Russia and what that could mean for its debt.

In the U.S., we think slower economic growth is likely for the first half of 2019 and we expect the dollar to remain strong. We also do not expect the Fed to raise interest rates this year. However, U.S. economic growth still is above trend, with healthy real income growth and an elevated personal savings rate that we think can insulate against the negative wealth affect from the lower stock market late in 2018.

Labor markets continue to expand, which has kept consumer confidence near cycle highs and supported strong spending growth. But we think trade will continue to be a risk factor going forward. There is a potential for more tariffs followed by retaliatory action that could impact the capital investment plans of many companies. That raises the risk of what we would consider a negative feedback loop that could affect all markets and ultimately consumer confidence.


Late cycle factor risks


An increasingly volatile environment has raised questions about the stock market’s ability to sustain its historic bull run. Our Ivy Live panel shared their views on the subject.

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Past performance is no guarantee of future results. 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 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.

The Fund is managed by Ivy Investment Management Company. The total return strategy is sub-advised by Apollo Credit Management, LLC.

Diversification cannot guarantee a profit or protect against loss in a declining market. It is a method to manage risk.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Although asset allocation among different sleeves and asset categories generally tends to limit risk and exposure to any one sleeve, the risk remains that the allocation of assets may skew toward a sleeve that performs poorly relative to the Fund’s other sleeves, or to the market as a whole, which would result in the Fund performing poorly. While Ivy Investment Management Company (IICO) monitors the investments of Apollo Credit Management (Apollo) in addition to the overall management of the Fund, including rebalancing the Fund’s target allocations, IICO and Apollo make investment decisions for their investment sleeves independently from one another. It is possible that the investment styles used by IICO or Apollo will not always complement each other, which could adversely affect the performance of the Fund. As a result, the Fund’s aggregate exposure to a particular industry or group of industries, or to a single issuer, could unintentionally be larger or smaller than intended. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. 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. Fixed-income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. 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.

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Fed stays consistent; what's next for rates?

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A combination of asset classes may offer lower volatility – a concern for many investors today. The Fund’s sleeve structure allows a blend of three fixed-income strategies.

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- We think low interest rates are likely to continue, based on the “dovish” policies of major central banks.
- In general, we are moving to higher quality securities and longer duration in the Fund.
- We consider it a defensive fund and have positioned it for an uncertain economic environment.

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Ivy Securian Core Bond Fund

Market Sector Update

  • The U.S. economy began 2019 in a position of strength as fourth quarter real gross domestic product (GDP) grew 2.6% quarter-over-quarter against 2.2% estimate. However, a sluggish first quarter has caused GDP estimates to be revised downward to 1.5% growth from 2.3% at the start of the year.
  • The Federal Reserve (Fed) struck an increasingly dovish tone as growth expectations eased, which may translate to a more benign environment for risk assets. The Fed now sees the current federal funds target rate as neutral and no longer projects further hikes this year. Market participants have gone even further, projecting one, possibly two, rate cuts by the end of the year.
  • Investors flocked to Treasuries when the Fed hit the pause button, pushing 5-year yields down by 28 basis points (bps), and 30-year yields lower by 20 bps. By quarter’s end, the 10-year treasuries were back to 2.41%, the level seen shortly after the 2016 election and the start of Fed’s tightening in earnest.
  • Risk assets have performed well to start the year as turbulence settled down in the wake of the federal government shutdown. Coming off the fourth quarter 2018 correction, the S&P 500 Index made up ground, returning more than 13% for the quarter.
  • Credit spreads retraced much of their fourth quarter widening with investment grade corporate spreads and high yield bonds tightening by 34 bps and 135 bps, respectively. Powered by lower treasury rates and spread tightening, investment-grade corporates produced a total return of 5.14% while high yield investors booked at total return of almost 7.12% in the quarter. Treasuries returned 2.11% for the quarter.

Portfolio Strategy

  • The Fund delivered a positive return for the quarter and outperformed its benchmark before the effect of sales charges.
  • The Fund’s overall exposure to corporate bonds decreased modestly during the quarter. Portfolio weights were increased in the banking automotive and health care industries, while we reduced our weight in the transportation and utility space.
  • In terms of interest rate exposure, the portfolio remains most exposed to credits in the utilities, insurance, energy and consumer cyclicals relative to the benchmark. The largest underweights in the corporate space are in communications, technology, capital goods, and consumer non-cyclicals.
  • Our exposure to agency mortgage-backed securities (MBS), non-agency MBS and asset-backed securities (ABS) were reduced during the quarter.
  • The overall duration of the portfolio was shortened during the quarter as we moved from slightly long to short the benchmark by approximately a quarter of a year.

Outlook

  • The economy is still on track to reach a record for the longest expansion. The employment picture remains exceptionally strong, with low unemployment drawing workers back into the labor force. Wages are going up at a more normal pace. We think weak payroll growth in February was an anomaly and are focused on the solid three-month moving average.
  • The move to a more accommodative stance aligns the Fed with other central banks that have recently walked back talk of tightening. This creates a more supportive environment for risky assets, making U.S. assets more attractive to foreign investors.
  • Despite the strong showing in risky assets, the market provided clues that investors are still worried, which gives us reasons for caution. Numerous risks — Brexit, the tenuous expansion of key eurozone’s economies and the ongoing trade dispute with China — remain in play.

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 March 31, 2019, 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.

The Ivy Advantus Bond Fund was renamed Ivy Securian Core Bond Fund on April 30, 2018.

David Land served as a portfolio manager on the Fund until May 11, 2018.

Duration is a measure of a security's price sensitivity to changes in interest rates. A fund with a longer average duration generally can be expected to be more sensitive to interest rate changes than a fund with a shorter average duration.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. 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. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. 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.

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Ivy IG International Small Cap Fund

Market Sector Update

  • International small-cap equities rebounded strongly over the first quarter of 2019 following a very challenging end to 2018. The markets can thank a more dovish U.S. Federal Reserve (Fed) and optimism around the resumption of trade talks between the U.S. and China for much of the rebound. When combined with several positive economic data points out of China (particularly around improving Chinese credit growth), the Chinese market witnessed robust growth over the quarter.
  • The U.K. secured a short-term delay to the initial March Brexit deadline. However with the U.K. no closer to a resolution, a further delay is likely. This process will be further complicated by the European elections scheduled for late May.
  • The strongest performing sectors for the quarter were energy, information technology and communication services, while financials, consumer staples and utilities underperformed. Brent crude rose by 26% over the quarter, supporting the energy sector, while bond yields moved lower, weighing on the financial sector.

Portfolio Strategy

  • The Fund produced positive performance but underperformed its benchmark for the period. At the country level, stock selection in Australia and France detracted from relative performance, while stock selection in Japan and the Netherlands benefited relative performance. Despite the strong growth in Australia, the Fund maintains a relatively defensive position to the country due to macro headwind and high relative valuation concerns.
  • Top relative individual contributors to performance for the period included Technopro Holdings Inc., a Japanesebased professional services company; Future Plc, a U.K.-based media company; and SCSK Corp., an information technology services company based in Japan. Top relative individual detractors to performance for the period included Ardent Leisure Group Ltd., an Australian-based leisure and entertainment company; Okamura Corp., a Japanese office furniture manufacturer; and Nufarm Ltd., an agricultural chemical company.
  • Several new positions were added from the Asia-Pacific region over the quarter. A position in Macromill, Inc., a Japanese internet marketing research firm, was established based on its long-term growth prospects and key client relationships with advertising agencies in Japan and overseas. As marketing budgets continue to be under pressure, we believe the company is well positioned to benefit from companies tying marketing spending to measurable results. Takeuchi Manufacturing Co. Ltd., a small-size excavator manufacturer, was added to the portfolio for its perceived attractive valuation, growth prospects and unique product offering within its niche of the earth moving equipment market. Positions in Melco International Development Ltd., a Macau casino operator; Sembcorp Marine Ltd., a Singapore-based oil services company; and Tadano Ltd., a Japanese mobile crane manufacturer, were sold.
  • Within Europe, we added U.K. housebuilder Barratt Developments plc. We believe the company offers an attractive valuation and offers the potential for very good annualized earnings growth driven by margin improvement and volume growth. We also added Qiagen N.V., which is a leader in DNA-based technologies for the life science and diagnostic industries. Molecular diagnostics account for approximately half of the firm’s revenue, and we believe the company has a strong franchise in areas such as tuberculosis testing. The remaining 50% of the firm’s revenue is generated from life sciences, where it provides a range of tools and applications ranging from DNA fingerprinting technology to solutions for pharmaceutical companies to aid in drug discovery. With end markets growing 5-10%, we believe the company is well positioned for revenue growth.

Outlook

  • While equity markets have recovered strongly over the first quarter, further upside will likely require an improvement in the macro data, which from a European perspective, remains weak. Brexit remains a significant risk and continues to weigh on sentiment and investment across Europe. While any clarity may provide upside relief, the current political backdrop in the U.K. does not instill confidence.
  • What is more encouraging is that Chinese economic and credit data is showing signs of bottoming. This data has historically been a decent leading indicator of economic strength, particularly for Europe. Therefore, with the prospect of an improving macro backdrop in Europe (lead by a Chinese recovery as well as a Fed that has abandoned its tightening stance) there appears room for further re-rating of cyclical sectors given their relative underperformance since the middle of 2018. With growth in both the Asian and European markets, closely tied to global economic activity, we believe any economic improvement should prove favorable to international markets.

The opinions expressed are those of the Fund’s managers for Class I shares and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2019, 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 3/31/2019: SCSK Corp. 2.2%, TechnoPro Holdings, Inc. 2.0%, Matsumotokiyoshi Holdings Co. Ltd. 1.9%, Tsubaki Nakashima Co. Ltd. 1.9%, Kenedix Office Investment Corp. 1.8%, Komeda Holdings Co. Ltd. 1.8%, ARTERIA Networks Corp. 1.7%, Future plc 1.7%, Rubis Group 1.7% and Grand City Properties S.A. 1.7%.

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.

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Ivy Global Equity Income Fund

Market Sector Update

  • After a joltingly negative close to 2018, the first quarter of 2019 marked a nearly equally robust upward move. The Fund’s benchmark increased nearly 10% during the period. The first quarter saw several favorable fundamental developments that underpinned this robust performance in three key areas: 1) near-term growth, 2) trade frictions, and 3) policy. During the fourth quarter, numerous factors drove substantial concern regarding a stark weakening of near-term growth. A combination of weakening soft and hard data fueled concerns regarding the economic outlook for 2019 on a global basis.
  • The worsening outlook for U.S.-China trade shifted more positively during the first quarter as well with the U.S. and China showing a willingness (albeit a potentially temporary willingness) to work toward a framework and eventual agreement that addressed many of the issues of interest for both sides. Clear and critical differences of interest and core values persist; however, markets cheered the perceived progress that has been made.
  • Perhaps most importantly, there was an overall shift in policy during the last three months. China has taken numerous targeted steps to stimulate its economy. However, the lack of traction in hard and soft data out of China had raised skepticism about the nature and efficacy of those programs. In the past quarter, there have been clearer signs that those targeted steps were in fact having an impact.
  • Perhaps the most significant shift came out of central banks. For much of last year both the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) seemed to be on an autopilot program of monetary tightening. This was despite clear signs of rising turbulence, and perhaps more importantly a lack of genuine upward pressure on inflation even during robust growth spurts over the last few years. During the quarter the ECB pushed out the timeline for initial rate hikes into 2020, which served as a positive policy surprise. The Fed went even further in our view. Not only did the Fed reduce expectations for tightening in 2019, but it has also begun to discuss a clear policy pivot toward allowing inflation to run well above its 2% long-run view during times of economic expansion. The Fed is now not considering tightening at present, but would ease even without a slowdown or recession in order to hit its long-run inflation goal. This important shift in the current environment cannot be under-estimated and is responsible for much of the optimism in the most recent quarter.

Portfolio Strategy

  • The Fund posted a double-digit positive return and outperformed its benchmark during the quarter. Stock selection was the primary driver of outperformance, with sector allocation and regional allocation also minor positives.
  • The Fund’s overweight positions in consumer staples, energy and industrials as well as underweight positions in financials and communication services helped performance. The Fund’s overweight position in health care adversely impacted performance. From a regional perspective, the Fund’s overweight in Europe and underweight in Japan helped relative performance.
  • Stock selection in financials, consumer staples, consumer discretionary and materials were all noteworthy contributors to relative performance, while stock selection in energy was a noteworthy drag on relative performance. Phillips Morris International, Inc., Tokyo Electron Ltd., British American Tobacco plc, 3i Group plc and Anglo American plc were the largest positive contributors to performance. Pfizer, Inc., Orange S.A., AbbVie Inc., Medtronic plc and not owning Cisco Systems, Inc. were the largest detractors from relative performance.
  • Our investment approach remains steadfastly focused on investing in perceived high-quality businesses with favorable near and intermediate fundamentals, generally rising dividends and attractive valuations. This approach is consistent across sectors and regions.
  • At this point, we remain balanced in the overall positioning of the Fund. The fundamental outlook in many areas has improved notably. However, in many cases valuations have coincidentally improved with sentiment and now more accurately reflect long-term business prospects. However, this is not uniformly the case – and as such we continue to find perceived attractive opportunities that fit our framework in a variety of sectors and geographies.

Outlook

  • The outlook for global growth has slowed over the past several quarters. However, in most regions growth remains at levels consistent with solid economic expansion and a solid rate of corporate earnings growth. While the economic expansion is certainly older in chronological terms relative to most in modern history, the current expansion appears strikingly devoid of the significant excesses or bubbles that ended most prior cycles. Consumer finances are in good condition, corporate leverage is mostly manageable (some concerns clearly evident in the leveraged loan market), capex has been reasonable during the expansion and inflation remains benign (if not too low for some). Europe and Japan are two areas that are an exception to this viewpoint, as these areas have been innocent bystanders who have been caught in the crossfire of the trade conflict.
  • Likewise, the picture on U.S.-China trade is also evolving positively in our view. It appears clear that both sides want to avoid a worst-case scenario outcome and perhaps find enough common ground to strike a deal that offers some sort of compromise. Longer-term we believe there could be a series of trade skirmishes, but for now some stability in outlook is likely.
  • Given the backdrop of slowing global growth, benign inflation, and risk skewed to the downside, the financial markets had grown increasingly concerned that central banks (including the Fed) had already, or were at high risk of overtightening. This variable was clearly heightening anxiety that the Fed and central bank tightening would be the driver of the end of the current expansion. We believe the stark pivot by the Fed and other central banks away from incremental tightening, and toward allowing inflation to rise dramatically, reduces policy risk in this quadrant.

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 March 31, 2019, 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.

Top 10 equity holdings as a percent of net assets as of 03/31/2019: Royal Dutch Shell plc, Class A 4.0%, Pfizer, Inc., 3.8%, Nestle S.A., Registered Shares 3.7%, Roche Holdings AG, Genusscheine 3.3%, Total S.A. 3.2%, Lockheed Martin Corp. 3.0%, Procter & Gamble Co. 2.8%, AstraZeneca plc 2.7%, Samsung Electronics Co. Ltd. 2.6% and Tokio Marine Holdings, Inc. 2.6%.

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. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected.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.

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Article Related Management: 

Robert Nightingale
Christopher J. Parker

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Quarterly Fund Commentary

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