Ivy IG International Small Cap Fund

Market Sector Update

  • International small-cap equities delivered a positive return during the second quarter, building on the positive momentum from the first quarter. While initially softer due to global trade tensions, equity markets recovered through June following more dovish comments from the U.S. Federal Reserve (Fed) and the European Central Bank (ECB), further reinforcing the easing bias among global central banks.
  • Economic data was mixed over the quarter. While employment data remains encouraging, U.S. survey data indicates deterioration in business conditions and expected future activity. Data in the European Union showed some signs of improvement, albeit data from Germany remains generally weak.
  • Despite a lack of political progress in the U.K. and the resignation of Prime Minister Theresa May, U.K. equities were resilient and posted marginally positive returns for the quarter though lagged performance across other regions. Japanese equities underperformed over the quarter as trade tensions and a stronger yen weighed on performance.
  • The strongest performing sectors for the period were information technology, utilities and real estate, while energy, consumer staples and consumer discretionary underperformed. Oil markets were weaker over the quarter with Brent crude falling by 2.80%. Bond yields moved lower with the U.S. 10-year Treasury yield approaching 2.0%, while the benchmark German 10-year bund yield marked new lows at -0.33%.

Portfolio Strategy

  • The Fund produced positive performance and outperformed its benchmark for the period. At the country level, stock selection in the U.K., Japan and Ireland contributed to relative performance, while stock selection in Sweden, Germany and South Korea detracted from relative performance.
  • Top relative individual contributors to performance for the period included Games Workshop Group plc, a U.K.-based leisure products company; Future plc, a U.K.-based media company; and Taiyo Nippon Sanso Corp., an industrial gas company based in Japan. Top relative individual detractors to performance for the period included Ryohin Keikaku Co. Ltd., a Japanese-based multiline retail company; Premier Oil Plc, a U.K.-based oil, gas and consumable fuels company; and Hyundai Marine & Fire Insurance Co. Ltd., a Korean-based insurance company.
  • Several new positions were added in the Asia-Pacific region over the quarter. A position in Stanley Electric Co. Ltd., a manufacturer of automobile headlamps, was added for its perceived strong position as a producer of LED lighting. We believe the company will continue to generate growth as penetration of LED technology grows due to its improved visibility and lower power consumption. MISUMI Group, Inc. was also added, a maker of small-batch customized pressed die and plastic mold products. Combined with the company’s unique online retail offering, we believe MISUMI gives the Fund exposure to the early-stage recovery of the machine tool cycle and as a long-term structural growth business. Over the quarter, several positions were sold including Maxell Holdings Ltd., which announced a significant special dividend and share repurchase following a campaign of shareholder activism. However, we believe the future prospects for the operating business are less appealing. Long-held positions in Japan (Maruichi Steel Tube Ltd., NGK Spark Plug Co. Ltd. and Nifco, Inc.) and Australia (Spark Infrastructure Group and Carsales.com Ltd.) were also sold.
  • Within Europe, we initiated a position in Domino’s Pizza Group Plc. We believe this is a mispriced high-quality franchisee business. We believe the company is a market leader in the delivered food market, with strong brand awareness, high returns and cash generation.
  • We also added Barco N.V., which we feel is a market leader across the niche activities of cinema projection, wireless meeting rooms and health care display.

Outlook

  • While equity markets have recovered strongly in 2019, we believe corporate results and management commentary will be key as we enter the second half of the year. Given the strong performance to date in 2019, the market is unlikely to look through any disappointment or downward revisions of earnings expectations.
  • Japan remains intent on raising its consumption tax from 8% to 10% in October, and while we feel this is a policy error, consumption and consumption stocks in Japan have reacted negatively well in advance of the tax hike. As a result, we believe these domestic-demand sectors are now very attractive.
  • With a temporary trade war truce having been called at the June G20 meeting in Osaka, Japan, we believe attention will turn to what progress can be made in bilateral talks between the U.S. and China. Critical to this will be what concessions are made for China’s telecom equipment giant Huawei to purchase critical components from U.S. manufacturers and whether it remains on the so-called "entity list." While it is difficult to forecast this outcome, incentives remain for both sides to reach a deal, particularly as the November 2020 U.S. election draws nearer.
  • Central bank policy in most major economies is likely to remain supportive and with valuations of cyclical stocks attractive relative to their defensive, quality counterparts, we remain cyclically inclined in our positioning but flexible to change this view should conditions change.

  • 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, 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 06/30/2019: SCSK Corp. 2.5%, Teleperformance SE 2.0%, Sixt SE 1.9%, TechnoPro Holdings, Inc. 1.8%, ARTERIA Networks Corp. 1.8%, Matsumotokiyoshi Holdings Co. Ltd. 1.8%, Alstom 1.8%, Steadfast Group Ltd. 1.8%, Manulife U.S. REIT 1.8% and Zeon Corp. 1.8%.

    All information is based on Class I shares.

    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 Apollo Multi-Asset Income Fund

Market Sector Update

  • The macro environment has softened with growth slowing in the U.S., Europe and China. The escalating trade dispute between the U.S. and China plus weakening fundamentals has left central bankers set to ease policy in response, with many taking a sharp turn from hawkish to dovish. By switching their focus from tight labor markets and accelerating wage growth to slowing economies and softening inflation expectations, policymakers are trying to create a backdrop for lower volatility.
  • Global equity market performance was largely positive during the quarter. Hopes for an improved global trade environment, along with increased confidence around favorable monetary policy, offset deteriorating hard economic data.
  • Global real estate securities produced modestly positive gains in the second quarter, outpacing global bond indices but trailing global equities. Global risk assets bounced between gains and losses for most of the period before trending higher in June to build on the robust gains of the first three months of the year.
  • In the U.S., the market has priced two to three rate cuts from the Federal Reserve (Fed) in the remainder of 2019. The European Central Bank (ECB) has signaled its willingness to cut rates and potentially restart its purchase of corporate bonds. In China, the government has started to implement a new round of policy initiatives to stimulate growth.
  • The normalization of the Fed’s balance sheet is also winding down as the Fed slows the pace to a level it considers consistent with efficient and effective policy implementation.
  • The yield curve inverted as the market reduced expectations of the Fed’s tightening policy and overall expectations for slower global growth. The 10-year U.S. Treasury declined 40 basis points and the 2-year Treasury declined 51 basis points.
  • Trade tensions continued during the quarter, but the G20 Summit in late June provided an opportunity for the U.S. and China to call a temporary truce in an effort to return to the negotiating table.

Portfolio Strategy

  • The Fund had a positive return in the quarter that was slightly less than the return of its benchmark and Morningstar peer group average.
  • The Fund’s equity holdings were the primary contributors to performance in the quarter, led by allocations to the financials, energy and industrials sectors. The allocation to high yield fixed income also contributed to performance.
  • The U.S. dollar slightly weakened over the quarter against developing market currencies as the Japanese yen and euro gained 2.79% and 1.38% respectively. The global bond strategy sleeve’s 100% U.S. dollar exposure was a slight detractor to performance relative to the Fund’s peers.
  • We continue to seek opportunities to reduce volatility in the Fund. In addition, we maintained our longstanding lowduration strategy to gain a higher degree of certainty about companies in which we can invest.
  • The Fund also continued to hold a higher level of liquidity, with an average allocation to cash in the quarter of about 11%. We will be opportunistic in allocating that capital as we find dislocations in the market.

Outlook

  • We expect most major economies to grow at a slower pace during the remainder of the year compared to last year. Global manufacturing and service sector businesses have reported weaker conditions than in recent times.
  • The U.S. budget deficit is expected to rise to $1.0 trillion (4.7% of GDP) in 2019 from structural forces that have deteriorated by a much greater amount than the offsetting cyclical improvement.
  • Trade war rhetoric and complicated political concerns including Brexit, potential European auto tariffs and the start of U.S. presidential debates are likely to mean that global interest rates and credit markets will continue to be volatile in the near term.
  • We believe trade also will continue to be a risk factor going forward. There still is the potential for more tariffs, followed by retaliatory action that might impact companies’ capital investment plans. That, in turn, could continue to affect markets, stocks and ultimately consumer and business confidence.
  • In our view, fundamentals in the credit markets remain stretched, with balance sheets still levered. The slowing in global growth is a concern and makes us cautious about the outlook for credit spreads. We think technicals in credit can be supported with investor expectations that the ECB will resume corporate bond purchases.
  • Real estate operating fundamentals remain solid across much of the globe, as shown by positive operating commentary from management teams in the most recent reporting periods and sector related conferences. We believe the expectation for modest, but positive economic growth and an easier interest rate environment should remain sufficient to drive demand for real estate.
  • Given our expectation for a modest widening of spreads in the second half of the year, we believe our conservative positioning relative to the benchmark is appropriate. We will remain opportunistic with credit selection and overall positioning.

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, 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.

All information is based on Class I shares.

The Fund is managed by Ivy Investment Management Company. The total return strategy is sub-advised by Apollo Credit Management, LLC and the global real estate strategy is sub-advised by LaSalle Investment Management Securities, LLC.

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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Chad Gunther
Robert Nightingale
Christopher J. Parker

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Ivy Crossover Credit Fund

Market Sector Update

  • The second quarter saw a continuation in the risk-on environment from the first quarter, however the period was marked by a moderate sell-off in risk assets in May as trade tensions resurfaced.
  • Despite the risk-on environment, U.S. Treasuries continued to rally. This was due to the anticipation of the Federal Reserve (Fed) cutting its benchmark interest rate, as well as falling interest rates across the globe. The market was pricing in a greater than 60% chance of one or more 25 basis points (bps) rate cuts by year end at the end of the first quarter. That has shifted to the market pricing in a nearly 60% chance of three or more cuts of 25 bps by year end.
  • The macroeconomic data, as well as the expectations for Fed easing, caused the 2-year yield to decline 51 bps to 1.75% and the 10-year yield to decline 40 bps to 2%. The spread between the 10-year U.S. Treasury note and the 3- month U.S. Treasury bill, which last quarter turned negative for the first time since 2007, remains negative or inverted. Another yield curve measure, the spread between the 10-year U.S. Treasury Note and the 2-year U.S. Treasury Note steepened from 14 bps to 25 bps in the quarter.
  • After a significant rise of over 7% in the first quarter, high yield returned a more modest 2.5% as Treasury rates fell and the spread on the index fell from 391 bps to 377 bps. Higher quality within high yield outperformed as BB excess returns (the portion of returns not derived from U.S. Treasury moves) were 1.87% versus 1.59% for B and 35 bps for CCC. Leveraged loans returned 1.58%, continuing to lag behind high yield as loans don’t benefit from falling Treasury yields, and the asset class saw outflows in the quarter.
  • Overall fundamentals for the investment grade universe continue to weaken, especially as the expansion is in its 11th year. The growth in revenues and earnings before interest, tax, depreciation and amortization (EBITDA) (excluding commodity sectors) were up 3.2% and 2.6% in the first quarter of 2019, a deceleration versus 4.5% and 4.3% in the fourth quarter of 2018, respectively.
  • In high yield, median leverage rose to 4.2-times from 4.1-times at the end of 2018. Recently, trends in median leverage in high yield have been better than investment grade, however this is largely due reduced leverage in the quartile with the lowest leverage being offset by an increase in leverage in highest leverage quartile.
  • On a ratings basis, the quarter was largely positive with 0.63 downgrades for each upgrade in the quarter from Moody’s while S&P saw 0.53 downgrade per upgrade. In the first half of 2019 we’ve seen five fallen angels (bond given an investment-grade rating but then reduced to junk bond status due to the weakening financial condition of the issuer) and 31 rising-star credits (bonds considered speculative grade when issued, but have improved their financials, reducing the risk of default) compared to 23 fallen angels and 54 rising stars in 2018.
  • Investment grade issuance was $291 billion in the quarter, down 14% year over year. Issuance, net of maturities, was up 14% year over year, however net supply growth for the first half of the year remained down 9% versus the first half of 2018. Merger and acquisition (M&A) related funding has declined this year to $106 billion in the first half of 2019 versus $143 billion in first half 2018. BBB issuance is 40% of year-to-date supply, down slightly from 43% of full-year supply in 2018. For the quarter, high yield net supply totaled just over $23 billion, which is up sharply from last year’s nearly $4 billion of negative net supply.

Portfolio Strategy

  • The Fund had a positive return and outperformed its benchmark, the Bloomberg Barclays U.S. Corporate Bond Index. The benchmark returned approximately 4.4%, which was driven primarily by falling rates as well as the benchmark’s spread tightening from 119 bps to 115 bps.
  • The Fund further reduced its duration relative to the benchmark, but the difference remains modest. Benchmark duration rose over 0.2 years to 7.6 years at quarter-end. Higher duration means higher price volatility for a given change in spreads.
  • Overall risk positioning in the fund remained relatively constant in the quarter with no material changes to exposures to the various ratings categories. The largest changes in sector positioning were increases in the financial and communications sectors and decreases in the basic materials and consumer non-cyclical sectors.

Outlook

  • The second half of the year has two large factors that likely drive asset performance – Fed policy and trade policy. While the end of the second quarter saw a commitment by the U.S. to hold off on additional tariffs with China, we did see an increase in tariff rates to 25% from 10% on $200 billion of imports as well as other trade frictions, most notably being restrictions on Huawei. Further uncertainty may dampen confidence and investment going forward.
  • The Fed has indicated they are likely to ease, but the pace of easing will have a material impact on asset prices. The market is pricing in a nearly 60% chance of three or more cuts by year end, a pace which we believe to be slightly too aggressive although we do anticipate the Fed easing. We believe macroeconomic data will continue to show a softening trend and will likely fall short of expectations in the second half due to trade policy uncertainty, Brexit and geopolitical concerns.
  • We believe credit spreads should widen for the second half of 2019 due to a few factors. First, macroeconomic data points are likely to underwhelm relative to consensus. Secondly, fundamentals in investment grade remain stretched with corporate balance sheets at their most levered levels post-crisis. Lastly, duration in investment grade marketplace continues to rise.
  • Our view of BB spreads, which is principally where the Fund participates, is for spreads to widen. This is due to the previously mentioned macro factors, as well as BB spreads outperforming BBB and other rating categories within high yield on a risk-adjusted basis. Additionally, as the dollar price of bonds has risen this year, the asset class is more asymmetric as a higher percentage of bonds are trading to their call price compared to recent history.
  • The technical backdrop for spreads remains relatively positive. We believe net supply should be materially lower than last year due to smaller M&A volume and tax changes reducing the incentive to issue debt. However, we expect a higher amount of total fixed income issuance principally from U.S. deficit funding. On the demand side, we see the trends modestly supportive of spreads. Mutual fund flows remain robust and are likely to continue in the near future, but overall yields in the market have compressed, which may reduce demand.
  • Given our expectation for modest widening of spreads in 2019, we believe our conservative positioning relative to the benchmark is appropriate.

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, 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.

All information is based on Class I shares.

The Bloomberg Barclays U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market and includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility and financial issuers. 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. Fixed income securities in which the Fund may invest are subject to credit risk, such that an issuer may not make payments when due or default or that the risk that an issuer could suffer adverse changes in its financial condition that could lower the credit quality of a security that could affect the Fund’s performance. A rise in interest rates may cause a decline in the value of the Fund’s securities, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Investing in foreign securities involves a number of economic, financial, legal, and political considerations that are not associated with the U.S. markets and that could affect the Fund’s performance unfavorably, depending upon the prevailing conditions at any given time. Mortgage-backed and asset-backed securities in which the Fund may invest are subject to prepayment risk and extension risk. The Fund typically holds a limited number of fixed income securities (generally 30 to 50). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund’s NAV than it would if the Fund invested in a larger number of securities. Fund performance is primarily dependent on the management company’s skill in evaluating and managing the Fund’s portfolio. There can be no guarantee that its decisions will produce the desired results. 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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Mark Beischel
Benjamin Esty
Susan K. Regan

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Ivy Apollo Strategic Income Fund

Market Sector Update

  • Rising political conflicts and uncertainty weighed on business sentiment leading to below trend growth in gross domestic product (GDP) in the second quarter.
  • The macro environment has softened with growth slowing in the U.S., Europe and China. The escalating trade dispute with China and weakening fundamentals has left central bankers set to ease policy in response, with many taking a sharp turn from hawkish to dovish. By switching their focus from tight labor markets and accelerating wage growth to slowing economies and softening inflation expectations, policymakers are trying to create a backdrop for lower volatility.
  • In the U.S., the market has priced two to three rate cuts from the Federal Reserve (Fed) in the remainder of 2019. The European Central Bank (ECB) has signaled its willingness to cut rates and potentially restart its purchase of corporate bonds. In China, the government has started to implement a new round of policy initiatives to stimulate growth.
  • The normalization of the Fed’s balance sheet is also winding down as the Fed slows the pace to a level it considers consistent with efficient and effective policy implementation.
  • The yield curve inverted as the market reduced expectations of the Fed’s tightening policy and overall expectations for slower global growth. The 10-year U.S. Treasury declined 40 basis points and the 2-year Treasury declined 51 basis points.
  • Trade tensions continued during the quarter, but the G20 Summit in late June provided an opportunity for the U.S. and China to call a temporary truce in an effort to return to the negotiating table.

Portfolio Strategy

  • The Fund had a positive return in the quarter that was slightly less than the return of its benchmark and its Morningstar peer group average.
  • The market’s reaction to the potential global easing in monetary policy led to a rally in both short- and long-duration Treasuries.
  • The U.S. dollar slightly weakened over the quarter against developing market currencies as the Japanese yen and euro gained 2.79% and 1.38%, respectively. The global bond strategy sleeve’s 100% U.S. dollar exposure hurt performance relative to the Fund’s Morningstar peers.
  • We continue to seek opportunities to reduce volatility in the Fund. In addition, we maintained our longstanding lowduration strategy to gain a higher degree of certainty about companies in which we can invest.
  • The Fund also continued to hold a higher level of liquidity in the quarter. We will be opportunistic in allocating that capital as we find dislocations in the market.

Outlook

  • We expect most major economies to grow at a slower pace during the remainder of the year compared to last year. Global manufacturing and service sector businesses have reported weaker conditions than in recent times.
  • The U.S. budget deficit is expected to rise to $1.0 trillion (4.7% of GDP) in 2019 from structural forces that have deteriorated by a much greater amount than the offsetting cyclical improvement.
  • Trade war rhetoric and complicated political concerns including Brexit, potential European auto tariffs and the start of U.S. presidential debates are likely to mean that global interest rates and credit markets will continue to be volatile in the near term.
  • We believe trade also will continue to be a risk factor going forward. There still is the potential for more tariffs, followed by retaliatory action that might impact companies’ capital investment plans. That, in turn, could continue to affect markets, stocks and ultimately consumer and business confidence.
  • In our view, fundamentals in the credit markets remain stretched, with balance sheets still levered. The slowing in global growth is a concern and makes us cautious about the outlook for credit spreads. We think technicals in credit can be supported with investor expectations that the ECB will resume corporate bond purchases.
  • Given our expectation for a modest widening of spreads in the second half of the year, we believe our conservative positioning relative to the benchmark is appropriate. We will remain opportunistic with credit selection and overall positioning.

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, 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.

All information is based on Class I shares.

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

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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Mark Beischel

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Ivy VIP Securian Real Estate Securities

Market Sector Update

  • Late-cycle concerns have emerged, putting downward pressure on second quarter economic forecasts. Gross domestic product (GDP) growth estimates for the period have fallen to 1.7% as cost pressures, trade tensions, and global uncertainty take their toll. These factors are pressuring corporate earnings, making a year-over-year decline likely for the second consecutive quarter. On a brighter note, the labor picture remains exceptionally strong, with the unemployment rate at 3.6% its lowest level in nearly 50 years.
  • While the U.S. Federal Reserve’s (Fed) base case calls for growth trending to a slower but more sustainable level, rate cuts are likely if the U.S. economy softens more than expected. Interest rates – here and abroad – are signaling that investors are worried about a slowdown. Investors believe the Fed is entering an easing cycle, at futures have priced multiple cuts over the next year. It’s unusual to see such strong market conviction about the need for easier policy while the Fed continues to temper expectations, guiding to only modest easing this year.
  • Despite the pro-cyclical bias of the equity market, the 10-year U.S. Treasury yield declined 11 basis points (bps) to 2.57%. The yield curve continued to flatten with the spread relationship between the 2-year and 10-year U.S. Treasuries ending the quarter at 14 bps, down from 19 bps at the start of the year.
  • All asset classes have performed well to date in 2019 despite slowing growth and fears of a downturn. Ironically, the catalyst for the second quarter rally was growing conviction the Fed will reduce rates in the near term, which would prolong the expansion. Real estate stocks once again delivered positive returns, including the FTSE NAREIT Equity REITs Index, the Portfolio's benchmark.
  • Macroeconomic and interest rate conditions remain favorable for real estate operators, although we are paying careful attention to indicators that suggest a slowdown and possible earnings recession in the second half of the year. Tailwinds from U.S. tax reform, business expansion and positive consumer sentiment have created a solid demand backdrop, allowing real estate investment trusts (REITs) to improve occupancies and command higher rental rate.

Portfolio Strategy

  • The Portfolio delivered a positive return for the quarter, but underperformed its benchmark.
  • The Portfolio's overall performance for the period is attributed to a more defensive positioning. We have held a larger than typical exposure to net lease and health care properties throughout 2019 given our belief that expectations for a “Goldilocks” environment are too optimistic. Net lease and health care companies tend to outperform while interest rates are falling, and underperform when rates climb. Our conviction is heightened by the sharp run-up in equity prices into what we believe will be an “earnings recession” this year.
  • Warehouse REITS also proved to be a detractor to relative performance, although modestly. The burgeoning ecommerce activity has produced strong demand for warehouse space, but new supply has begun to outstrip that demand, leading to reduced rental rate and net income growth for the companies. Typically, that combination has resulted in sub-par performance for the equity and we believe a correction is due. We reduced our exposure to warehouse owners after a period of strong performance left these companies with what we believe are unsustainably inflated valuation levels – particularly if the previously mentioned “earnings recession” unfolds across corporate America.
  • Single family rentals (SFR) REITs were the top performing sector in the benchmark for the quarter on a total return basis. Given the Portfolio’s overweight, it was also the top positive contributor for the quarter. The expense hiccups from previous quarters for now have stabilized, resulting in a robust same store net operating income growth average of 6.4% for the quarter. With greater comfort with their maturing operational controls, SFR holdings were increased during the quarter, as we feel there continues to be a long runway for growth; both from a steady stream of millennial and retiree demand, and from demonstrated outreach for affordable housing.
  • Datacenter REITs outperformed the broader index for the quarter and contributed to the Portfolio’s performance. Demand for the space remains strong, driven most notably by cloud computing, enterprise outsourcing, artificial intelligence and the continued growth of edge computing. We anticipate these tailwinds to produce better than industry earnings growth in the near future and, with the sector valuation remaining compelling, we are overweight the sectors.
  • Also contributing to performance in the quarter were retail REITs. The Portfolio was underweight to both shopping centers and malls in the quarter and both sectors lagged the broader universe. The Portfolio remains underweight to the traditional retail group with the belief that store closings and leasing costs will remain elevated and mute returns for the space.
  • Self-storage REITs remain under new supply pressure, causing significant deceleration in revenue growth. Despite the drag on quarterly performance, we remain underweight the sector. Among the REITs that provide 2019 guidance, the implication is that revenue growth will continue to decelerate as the overhang from new supply erodes pricing power for this subsector. We believe this will be a continued strain on operations into 2020.
  • Negative stock selection among hotel REITS detracted from the Portfolio’s relative performance. We remain underweight the group on concerns that increasing labor costs and continued new supply will pressure earnings, while increasing economic headwinds will pressure sentiment towards the spacer.

Outlook

  • Equity markets remained rock solid for the period, but risks are in play. Geopolitical risks remain high. Increasing labor costs and slowing growth have reset earnings expectations at a lower level. However, we think a strong backdrop for the consumer and favorable Fed policies are enough to keep the economy out of a textbook recession.
  • However, we a being quite vigilant for signs of further macroeconomic data deterioration along with a corporate “earnings recession.” Continued dovish Fed policy should prove favorable for risk assets so long as the date doesn’t deteriorate materially throughout the remainder of the year.
  • With regard to the current commercial real estate cycle, we continue to see stable operating conditions across the sector with few material concerns on the horizon. Bank lending, commercial construction, equity allocations and overall pricing metrics remain much healthier than was often the case in previous cycle peaks. Simply moving into the later stages of this recovery does not mean sector fundamentals will turn negative.

The opinions expressed are those of the Portfolio'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, 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 FTSE NAREIT Equity REITs Index is designed to present investors with a comprehensive family of REIT performance indexes that spans the commercial real estate space across the U.S. economy. The FTSE NAREIT Equity REITs index contains all Equity REITs not designated as Timber REITs or Infrastructure REITs. 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. 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. Because the Fund invests more than 25% of its total assets in the real estate industry, the Fund may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. 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.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Ivy Natural Resources Fund

Market Sector Update

  • Global equity markets posted modestly positive returns on the broad indexes. The energy and materials sectors were mixed with slightly positive returns for materials and slightly negative returns for energy during the quarter. Energy underperformed the broader equity markets, while materials were more in line.
  • After rebounding strongly in the first quarter, crude oil prices declined slightly with West Texas Intermediate, the U.S. benchmark, declining about 3% and Brent crude oil declining about 6%.
  • Toward the end of the quarter, OPEC signaled that it intended to extend its policy that was agreed to in December 2018 to maintain oil production cuts of approximately 1.2 million barrels per day (bpd). OPEC’s primary goals are to balance the oil market and keep inventories at a targeted level, which will support prices.
  • OPEC has found it necessary to reduce production because of the continued growth of U.S. production. Despite U.S. producers seeking to increase free cash flow by moderating capital expenditures, U.S. oil production again grew in the quarter. According to the U.S. Energy Information Administration, U.S. oil production in the second quarter grew by approximately 1.5 million bpd from the second quarter of 2018.
  • Other commodity prices were mixed in the quarter. Iron ore prices were up about 26% because of supply disruptions, while copper prices declined about 7% on decelerating demand trends.

Portfolio Strategy

  • The Fund posted a negative return for the quarter and slightly underperformed the return of its benchmark.
  • The five greatest equity contributors to the Fund’s performance relative to the benchmark were BHP Group plc, Barrick Gold Corp., Rio Tinto plc, Occidental Petroleum Corp. and Canadian Pacific Railway Limited.
  • The five greatest detractors to relative performance were Halliburton Co., RPC Inc., Newmont Mining, WPX Energy Inc. and Centennial Resource Development, Inc.
  • The Fund’s exposure to the energy sector remained stable from the prior quarter, ending at about 66% of equity assets. The remaining sector exposure was composed of materials, industrials and chemicals.
  • In general, we seek to own companies in the Fund with low-cost positions, strong balance sheets and the ability to grow profitably with high returns on capital. We also seek to own companies exposed to favorable trends in their respective commodities and sub-sectors.

Outlook

  • We expect OPEC production cuts to remain in place for the second half of the year and possibly longer. Non-OPEC oil production is expected to grow enough to satisfy global oil demand growth and could possibly exceed it. This would require additional cuts from OPEC to balance the market. U.S. production growth is expected to decelerate but still grow in excess of 1 million bpd in 2019.
  • Global demand for commodities is expected to slow as the market seeks clarity on the resolution of U.S. Federal Reserve policy and U.S. trade policy. Positive results on these two issues could lead to an improvement in global growth and commodity demand.
  • Energy equities continue to price-in a lower oil price than the current spot price, and it is expected that this gap will eventually converge.

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, 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 06/30/2019: Chevron Corp., 6.18%; BHP Group plc, 4.95%; Phillips 66, 4.72%; Rio Tinto plc, 4.65%; EOG Resources, Inc., 4.65%; Halliburton Co., 4.19%; Concho Resources, Inc., 4.07%; Diamondback Energy, Inc., 3.94%; Valero Energy Corp., 3.86%; Marathon Petroleum Corp., 3.70%.

All information is based on Class I shares.

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. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. 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 natural resources can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments; and the cost assumed by natural resource companies in complying with environmental and safety regulations. Investing in physical commodities, such as gold, exposes the Fund to other risk considerations such as potentially severe price fluctuations over short periods of time. The Fund may use a range of derivative instruments in seeking to hedge market risk on equity securities, increase exposure to specific sectors or companies, and manage exposure to various foreign currencies and precious metals. Such hedging involves additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. These and other risks are more fully described in the prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

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Ivy Pictet Emerging Markets Local Currency Debt Fund

Market Sector Update

  • The Fund's benchmark, the JP Morgan GBI-EM Global Diversified Index, gained 5.6% with most of the gains seen in June and coming from stronger local bond prices.
  • Argentina dropped 5%, but gained 22% in June, disguising most of its earlier losses as industrial production started declining again. Brazil gained 7.4% and we believe the expected pension reform will help fiscal savings, though economic data moderated. Colombia gained 3.2%, impacted by the sharp move lower in oil and coal prices. Mexico was up 6.1%, almost all from local bond prices given a central bank now likely to cut rates.
  • Russia gained 10.4%, with interest rates cut by 25 basis points (bps) and while growth slowed, external sector balances remained strong. Turkey gained 10.1% and the currency weakened, but was more than offset by local bond prices supported by lower inflation and a dovish central bank. The Philippines gained 6.8%, mostly from local bond prices as inflation declined and interest rates were cut by 25 bps.

Portfolio Strategy

  • The Fund posted a positive return but underperformed the benchmark for the quarter. Our current strategy continues to be overweight local rates where we believe yields look attractive, such as in Russia, or where the central bank is now likely to cut interest rates such as in Mexico. The dovish U.S. Federal Reserve (Fed) with interest rate cuts on the horizon is also a key factor.
  • Conversely, markets where inflation may surprise on the upside and fundamentals on the downside may result in selective opportunities to move underweight. Hungary is a key example where inflation pressures are building.
  • We continue to look for the perceived right entry point to selectively move overweight emerging market currencies that have improving growth and fundamentals. We expect more idiosyncratic moves over the coming months which will result in our implementing more relative value plays with overweights versus underweights to certain markets.

Outlook

  • We expect global data and growth to remain weak, but believe emerging market growth is holding up better than developed market growth, which is more late cycle. U.S. growth is expected to soften with an increasingly dovish Fed with interest rate cuts well priced in and this could continue to be supportive for some emerging market local rate markets. While less optimism over growth is normally not supportive for currencies, a favorable growth differential would be supportive while valuations look appealing compared to their long-term equilibrium levels.
  • We believe emerging market inflation remains low on average and the outlook remains favorable given output gaps are not yet closed in most countries.
  • In local rates, we see select Asian countries, Mexico, Peru and Russia with a dovish bias offering opportunities to be overweight while eastern Europe is more likely to have a bias towards tighter policy should the economic environment in Europe improve. To be sure, this is still a sovereign investment-grade asset class, yielding over 5.5%, with potential returns from currencies.

  • The opinions expressed are those of the Fund’s managers regarding 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.

    The JP Morgan GBI-EM Global Diversified is an unmanaged index that tracks the performance of emerging market debt. It is not possible to invest directly in an index.

    Effective December 2018, Wee-Wing Ting, portfolio manager, left the firm to pursue other opportunities.

    All information is based on Class I shares.

    Risk factors: As with any fund, 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. 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, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund’s performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/or less stringent financial reporting standards. Sovereign debt instruments are also subject to the risk that a government or agency issuing the debt may be unable to pay interest and/or principal due to cash flow problems, insufficient foreign currency reserves or political concerns. Risks of credit-linked notes include those risks associated with the underlying reference obligation, including but not limited to market risk, interest rate risk, credit risk, default risk and foreign currency risk. The buyer of a credit-linked note assumes the risk of default by the issuer and the underlying reference asset or entity. If the underlying investment defaults, the payments and principal received by the Fund will be reduced or eliminated. Also, in the event the issuer defaults or there is a credit event that relates to the reference asset, the recovery rate generally is less than the Fund’s initial investment, and the Fund may lose money. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. Derivatives also may be subject to counterparty risk, which includes the risk that a loss may be sustained by the Fund as a result of the insolvency or bankruptcy of, or other non-compliance by, another party to the transaction.These and other risks are more fully described in the Fund's prospectus.

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Ivy Accumulative Fund

Market Sector Update

  • The upward momentum in equities continued into the second quarter, but at a more moderate pace compared to the sharp rally at the start of the year. The Russell 3000 Growth Index, the Fund’s benchmark, advanced 4.5% for the period, with 10 of 11 sectors delivering positive returns. There were numerous market moving headlines during the period, but none more dominating than the China trade negotiations and the expected path of future interest rates.
  • The U.S.-China trade story veered from news that a deal was near in April, to a complete breakdown in early May, which included significant sanctions placed on Huawei, China’s technology giant. The story appears to be rebounding again after President Donald Trump and China President Xi Jinping called a “truce” at the G20 Summit and agreed to restart talks. Investors reacted in real-time to this sequence of events by moving markets lower on fears of a prolonged trade war and then higher on renewed hope for compromise.
  • With regard to interest rates, there were expectations in early 2019 the U.S. Federal Reserve (Fed) would prolonged its program of raising the federal funds rate with at least two hikes during the year. However, slowing global economic growth has led to a reversal in that forecast, with many investors anticipating the Fed to start cutting rates. Options markets are currently pricing in a 100% probability of a 25 basis points (bps) rate cut at the Fed’s July meeting and a 63% probability of another 25 bps of cuts through the remainder of 2019.

Portfolio Strategy

  • The Fund had a positive return for the quarter and slightly outperformed its benchmark.
  • The Fund benefited from solid stock selection, while sector allocation was a minor drag when compared to the benchmark. Strong stock selection in the communication services, industrials and information technology sectors more than offset slight weakness in the consumer discretionary space. From an allocation standpoint, relative performance was marginally impacted by the Fund’s overweight in health care, which was the second worst performing sector in the benchmark during the period.
  • With regard to individual holdings, top contributors included Qualcomm, Inc., Market Axess Holdings, Inc., the Walt Disney Company, Gardner Denver Holdings and Dexcom, Inc. Conversely, the largest detractors to performance were Aerie Pharmaceuticals, Inc., Facebook, Inc., Farfetch Ltd., GoDaddy, Inc. and Apple, Inc.

Outlook

  • Looking forward, we remain diligent and patient with our investment approach, recognizing that the economic environment is not always predictable. We seek companies with strong secular growth profiles, robust business models, strong competitive moats and competent management teams that are properly prepared to navigate the difficult times, as well as capitalize on future opportunities. Investing in businesses, not trading in the latest “tweet” remains our focus for generating long-term capital appreciation.
  • Our efforts remain laser focused on researching individual companies of all sizes that we believe are well positioned to disrupt their markets while exceeding market averages on profitability. We continuously monitor a list of target companies to assess their potential for delivering above market returns over a three-to-five year basis, not just in the short term.

The opinions expressed are those of the Fund’s manager 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, 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.

All information is based on Class I shares.

Effective Feb. 21, 2019, the Fund's benchmark changed from the S&P 500 Index to the Russell 3000 Growth Index.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. The Russell 3000 Growth Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. It is not possible to invest directly in an index.

Top 10 Equity Holdings as a percent of net assets as of 06/30/2019: Microsoft Corp. 6.4, Amazon.com, Inc. 3.7, The Walt Disney Co. 3.5, The Boeing Co. 3.3, Elanco Animal Health, Inc. 3.2, Fiserv, Inc. 3.0, MasterCard, Inc. 2.9, Danaher Corp., 2.7, Take-Two Interactive Software, Inc. 2.6, Gardner Denver Holdings, Inc. 2.6.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. Large-capitalization companies may go in and out of favor based on market and economic conditions. Prices of growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. The Fund typically holds a limited number of stocks (generally 30 to 50). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund's net asset value than it would if the Fund invested in a larger number of securities. 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 VIP High Income

Market Sector Update

  • High yield bonds posted positive gains in the second quarter by returning 2.57%, as measured by the ICE BofAML US High Yield Index. Year to date, the index has returned 10.16%. Meanwhile, leveraged loans underperformed high yield, returning 1.63% and 5.58% for the quarter and year to date, respectively.
  • The Federal Reserve (Fed), tariffs and the trade war between the U.S. and China continued to dominate the markets in the quarter. At the Fed’s June meeting, the interest rate forecast “dots” were lowered, indicating participants are looking for 50 basis point (bps) in cuts by the end of the year. This helped extend the equity and bond market rallies as a dovish Fed is seen as supportive of asset values. The U.S. and China agreed to continue talks after the G20 Summit, which was viewed positively.
  • After seeing $14.1 billion of inflows in the first quarter, the high yield asset class recorded $600 million in outflows in the second quarter. Year to date, high yield mutual fund inflows are $12 billion compared with outflows totaling $24.5 billion during the first six months last year.
  • Leveraged loans continued to experience outflows in the quarter with approximately $8.8B leaving the asset class mainly due to the Fed’s dovish pivot and high likelihood of a 25 bps rate cut at the end of July.
  • High yield new-issue volume in the second quarter was strong at $74.7 billion versus $65.4 billion last quarter. Yearto- date volume is up 11% over last year. Leveraged loan new-issue volume was $90.9 billion in the quarter versus $66.8 billion in the first quarter. However, year-to-date gross loan issuance is down 38% relative to last year reflecting the negative sentiment and technicals in the loan market.

Portfolio Strategy

  • The Portfolio had a positive return, but underperformed the benchmark.
  • The Portfolio’s weighting in bonds versus loans did not change materially from quarter over quarter. Currently, the allocation breakdown is 66% bonds, 20% loans, 6% other and 8% cash. Our weighting by rating category is 16% BB, 50% B and 24% CCC, as measured by Standard & Poor’s ratings.
  • We have maintained our exposure to leveraged loans as they continue to offer attractive yields relative to their seniority in the capital structure. They also offer the potential for less volatility in times of stress, such as fourth quarter of 2018, when leveraged loans outperformed the Portfolio’s benchmark by 339 bps.
  • As yields have tightened and spreads compressed year to date, we have become more cautious about the risks we are taking. The outperformance of the BB rated bonds has mostly been rate-driven as the 10-year U.S. Treasury note has moved from 2.68% to start the year to 2% at the end of the quarter. We view our loan exposure as a replacement to our exposure to the BB rated category and has underperformed year to date. When looking at the yield pick-up we are getting in loans relative to that of BB rated paper, we think it continues to make sense holding loans, especially as the 10-year Treasury note is close to 2%.
  • Our structural underweight in high yield bonds, when compared to the all-bond benchmark, again detracted from performance as bank loans underperformed the ICE BofAML High Yield Index. The allocation to loans was the largest single detractor during the quarter, for reasons outlined above. We continued to have a meaningful underweight to the energy sector, but unlike the first quarter, the energy sector in the second quarter underperformed which helped our relative performance.
  • Credit selection in health care services and cable sectors contributed to performance in our bond portfolio, while credits in agriculture and gaming detracted. Our weighting in equites also detracted from performance.

Outlook

  • Our outlook for a sharp rebound in growth in the second half of 2019 has been tempered by the continued global slowdown stemming from the uncertainty around U.S.-China trade. Our tempered outlook is somewhat offset by the fact that a global easing cycle is now in place and looks likely to build in the coming months along with growth in the U.S. continuing, albeit at a slower pace.
  • Longer term, “extending the cycle” depends on the stabilization of global growth which will be highly influenced by a resolution, or not, between the U.S. and China on trade negotiations. According to the Duke CFO survey completed in June, the outlook for earnings, wages, inflation and capital spending deteriorated in Q2. To be certain, trade wars and broad economic uncertainty are hurting the economic outlook.
  • As always, our focus when evaluating investments is on a company’s business model and competitive advantages in order to weather a recession and perform throughout the cycle.

The opinions expressed are those of the Portfolio’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, 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.

Diversification is an investment strategy that attempts to manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.

The ICE BofAML US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. It is not possible to invest directly in an index

Risk factors: The value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio 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 Portfolio 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 Portfolio's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Ivy VIP Global Bond

Market Sector Update

  • Rising political conflicts and uncertainty weighed on business sentiment leading to below trend gross domestic product (GDP) growth during the quarter. The macro environment softened with growth slowing in the U.S., Europe and China. The escalating trade war concerns between the U.S. and China left central banks set to ease policy in response to weakening data. Policy makers took a sharp turn from hawkish to dovish with the weakening fundamentals.
  • In the U.S., the market has priced two to three rate cuts by the Federal Open Market Committee for the remainder of 2019. In Europe, the European Central Bank (ECB) has signaled its willingness to cut rates and potentially restart its purchase of corporate bonds. And finally, in China, the government has started to implement a new round of policy initiatives in an effort to stimulate growth.
  • The normalization of the U.S. Federal Reserve’s (Fed) balance sheet is also winding down as the Fed slows down the pace of decline in the balance sheet to a level consistent with believed efficient and effective policy implementation.
  • The yield curve inverted as the market brought down expectations of the Fed’s tightening policy and overall expectations of a slower global growth environment. The 10-year U.S. Treasury declined 40 basis points while the 2- year U.S. Treasury declined 51 basis points.
  • By switching their focus from tight labor markets and accelerating wage growth to slowing economies and softening inflation expectations, policymakers are trying to create a backdrop for lower volatility.

Portfolio Strategy

  • The Portfolio had a positive return and performed in line with its benchmark for the quarter. The market’s reaction to the potential global ease in monetary policy led to a rally in both short- and long-duration Treasuries.
  • The U.S. dollar slightly weakened over the quarter against developed market currencies as the yen and euro gained 2.79% and 1.38%, respectively. The Portfolio’s 97.5% U.S. dollar exposure hurt performance relative to peers.
  • We continue to seek opportunities to reduce volatility in the Portfolio. Additionally, we are maintaining a low duration strategy for the Portfolio as we feel it allows us a higher degree of certainty involving those companies in which we can invest.
  • We continue to focus on maintaining proper diversification for the Portfolio. We continue to hold a higher level of liquidity (patient capital) because of structural changes in the capital markets. We will be opportunistic in allocating that capital when we believe dislocations in the market arise.

Outlook

  • We expect most major economies to grow at a slower pace for the remainder of the year. Global manufacturing and service sector businesses report weaker conditions today than in recent times.
  • Trade war rhetoric and complicated political concerns like the ongoing Brexit saga, European auto tariffs and the U.S. presidential debates will likely mean that global interest rates and credit markets will continue to exhibit volatility in the near term. We believe trade will continue to be a risk factor going forward. There is the potential for more tariffs, followed by retaliatory action that might impact company capital investment plans. A negative feedback loop might impact markets, stocks and ultimately consumer and business confidence.
  • Fundamentals in the credit markets continue to remain stretched with balance sheets remaining levered. Softer global growth is concerning and leads us to be cautionary on the outlook for credit spreads. Technicals in credit can be supported with investors’ expectations that the ECB will resume corporate bond purchases.
  • Given our expectation for modest widening of spreads during the second half of 2019, we believe our conservative positioning relative to the benchmark is appropriate. We will be opportunistic about our credit selection and overall positioning to take advantage of perceived opportunities and dislocations as they present themselves.
  • The U.S. Federal budget deficit is expected to rise to $1.0 trillion (4.7% of GDP) in 2019 from structural forces which have deteriorated by a much greater amount than the offsetting cyclical improvement.

The opinions expressed are those of the Portfolio’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, 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.

Diversification and asset allocation are investment strategies that attempt to manage risk within your portfolio but they do not guarantee profits or protect against loss in declining markets.

Risk factors: The value of the Portfolio’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. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio 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 Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Mark Beischel

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Quarterly Fund Commentary

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