Ivy LaSalle Global Risk-Managed Real Estate Fund

Market Sector Update

  • Global real estate securities were lower in the third quarter, with the sector lagging the solid returns of the broader equity market for the period.
  • For a large portion of the third quarter, real estate securities and broader equities continued to advance benefitting from the combination of a supportive economic backdrop and positive operating results. As the quarter progressed investors began to refocus their attention to the health of the overall economic outlook, looking past lingering trade tensions and political uncertainty.
  • In the quarter’s final weeks, this shift in sentiment drove an increase in interest rates, which weighed on the earlier performance of the real estate sector and favored more economically sensitive broad market segments.
  • Share prices for global real estate securities are modestly ahead for the year and lead bond indices, but the asset class has trailed the broader equity market in 2018.

Portfolio Strategy

  • The Fund outperformed its benchmark, FTSE EPRA/NAREIT Developed Index, for the quarter, based on Class I shares. Relative outperformance was driven by positive stock selection, stemming from strong results in the U.S., Hong Kong and Japan.
  • Regional allocation results were modestly negative, somewhat offsetting the positive impact of selection results during the quarter. Underweight positions to Singapore and Canada weighed on results in the period. Singapore performance rebounded after a weak first half of 2018, while Canadian company performance has benefitted from better than expected economic growth and firming oil prices.
  • Positive stock selection was driven by outperformance in the Asia Pacific region, particularly in Hong Kong. Strong Hong Kong results stemmed from a tilt to the region’s office and non-discretionary retail sectors.
  • Several of the Fund’s country allocations were adjusted during the quarter. The Fund’s overweight position to Australia was transitioned to an underweight. This change was used to shift the Fund’s U.K. market weight position to an overweight and increase overweight positions to Hong Kong and Japan. The Fund’s overweight to the U.S. was also modestly reduced. Despite the modest reduction in U.S. exposure, the Fund remains meaningfully overweight the country. Underweight positions to Singapore, Canada and Continental Europe were maintained during the quarter.
  • Given the Fund’s lower-risk investment strategy, the portfolio is tilted toward companies we believe are better quality assets, lower leverage and have management teams capable of adding shareholder value. The benefit of the Fund’s strategy was evident in the latter half of the period as global markets were negatively impacted by rising trade tensions which resulted in companies with higher-risk attributes lagging those of a lower-risk nature, and in turn, adding a further benefit to Fund results.

Outlook

  • Global economic growth expectations were largely unchanged during the quarter. Leading economic indicators have come off peak levels, but continue to suggest continued economic expansion. Ongoing global trade and political tensions remain a risk.
  • Interest rates, from both a nominal and real perspective, have trended higher this year. Tighter financial conditions and higher borrowing costs can create headwinds for risk assets. At this time, tighter financial conditions have not reached a level that has significantly impacted the pricing of direct real estate.
  • In addition, a broadly positive economic environment, any impact from tighter financial conditions is likely to be mitigated to some degree by the benefits such an economic environment provides. With regard to the real estate sector, a more positive economic backdrop drives the potential for further demand for space and consumption, providing potential upside to company cash flows.
  • Real estate operating fundamentals are healthy across much of the globe, most recently demonstrated by broadly positive operating results relayed in the latest quarterly and half-year reporting periods. Management teams in several regions have suggested the possibility of a modest near-term acceleration. Given the health of real estate fundamentals in the current economic and capital market environment, we continue to expect solid levels of earnings and dividend growth from real estate securities.
  • Global real estate securities continue to offer attractive pricing compared to their historical trading pattern with private real estate.

The opinions expressed are those of the Fund’s managers at 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 Sept. 30, 2018, 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 EPRA/NAREIT Developed Index is an unmanaged index that tracks the performance of listed real estate companies and REITs worldwide. It is not possible to invest directly in an index.

Co-Portfolio Manager Stanley J. Kraska, Jr. retired from LaSalle Investment Management Securities on Sept. 4, 2018.

Risk factors: The value of the Fund's shares will change and you could lose money on your investment. 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, it may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. 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. The Fund is non-diversified, meaning that it may invest a significant portion of its total assets in a limited number of issuers, and a decline in value of those investments would cause the Fund's overall value to decline greater than that of a more diversified portfolio. There is no guarantee that the Fund will not decline in value in comparison with funds that do not use a risk-managed approach. 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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September Highlights: The yield curve effect

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Watch the Ivy team's take on the flattening yield curve and its effect on bonds and equities.

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Jeff Surles, CFA
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Matt Norris, CFA
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Ivy Investment Management Company
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Susan Regan
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Mercedes unveils its first battery-powered model

Mercedes-Benz put Tesla in its sights in September as it introduced its first model of its electric-vehicle line, the EQC crossover, reports Bloomberg.

Mercedes is the latest traditional luxury brand to enter the electric-car race, joining Porsche, Audi and Jaguar to challenge California-based Tesla.

“We are going all in. It’s starting right now,” said Daimler AG CEO Dieter Zetsche.

Daimler, which includes the Mercedes and Smart brands, is making a $12 billion investment in the technology and anticipates offering 10 fully electric cars by 2022. The automaker plans to utilize existing assembly plants for EQC production rather than establishing a dedicated electric facility, Zetsche added.

The EQC, which is roughly the size of the popular GLC line, features a range of 280 miles per charge and accelerates to 62 mph in 5.1 seconds. Production of the vehicle starts in the first half of 2019. (Source: Bloomberg

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Four generational myths that can hurt client relationships

One of the biggest obstacles to peaceful, cohesive cross-generational relationships is the presence of generational stereotypes. Misinformation evolves into stereotypes which spiral into myths — and all of this is exacerbated by the extensive reach of social media and the internet. While it may seem like Millennials bear the brunt of today’s generational stereotypes, the reality is negativity afflicts each generation. To improve your generational understanding and foster more effective cross-generational relations with your clients, don’t fall prey to these common myths.

July Highlights - Shale vs. The World: What's next in a volatile oil market?

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Will increased output by OPEC and U.S. shale oil producers put a lid on prices? How might the supply/demand balance change if global growth cools?

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David Ginther, CPA
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Ivy Investment Management Company
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Michael Wolverton, CFA
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OPEC is boosting output, U.S. shale oil production is growing again, emerging markets are demanding more energy – where might oil prices go from here? Watch the highlights as Ivy’s energy investment team’s discusses key issues and opportunities.

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Ivy European Opportunities Fund

Market Sector Update

  • Global equities as a whole were flat during the quarter. The U.S. was a standout performer (up approximately 3%). European markets were up in local currency, though posted slightly negative performance in U.S. dollar terms. The U.S. dollar rebounded strongly over the quarter, gaining approximately 4% versus a basket of other currencies. Emergingmarket equities underperformed – as demonstrated by a 13% local currency decline in Chinese A shares. Additionally, many emerging-market currencies were particularly hard hit and detracted from market performance.
  • Conviction of continued solid global gross domestic product (GDP) growth remains. We believe the Tax Cuts and Jobs Act passed at the end of 2017, along with higher federal spending, will serve as a tailwind to economic growth in 2018 and into 2019 via increase business and consumer spending. However, inflation concerns and a higher-thanexpected U.S. Federal deficit have added to concerns of unsustainably strong economic growth.
  • During the quarter, the U.S. Federal Reserve (Fed) expectedly raised rates and indicated they plan on two additional rate increases in 2018. The Fed has stated they will continue on the path to unwind its multi-trillion-dollar balance sheet, which the market anticipates.
  • The European Central Bank (ECB) began to taper its bond purchases in early 2018, and their first rate increase is expected during the fourth quarter of 2019. The ECB has focused its attention on getting the banking system fit to handle any additional shocks by pushing for more capital into weaker Italian, German, Spanish and Greek banks as well as sales of non-performing loans to third parties.
  • Emerging-market growth is now under pressure from the combination of a stronger U.S. dollar and higher oil prices. The outlook is further clouded due to aggressive U.S. trade policy and rhetoric regarding numerous nations, with China being a particular focus of escalating tariffs. These headwinds could result in sales and earnings pressure for multinational and emerging-market companies.

Portfolio Strategy

  • The Fund outperformed its benchmark (Class I shares) for the quarter. Strong sector allocation drove relative outperformance, led by overweight allocations to the energy and information technology sectors. Additionally, an underweight allocation to the poor-performing financials sector aided performance. Stock selection slightly detracted from performance, with selection in consumer discretionary the top detractor.
  • Currency hedges stemming from the U.S. dollar strengthening versus the euro slightly aided performance. At quarter end, the Fund maintains no currency hedges.
  • Country allocation benefited performance, with the Fund’s overweight allocation to the U.K. and underweight allocation to Switzerland top contributors. Stock selection was solid in France and more than offset poor selection in Spain. By and large, the Fund’s country allocations are driven by sector and company analysis, rather than macroeconomic viewpoints.
  • As the quarter progressed, we maintained a growth and cyclical overweight allocation relative to the benchmark. We reduced exposure to consumer discretionary, while adding to energy.
  • The Fund’s largest sector overweights continue to include information technology, industrials and energy where we continue to find companies we believe provide good recovery potential or growth prospects. In our view, our underweight allocations to consumer discretionary, consumer staples and financials tend to have poor relative fundamentals and valuation.

Outlook

  • We think global economic growth will remain moderate as we move through 2018 and 2019. We expect the U.S., Europe, China and some parts of emerging markets to be the main engines of growth. We anticipate moderate earnings growth, somewhat high valuations and a market environment with continued political and macroeconomic uncertainty in the U.S., Europe and Asia.
  • We believe the largest macro risks include an expanding trade war between the U.S. and China, as well as higherthan- expected inflation. Nevertheless, bonds are becoming less attractive relative to equities and we believe this trend will continue if global inflation reaccelerates. We expect the Fed to enact additional rate increases in 2018 and 2019, as well as continue to shrink its balance sheet as planned. We believe the ECB will begin to raise rates during the fourth quarter of 2019, while continuing to taper its purchase of bonds.
  • In Europe, political uncertainty has increased largely due the region’s inability to effectively manage and absorb a large population of refugees. The new Italian government is headed by a coalition of two parties that are Euro-skeptics, an environment that could induce increased instability to the region. We feel the U.K. faces additional long-term headwinds stemming from Brexit, as unknowns and “an uncertainty tax” will hurt its economy. In France, pro-business reformer Emmanuel Macron pushed through labor reforms. That said, we believe expectations for major European Union reforms look poor. Interests in the region are widely disparate, and leadership is slow moving and seemingly lacks the political capital necessary to drive substantive reform.
  • We continue to target sectors, stocks and countries we believe best reflect our economic outlook and that have solid and growing free cash flow. We believe the odds of a recession are low as there has not been a boom in spending, excluding some property markets around the world, and the U.S. has a large tax cut that should encourage capital investment and consumer spending. In our view, the strongest long-term GDP growth should still occur in emerging markets and the U.S. due to better demographics. In an effort to capture this growth, we intend to continue investing in European multinationals with high revenue exposure to the U.S. and/or emerging markets.

The opinions expressed are those of the Fund’s manager 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 June 30, 2018, 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.

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. 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. Because the Fund is generally invested in a small number of stocks, the performance of any one security held by the Fund will have a greater impact that if the Fund were 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 Micro Cap Growth

Market Sector Update

  • Smaller companies added to first quarter gains over the past three months, and also outperformed their large-cap peers, based on broad market indices.
  • Small-cap company outperformance has now occurred in each of the past four months, which in and of itself is not that significant; however, the magnitude is. Over this four-month period small caps, based on the Russell 2000 Growth Index are outperforming large caps, based on the S&P 500 Index, by the largest margin since 2010. This performance differential is almost certainly a result of increasing rhetoric about tariffs and fears of a global trade war erupting. On the surface, it would appear a trade war would be less of an impact for smaller companies as they commonly generate a lower percentage of revenue and earnings from overseas compared to large caps.

Portfolio Strategy

  • In the quarter ended June 30, 2018, the Portfolio outperformed its benchmarks, the Russell Microcap Growth Index and Russell 2000 Growth Index.
  • In the second quarter, every sector but one posted positive returns in the Russell Microcap Growth Index, which is indicative of the broad-based strength. In what has been a reoccurring theme in the recent past, the index continued to be fueled by its two largest sectors – healthcare and technology. Broadly speaking, these sectors benefited from a powerful combination of strong financial results, innovative new products, as well as multiple expansion.
  • The industrials and consumer discretionary sectors also produced solid gains for the index in the quarter. In the past, companies in these two sectors commonly paid some of the highest tax rates; thus, the passage of tax reform has enabled them to generate significant year-over-year growth in after tax cash flow and earnings. Lastly, as previously mentioned, there was no real drag on the index’s performance. Materials was the worst performing sector and it was down only slightly during the period.
  • Performance attribution analysis for the quarter reveals that the Portfolio benefited from both allocation effect and stock selection. From an allocation standpoint, performance was aided by the technology sector since the Portfolio carries an overweight position, and it was one of the strongest performing areas in the index. Additionally, the Portfolio’s underweight position in financials also helped given this area of the market underperformed during the period.
  • Stock selection provided an outsized benefit during the second quarter due primarily to the Portfolio’s health care holdings. Despite being underweight the sector, the Portfolio’s holdings appreciated meaningfully more than the index’s, which resulted in significant outperformance in the second quarter. Technology holdings also added to the selection benefit. On the negative side, stock selection in the energy sector created a modest headwind.
  • Companies that had the biggest positive impact on performance in the quarter included Tabula Rasa Healthcare, Tactile Systems Technology and Axogen. Each of these companies have unique, innovative products that provide them with strong competitive positions in very large, underpenetrated end markets. In terms of performance detractors, the Portfolio benefited from having very few holdings that performed poorly. GTT Communications and Mercury Computer Systems were the only two laggards in the quarter. In both instances this weakness came after posting sizable gains over the past 18-24 months.

Outlook

  • Looking forward, as we enter the second half of the year, it appears that business fundamentals remain favorable and the prospect for robust earnings growth is still intact. However, as valuation multiples continue to march higher, especially for smaller healthcare and technology companies, it would increasingly appear that the marketplace recognizes this forecasted growth. After posting strong absolute and relative returns in the quarter, we have trimmed some of our stronger performers, which is providing us fresh capital to seek out new investments. While it is anyone’s guess which direction the market is headed in the short term, we remain ready to capitalize on any pullback that could occur due to something such as the escalating global trade conflict.

The opinions expressed are those of the Portfolio’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, 2018, 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 holdings (%) as of 06/30/2018: 8x8, Inc. 5.3, Aerie Pharmaceuticals 5.2, Tabula Rosa HealthCare, Inc. 4.9, Mimecast Ltd. 4.9, Tactile Systems Technology, Inc. 4.7, AxoGen, Inc. 4.0, MYR Group, Inc. 3.2, Kornit Digital Ltd. 3.1, EVO Payments, Inc. 3.1 and Cornerstone OnDemand, Inc. 2.8.

The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. The Russell Microcap Growth Index measures the performance of the micro-cap growth segment of the U.S. equity market. The S&P 500 Index is an unmanaged index of common stocks. 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. Market risk for small-sized companies may be greater than that for medium or large companies. Smaller companies are more likely to have limited financial resources and inexperienced management. Stocks of smaller companies, as well as stocks of companies with high-growth expectations reflected in their stock price, may experience volatile trading and price fluctuations. Furthermore, when the economy enters a recession, there tends to be a “flight to quality,” which may exacerbate the increased risk and greater price volatility normally associated with smaller companies. The Portfolio’s performance may be more susceptible to a single economic, regulatory, or technological occurrence than if it had a more diversified investment portfolio. The Portfolio may invest in Initial Public Offerings (IPOs), which can have a significant positive impact on the Portfolio’s performance that may not be sustainable. 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. 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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