Ivy Micro Cap Growth Fund

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 Fund outperformed its benchmarks, the Russell Microcap Growth Index and Russell 2000 Growth Index, based on Class I shares.
  • 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.
  • Portfolio performance attribution analysis for the quarter reveals that the Fund benefited from both allocation effect and stock selection. From an allocation standpoint, performance was aided by the technology sector since the Fund carries an overweight position, and it was one of the strongest performing areas in the index. Additionally, the Fund’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 Fund’s health care holdings. Despite being underweight the sector, the Fund’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 Fund 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 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, 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 Fund’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 Fund’s performance may be more susceptible to a single economic, regulatory, or technological occurrence than if it had a more diversified investment portfolio. The Fund may invest in Initial Public Offerings (IPOs), which can have a significant positive impact on the Fund’s performance that may not be sustainable. 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. 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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John Bichelmeyer

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Ivy Tax-Managed Equity Fund

Market Sector Update

  • Second quarter equity performance was strong across all styles and capitalization ranges. Growth styles continued
    to outperform value styles while small-cap styles outperformed all capitalization styles according to broad market
    indices.
  • Most of the market gains in the quarter came in May as the technology sector pushed higher. However, during the
    quarter, especially in June, there was a clear underlying rotation to more defensive positions, specifically dividend
    payers and securities at lower valuation levels. This likely stems from falling bonds yields, concerns over global growth
    and progress toward implementation of trade tariffs.
  • Although trade war rhetoric was not expected to disappear, it unfortunately intensified during the quarter as the U.S.
    threated additional tariffs on China but also on several U.S. allies.
  • As the quarter closed out there were emerging signs that the trade war uncertainty was beginning to find its way
    into business and consumer confidence, supply chain lead times and Federal Reserve (Fed) outlook commentary.
  • The Fed increased rates in June, marking the second this year and seventh since the first hike back in December of
    2015. The front end of the yield curve moved higher during the quarter while the 10 year, despite some notable swings,
    moved only slightly higher resulting in a further flattening in the yield curve.
  • Momentum and growth factors outperformed while value and quality underperformed. It is notable that more
    defensive factors, such as dividend yield, strongly outperformed momentum toward the end of the quarter.

Portfolio Strategy

  • During the quarter, the Fund had strong gains similar to its benchmark, the Russell 1000 Growth Index, but
    underperformed in the period. Performance was driven by favorable stock selection in technology and consumer
    discretionary. The main detractors were industrials and energy.
  • Outperformance in technology was driven by overweight positions in salesforce.com, Adobe and MasterCard. These
    stocks benefited from a strong and sustained level of sales and earnings growth.
  • Relative consumer discretionary strength was driven by Nike, a new position during the quarter, and Amazon.com.
    Nike is seeing the benefits of a refresh in product innovation and new digital marketing strategy.
  • Industrials was a notable detractor during the quarter as slowing global growth, potential ramifications of a trade war
    and a stronger U.S. dollar weighed on earnings forecasts and valuation. Stanley Black and Decker and Caterpillar were
    relative weak performers in the Fund.
  • Weakness in energy was driven by an overweight position in oil service company Halliburton. During the quarter
    there was growing concern about constrained takeaway capacity in the Permian basin temporarily reducing demand
    for Halliburton’s services.

Outlook

  • U.S economic data remained supportive of gross domestic product growth, likely 2.5% to 3.0%, with few apparent
    excesses. Unemployment should continue to move lower while inflationary pressures continue to build. Fed tightening
    will continue as policy moves from accommodative to neutral. The general set-up is a move toward late cycle with
    increasing risk and volatility.
  • A full-blown trade war remains the biggest threat to markets. Globalization has been a boon to sales growth and
    profit margins for many U.S. companies. Many of these companies have also been revalued higher based on the
    stability and consistency in profitability given a global business model.
  • This highlights that not only would a trade war unwind some of the margin benefits accrued by globalization over
    the past several decades, but it could also lead to a revaluation lower in those equities that benefited.
  • Economist project limited first order impacts from tariffs, but clarity on trade rules is needed for corporations.
    Continued uncertainty about the duration of trade war rhetoric and depth of tariffs will erode the strong business
    confidence built following tax reform. Willingness to invest capital in long-term growth projects will diminish if the rules
    to global trade are not known. That pause in spending will have economic and market ramifications.
  • If the trade war escalates then sectors considered more defensive – consumer staples and pharmaceuticals – would
    be a potential hiding spot for investors. Unfortunately, growth prospects in those sectors are currently limited and it
    appears too early to be interested in those areas on a fundamental basis. Thank you for your continued support.

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, 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: Microsoft Corp. 9.2, Amazon.com, Inc. 6.8, Apple, Inc. 5.1, Alphabet, In. 4.3, salesforce.com, Inc. 4.3, Verisk Analytics, Inc. 3.9, Adobe Systems, Inc. 3.8, CME Group, Inc. 3.6, Visa,
Inc. 3.4 and Home Depot, Inc. 3.2.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. 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. Tax-management strategies may alter investment decisions and affect portfolio holdings, when compared to
those of non tax-managed mutual funds. Market conditions may limit the Fund’s ability to realize tax losses or to generate dividend income that is taxed at favorable Federal income tax rates. In addition, the Fund’s
tax-managed strategy may cause the Fund to hold a security in order to achieve more favorable tax-treatment or to sell a security in order to realize tax losses, which could result in losses that exceed any benefits
of the tax-managed strategy. The Fund’s ability to utilize various tax-management techniques may be curtailed or eliminated in the future by tax legislation or regulations. While the Fund seeks to minimize tax
distributions to shareholders, it may realize capital gains and earn some dividends. 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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Bradley Klapmeyer

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Ivy Global Income Allocation Fund

Market Sector Update

  • Despite an increasingly uncertain macroeconomic backdrop, with most leading economic indicators slowing and
    geopolitical concerns rising, riskier asset prices held up well during the quarter. Equities were able to produce
    moderate gains and riskier parts of the fixed-income market outperformed.
  • One notable exception to this was emerging markets, where trade fears and slowing economic conditions took their
    toll on asset prices and currencies.
  • The U.S. dollar resumed its status as a safe haven, appreciating against most major currencies during the quarter.
  • Despite additional U.S. Federal Reserve rate hikes, the long end of the yield curve has remained anchored, resulting
    in additional flattening of the curve.

Portfolio Strategy

  • The Fund outperformed its benchmark for the quarter, with both the equity and fixed-income portfolios contributing
    to relative outperformance.
  • The fixed-income portfolio benefited from a shorter duration relative to the benchmark as well as significant exposure
    to both high-coupon securities with short call provisions and securities with floating rate coupon features.
  • Within the equity portfolio, allocations to energy, financials and information technology were top relative contributors
    to Fund performance. On a geographic basis, allocations in Norway, Canada and the U.S. benefited performance, while
    Germany, Italy and Japan proved to be a drag on performance.

Outlook

  • After reducing perceived risks in the portfolio in an increasingly uncertain market environment at the end of last
    quarter, the Fund’s positioning remained largely unchanged for the second quarter. The Fund remains slightly
    overweight equities with a tilt toward defensive stocks, and the fixed-income portfolio maintains its relative overweight
    allocation to shorter duration credit and floating rate securities.
  • That said, the emerging-market debt selloff has made their yield levels more attractive. While, we remain reluctant
    to take on emerging-market currency risk, we believe there are several attractive opportunities appearing in emergingmarket
    (U.S. dollar denominated) debt.

The opinions expressed are those of the Fund’s manager for Class I shares and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current
through 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.

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 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 risks and, as such, the net asset value of the Fund may fall as interest
rates rise. Dividend-paying investments may not experience the same price appreciation as non-dividend-paying instruments. Dividend-paying companies may choose not to pay a dividend, or dividends may be less
than was anticipated. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Not all funds or fund classes may be offered at all broker/dealers.
These and other risks are more fully described in the Fund’s prospectus.

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