Ivy VIP Mid Cap Growth

Market Sector Update

  • Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Portfolio’s benchmark) enjoyed the strongest returns across the domestic equity spectrum again in the second quarter of 2019, with an index return of 5.4%, following 19.6% in the first quarter of the year. In deconstructing the return, all sectors within the index posted positive returns except for energy. The leading performing sectors were financials, communication services, consumer discretionary, industrials and real estate.
  • Continued strong performance in the domestic market appears to be due to a more dovish Federal Reserve (Fed) indicating potential rate cuts are coming in the back half of 2019, and ongoing hopes for governmental stimulus in China moderated slightly by the on-again, off-again potential for a trade deal. The U.S. economy continues to remain resilient to many of these shocks, whether real or perceived, that are being thrown its way.

Portfolio Strategy

  • The Portfolio posted a positive return but underperformed its benchmark in the second quarter of 2019. Relative underperformance came from the consumer discretionary and information technology sectors.
  • Consumer discretionary continues to be the biggest sector overweight in the Portfolio. While this overweight was beneficial to the Portfolio, stock selection within the sector, particularly in specialty retail and luxury goods, more than offset the contribution. Underperformance came from overweight positions in Tiffany & Co. and Burberry Group Plc, both of which were negatively impacted by the continued strength of the U.S. dollar, the trade war impasse and declining tourism at flagship stores.
  • Performance strength came from MercadoLibre, Inc. and Grubhub Inc. MercadoLibre continued to post solid returns, as the Latin American focused e-commerce company demonstrated strong growth after emerging from a significant corporate investment period. Grubhub was a positive overweight in the Portfolio for the quarter as the restaurant delivery landscape lost Amazon as a player in the space at the end of June, eliminating one potential competitor for the company. Grubhub also restructured its debt, leading to additional cash on the balance sheet with looser covenants, allowing for potential acquisitions.
  • Another area of weakness for the Portfolio versus the benchmark was in information technology. Although the Portfolio was underweight this underperforming sector, stock selection within the sector dragged performance lower, namely holdings Arista Networks and Palo Alto Networks. Arista Networks, a provider of data center switches, declined as it reported disappointing guidance given the slowdown on spending from a large cloud customer. Palo Alto Networks, a leader in global cybersecurity, announced negative estimate revisions due to the change in business model as customers shifted from paying up-front subscriptions to software as a service, thereby causing a hit to near term earnings. Additionally, the company announced the acquisition dilution was worse than expected.
  • From a sector perspective, the Portfolio benefitted from relative outperformance in industrials and materials. The Portfolio’s industrials exposure was a slight overweight in the quarter that benefitted from several names, including CoStar Group, Inc. CoStar Group is the leading provider of real estate data, analytics and marketplace-listing platforms, including Apartments.com. The company has a defensible franchise of mainly subscription-based revenue that continues to grow with solid management execution. Recent online traffic trends for Apartments.com and ForRent.com indicated robust growth over the past 12 months, far outpacing that of competitors.
  • The Portfolio’s cash exposure, while at the low end of our typical range, was a slight drag on performance.

Outlook

  • The market’s temperament cooled substantially from the first quarter to the second quarter, based largely on trade war concerns and the ultimate effect the impasse will have on global and U.S. gross domestic product growth. Though the ramifications of the impasse seem largely contained at this point, we remain vigilant with regard to any potential changes on business activity. We also appreciate that many of the rest of the world’s economies are challenged and we continue to watch for any signs of inflection. The Fed is now talking about interest rate cuts in the back half of 2019 and there is much rhetoric around a resolution, albeit on the horizon, to the China/U.S. trade wars. Near-term confidence in the economy and corporate profits became more uncertain in the second quarter, with decelerating earnings growth once again the talk of the markets.
  • For the quarter within the benchmark, higher debt companies outperformed lower debt companies. Our take is that, while interest rates declined more than 0.4% on the 10-year treasury and the market is looking forward to two or three cuts to the Fed Funds rate this year, the environment for companies to add leverage is not the same as it was in the past cycle of cuts post the global financial crisis.
  • While the Portfolio’s portfolio represents an economically constructive point of view, our approach is essentially balanced based on stock selection as opposed to overt sector allocations. The Portfolio continues to express a more economically constructive and optimistic view, with a more assertive pro-growth, less defensive stance.
  • The Portfolio remains overweight the consumer discretionary, health care and industrials sectors. We are underweight the information technology sector but still have a healthy exposure. We are also underweight the financials sector. We have no exposure to the real estate and energy sectors, which represent a combined 3.6% of the benchmark.

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.

Top 10 equity holdings as a % of net assets as of 06/30/2019: CoStar Group, Inc. 3.4, Tractor Supply Co. 2.9, Zoetis, Inc. 2.8, Chipotle Mexican Grill, Inc. 2.7, Electronic Arts, Inc. 2.7, ServiceNow, Inc. 2.4, Keysight Technologies, Inc. 2.2, TransUnion 2.2, MarketAxess Holdings, Inc. 2.1 and Ulta Beauty, Inc. 2.0.

The Russell Midcap Growth Index measures the performance of the mid-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 Portfolio’s shares will change, and you could lose money on your investment. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more wellestablished companies. 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. Not all funds or fund classes may be offered at all broker/dealers. 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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Kimberly A. Scott, CFA
Nathan A. Brown, CFA

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Ivy Pzena International Value Fund

Market Sector Update

  • International equities moved higher in the second quarter despite significant month-to-month volatility. The flight to safety continued to dominate market sentiment as trade tension and recession concerns heightened during the quarter, leading value stocks to once again underperform.
  • Global economic data was generally weak for the quarter, as the continuation of trade wars weighed heavily on the markets. In early May, U.S.-China trade negotiations deteriorated and the U.S. increased tariffs from 10% to 25% on $200 billion of Chinese goods. On a positive note, at quarter end, the U.S. and China agreed to resume trade discussions.
  • The best performing sectors were industrials, financials and technology, while by geography, Argentina, Russia and Greece led the way, all posting double-digit returns.

Portfolio Strategy

  • The Fund posted positive performance but underperformed its benchmark for the quarter. Poor stock selection in the information technology, health care and consumer discretionary sectors drove relative underperformance. On the other hand, stock selection in the industrials and utilities sectors benefited performance.
  • Top individual detractors to performance in the period included Mylan, Inc. (Dutch generic drug manufacturer), Lenovo Group Ltd. (Chinese PC maker) and John Wood Group plc (U.K. oil services company). Mylan’s underperformance was driven by a combination of company-specific issues as well as continued pricing pressure on generic drugs. Although we believe the stock is deeply undervalued, the changing industry dynamics could have a permanent impact on profitability. We continue to closely monitor the investment. Lenovo fell due to trade-related concerns, though we believe company fundamentals remain quite positive. John Wood Group reported weak cash flow despite in line earnings.
  • The top contributors to relative performance were Schneider Electric S.A. (French electrical equipment maker) and Standard Chartered plc (U.K.-based global trade bank). Schneider benefitted from a rebound in perceived cyclical industrials as well as strong quarterly sales updates that demonstrated robust, better-than-peer, organic growth. Standard Chartered performed well in light of increased stock repurchases as well as its liability-sensitive balance sheet benefitting from lower interest rates.
  • We initiated three new positions this quarter, which included TechnipFMC plc (U.K. oil services company), Catcher Technology Co. Ltd. (Taiwan-based casing manufacturer) and Resona Holdings, Inc. (Japanese regional bank). TechnipFMC is a leading oil service company with a significant offshore presence. Recent disappointing guidance on earnings and cashflow has led to significant underperformance. Catcher Technology specializes in casing manufacturing for mobile devices such as the iPhone. Given the weakness of recent iPhone volumes, Catcher’s earnings and share price have seen a meaningful decline. With a cash balance that is more than 50% of its market capitalization and potential for further share gains with Apple over time, we see meaningful upside potential in the share price. Resona came under pressure recently due to lowered guidance. We see good synergy opportunities from its recent acquisition of three regional banks from Sumitomo Mitsui Financial Group.

Outlook

  • Earnings forecasts have continued to drift lower, as they have since mid-2018, with more modest growth expected this year. Lower commodity prices and softer growth have weighed in particular on the industrials sector, while parts of information technology have also cooled down. In emerging markets, profit expectations have also fallen, but there are some signs of improvement recently. Fears of a U.S. recession remain top of mind, but aside from the yield curve inversion, there are scant tangible warning signs.
  • Global headwinds continue to appear from leading economic indicators, with the U.S. now falling in line with the weak global backdrop. China's policymakers have stepped up the pace of fiscal and monetary stimulus, but credit growth remains subdued.
  • We believe value stocks are trading at extremely depressed levels, and are excited by the opportunity to buy great franchises with potential for company specific improvement. Our largest exposures remain to highly cyclical sectors financials and industrials, while our smallest sector weights are in real estate, materials and utilities.

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: Schneider Electric S.A. 3.4%, Roche Holdings AG, Genusscheine 3.0%, Rexel S.A. 3.0%, ENEL S.p.A. 2.9%, Hitachi Metals Ltd. 2.8%, Tesco plc 2.8%, Volkswagen AG 2.7%, %, A.P. Moller-Maersk A/S 2.7%, Honda Motor Co. Ltd. 2.7% and Travis Perkins plc 2.6%.

Effective July 31, 2018, Pzena Investment Management, LLC replaced Mackenzie Financial Corporation as the sub-adviser of the Ivy Cundill Global Value Fund. In connection with the change in sub-adviser, the Ivy Cundill Global Value Fund has been renamed to Ivy Pzena International Value Fund. In connection with the change from the Ivy Cundill Global Value Fund to the Ivy Pzena International Value Fund effective July 31, 2018, the benchmark changed from the MSCI ACWI Value Index to the MSCI EAFE Index. The index was changed to more closely align with the Fund’s international investment approach.

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. 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 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.

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Ivy VIP Global Equity Income Fund

Market Sector Update

  • 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. Hard data has softened progressively over the course of the year as the impact of tariffs and other aspects of the U.S.-China trade war have taken a toll on growth. Additionally, the uncertainty around the short- and long-term implications of a new long-term global trade paradigm appear to be causing marginal weakening in hiring and spending.
  • Markets have been propped up to some degree by the prospects for an aggressive monetary response to weakening conditions, with both the U.S. Federal Reserve (Fed) and European Central Bank making sharp shifts toward much more accommodative policies in response to the aforementioned slowdown. Against this tailwind, the outlook on trade resolution was less favorable for most of the quarter. Markets gave back roughly half of their year-to-date gains during the month of May as the outlook for some sort of trade agreement worsened. However, the quarter finished on a strong note as positive news with respect to a freeze on additional tariffs and progress on other areas emerged from the G20 Summit in Japan.
  • From a sector perspective, performance was mixed regarding pro-cyclical and stable sectors. Within the Portfolio’s benchmark, financial stocks were the strongest performers, with insurance companies being the most positive driver of performance in the sector. Industrials also outperformed on prospects for improved activity. Utilities were a strong performer, as was communication services, which was driven by the media components of this sector rather than the telecom constituents. Health care and real estate underperformed, as did energy on weak crude price dynamics..

Portfolio Strategy

  • The Portfolio posted positive performance and performed in line with its benchmark for the quarter. Stock selection during the period was favorable, while sector allocation was a drag on relative performance. Geographic allocation was a positive relative contributor to performance, while currency positioning (a by-product of stock selection and sector/country decisions) was a drag on relative performance.
  • Regarding sector allocation, the Portfolio’s underweight position in real estate was the largest positive relative contributor to performance. The Portfolio's overweight allocation to energy and health care, as well as being underweight financial services were negative relative return drivers.
  • Stock selection in industrials, health care, consumer staples, materials and energy all contributed favorably to relative performance. Stock selection in communication services and information technology were both relative return headwinds. Lockheed Martin Corp., Wal-Mart Stores, Inc., Citigroup, Inc., LVMH Moet Hennessy – Louis Vuitton and Nestle S.A. were the most significant individual contributors to relative performance. Intel Corp., British American Tobacco plc, Philip Morris International, Inc., Taiwan Semiconductor Manufacturing Co. Ltd. and CNOOC Ltd. were the largest individual negatives with respect to relative performance.
  • From a geographic allocation perspective, the Portfolio’s underweight position in Japan, along with favorable stock selection, more than offset the impact of being underweight the yen. The Portfolio’s overweight position in Europe, along with positive stock selection in that region helped relative performance. Stock selection in North America was a solid positive contributor to results, while stock selection in Asia ex Japan was a drag to relative performance.
  • Our investment approach remains steadfastly focused on investing in perceived high-quality businesses with favorable near and intermediate fundamentals, generally rising dividends and attractive valuations. This approach is consistent across sectors and regions. The core of our approach is based on stock selection as the key driver of Portfolio inclusion and construction.
  • Global growth has moderated due to trade concerns, as well as normalization of certain aspects of fiscal and monetary policy. One of the most noteworthy aspects of market performance over the past several quarters has been the violent risk-on/risk-off episodes that have occurred. We have attempted to take advantage of these episodes by adding to or establishing positions in companies that fit our key investment criteria when we believe those shares are reflecting excessive company-specific pessimism or overblown macro fears. We are particularly focused on businesses that we believe can deliver reasonable results in a slowing environment. From a broader portfolio construction point of view, we believe it as a bit of a fool’s errand to shift portfolio positioning in response to the latest tweets or headlines on trade or the latest perturbations with respect to monetary policy. This has been our view for several quarters and remains our view at present.

Outlook

  • Global growth has clearly slowed over the past several quarters, in part due to trade uncertainty but also due to a return to trend from artificial stimulus (the U.S. in particular). This slowdown has been felt most sharply in Asia and Europe, while economic expansion in the U.S. has been slightly more resilient. Despite this softness, optimism about improving trade relations abounds after a truce was reached between President Donald Trump and Chinese President Xi Jinping at the G20 Summit in June. In our view, this optimism is reflected not only in stock prices but also in corporate guidance and forward earnings estimates. This quality is most pronounced in the U.S., and less so in Europe, Japan and Asia.
  • Directionally, this sense of relief may be correct, though much work remains before there is an end to current trade hostilities. Additionally, if a deal is reached it is not entirely clear this event would be sufficient to drive a reacceleration of growth needed to meet earnings expectations and support current valuations.
  • Our low-conviction, base view is that progress will be made, and a period of stability is likely to follow. In this case, we find some of the most intriguing opportunities to be outside the U.S. at present, given current expectations, coupled with current valuation differentials.

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.

Top 10 equity holdings as a percent of net assets as of 06/30/2019: Royal Dutch Shell plc, Class A 4.1%, Lockheed Martin Corp. 3.5%, Nestle S.A., Registered Shares 3.4%, Pfizer, Inc., 3.3%, Taiwan Semiconductor Manufacturing Co. Ltd. 3.3%, Total S.A. 3.3%, AstraZeneca plc 2.8%, Citigroup, Inc. 2.8%, Samsung Electronics Co. Ltd. 2.8% and Tokio Marine Holdings, Inc. 2.7%.

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. 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 Portfolio may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected. These and other risks are more fully described in the 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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Robert Nightingale
Christopher J. Parker

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Ivy Asset Strategy Fund

Market Sector Update

  • The quarter was defined by a marked turn in central bank policy. Global central banks abruptly turned dovish, with the president of the European Central Bank (ECB) expressly foretelling additional easing during a policy speech in mid- June. This was followed by dovish rhetoric from the U.S. Federal Reserve (Fed) and several emerging market central banks cut interest rates.
  • The changes caused interest rates globally to drop – in some cases to record low levels. The 10-year U.S. Treasury fell toward 2% and yields in Europe fell precipitously, with 10-year points on multiple euro-denominated curves falling into negative territory. The Bank of Japan indicated that its yield curve control, which had been targeting 10-year yields around 0%, no longer had a lower boundary. Roughly $13 trillion of debt globally had negative yields at quarter-end.
  • The market started fully pricing-in rate cuts by the Fed and ECB before the end of the summer, with additional rate cuts from the Fed by year end. Credit spreads rallied as the market started to expect that quantitative-easing programs could be restarted and central bank balance sheets expanded.
  • Equities generally welcomed the dovish tilt by central banks and added to first-quarter performance, despite softening economic data. Softer data from the Institute for Supply Management and on capital goods as well as uneven employment data added to concerns about the global economy. Chinese equities were a notable underperformer, even as the G20 Summit meeting in late June prompted a temporary truce in ongoing trade tensions between the U.S. and China
  • Gold was a big beneficiary during the quarter of the tilt in central bank policy and rose to its highest level since mid- 2013. Other commodities such as oil, gas and copper did not perform well, as weakening economic data hurt prices. The one exception was iron ore, which benefited from several mine closures which constrained supply.
  • Through all of this, the U.S. dollar remained fairly stable as expectations of lower U.S. rates were offset by dovishness of other central banks and weakening economic data.

Portfolio Strategy

  • The Fund had a strong positive return during the quarter and outperformed its all-equity benchmark. Gold was the best-performing asset class. The equity portfolio outpaced the benchmark, while the fixed income portfolio slightly lagged the benchmark.
  • Within the equity portfolio, performance was driven largely by stock selection, especially in the technology, industrials, consumer staples and health care sectors. Qualcomm was one of the Fund’s strongest performers, driven by its settlement with Apple, Inc. We felt the likelihood of that result was underappreciated by the market. We trimmed that position after the event. Microsoft Corp., which we also trimmed, continued to contribute as well.
  • Within industrials, the Fund’s tilt toward aerospace and defense continued to provide a tailwind given renewed rumblings in the Middle East as well as further Chinese activity in the South China Sea. In addition, Schneider Electric SE (France) and Larsen & Toubro (India) added to the sector’s performance.
  • On the negative side, Philip Morris International suffered along with its industry after standout first-quarter performance, and Glencore International plc continued to underperform mining peers because of low iron ore exposure and nagging regulatory issues. While the performance of Asia-Pacific holdings exceeded the benchmark, the Fund’s position in China Unicom Ltd., a mobile and fixed-line operator, detracted amid concerns about higher capital expenditures, which we think are overblown.
  • The Fund’s fixed income portfolio lagged the benchmark but still provided positive returns for the quarter. Global interest rates rallied, which helped holdings in longer-duration Treasuries and investment-grade fixed income positions. The investment-grade credit positions were helped by the rally in spreads, which also benefited high yield and emerging market fixed income exposure in the Fund. The one detractor was in the bank loan portfolio, which generally underperformed as the market shifted towards pricing-in Fed rate cuts.
  • Gold rose more than 9% and again reinforced why we own a large position in the Fund as a risk diversifier against global macro risks and the unconventional central bank policy that is intended to combat them. We tend not to place too much emphasis on technical factors, but it is noteworthy that gold has broken through persistent resistance to rise above $1,400 per ounce.

Outlook

  • While we were expecting further support from global central banks, the timing and magnitude of the dovish tilt caught us slightly by surprise. We thought the shift would be more gradual, especially given the fact that the Fed was hiking interest rates as recently as December and the ECB just started trying to normalize policy. We now acknowledge that while global growth is slowing and economic data is weakening, central bank balance sheets are powerful policy tools not to be taken lightly.
  • Of greater concern, uncertainty remains elsewhere in the global backdrop with tariffs and trade wars representing a wildcard with an unpredictable outcome, despite the apparent truce that was agreed to during the G20 meeting.
  • As a result we have been operating near the bottom end of our risk budget of 70-90% of the expected risk of the benchmark and expect to remain there for the foreseeable future.
  • We are exploring how to adjust the nature of some of our risk-diversifying assets. Given the absolute low level of interest rates, we are increasingly uncomfortable holding a number of assets that we have traditionally held to diversify risk, mainly long-duration Treasuries. We are exploring replacements mainly in the mortgage market, which could provide similar diversification without exposing the Fund to as much interest-rate risk.
  • Our outlook on the global economy remains somewhat subdued and we are skeptical about a recovery in the second half of the year, which many cyclical companies were forecasting in their first-quarter earnings reports. As a result, risk in the equity portfolio has been reduced and we have slightly taken down credit risk in the fixed income portfolio.

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.

Top 10 equity holdings as a percent of net assets as of 06/30/2019: Microsoft Corp., 3.15%; Airbus SE, 2.20%; Nestle S.A., Registered Shares, 1.99%; Fiserv, Inc., 1.86%; Wal-Mart Stores, Inc., 1.81%; AIA Group Ltd., 1.60%; Adobe, Inc., 1.55%; Visa, Inc., Class A, 1.51%; Sampo plc, A Shares, 1.37%; Pfizer, Inc., 1.37%.

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. The Fund may allocate its assets among different asset classes of varying correlation around the globe. The Fund’s Equity Sleeve typically holds a limited number of stocks (generally 50 to 70). 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 it invested in a larger number of securities. 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’s Diversifying Sleeve includes fixed-income securities, that are subject to interest-rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. 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. The Fund may seek to hedge market risk via the use of derivative instruments. Such investments involve additional risks. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Markets for commodities are likely to be volatile and the Fund may pay more to store and accurately value its commodity holdings than it does with the Fund’s other holdings. 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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Chace Brundige
W. Jeffery Surles, CFA

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Ivy Lasalle Global Real Estate Fund

Market Sector Update

  • 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 quarter.
  • The combination of escalating trade tensions and softer economic data reignited fears of a material slowdown in global economic growth, weighing on the performance of risk assets during the early portion of the period. These fears were met with a combination of accommodative commentary and action from central banks around the globe. Late quarter progress in trade negotiations further supported risk assets, particularly those of a more cyclical nature and more directly impacted by lingering trade disputes.
  • Real estate securities have produced year-to-date returns, benefitting from the combination of healthy operating fundamentals and an easing of financial conditions. Real estate securities and global equities both have produced returns returned greater than 15% for the first half of 2019.

Portfolio Strategy

  • The Fund had a negative return and slightly lagged its benchmark for the quarter.
  • On a relative basis, the Fund’s performance was impacted by negative regional allocation and stock selection results. Regional allocation results were impacted by an underweight position to Singapore, which outperformed in the period, and overweight positions to the U.K. and Hong Kong, which both underperformed this quarter. Singapore real estate securities benefitted from the combination of further easing of financial conditions and improvement of real estate fundamentals in the region. Performance of U.K. real estate securities was hurt by increased expectations for the potential of a no-deal Brexit scenario following the resignation of Prime Minister Theresa May. In addition, outperformance in Japan and continental Europe helped to offset a portion of underperformance in the period.
  • Stock selection results were impacted by underperformance in the U.S. and Australia, and stemmed largely from an overweight position to the higher-quality regional mall sector and an underweight position to the industrial sector. Performance of the regional mall companies has been hindered this year as sector sentiment has turned more negative with an acceleration of retailer store closings, as well as weaker outlooks from numerous retailers. Industrial performance has been supported by the ongoing strength of operating fundamentals within the sector.
  • The Fund's country allocations were adjusted during the period. The Fund’s overweight positions to the Hong Kong and Japan were increased during the quarter. The Fund’s underweight position to continental Europe was reduced during the period. These changes were funded by increasing the Fund’s underweight positions to the U.S., Australia and Canada. The Fund’s underweight position to Singapore and overweight position to the U.K. were maintained.

Outlook

  • Leading economic indicators continue to align with a more muted, but positive pace of expansion as fiscal and monetary stimulus efforts have offered support to the economic environment for most of the year. Lingering global trade tensions and further softening of economic data has prompted additional fiscal stimulus policy measures around the globe, helping to ease financial conditions.
  • Global real estate operating fundamentals appear to be stable across many markets based on management teams and sector-related reporting. The expectation for modest, but positive economic growth and an easier interest rate environment should remain sufficient to drive demand for real estate. We believe cash flow growth to remain healthy for the foreseeable future based on healthy growth prospects and select instances of external growth.
  • With the strong performance in 2019, global real estate securities are trading largely in line with their historical average trading pattern with alternatives - private real estate, bonds and equities, while certain sectors and countries within the asset class continue to offer significant pricing discounts.

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

On Nov. 5, 2018, the Ivy LaSalle Global Risk-Managed Real Estate Fund merged into the Ivy LaSalle Global Real Estate Fund.

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, 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. 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. 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 Corporate Bond 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. Historically, an inverted yield curve has implied a forthcoming recession, but the time lag can be significant. 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, a small indicator that the Fed will rekindle growth expectations with rate cuts.
  • 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. 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.
  • 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.

Portfolio Strategy

  • The Fund had a positive return, but underperformed its benchmark, the Bloomberg Barclays U.S. Credit Index. The benchmark returned approximately 4%, which was driven primarily by falling rates as well as the benchmark’s spread tightening from 113 bps to 109 bps.
  • The Fund further reduced its duration relative to the benchmark, but the difference remains modest. Benchmark duration rose 0.2 year to 7.4 years at quarter-end. Higher duration means higher price volatility for a given change in spreads.
  • Overall risk positioning in the Fundremained 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 communications and technology sectors and decreases in the financial and consumer 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 while talks resume, we did see an increase in tariff rates to 25% from 10% on $200 billion of imports into the U.S. from China as well as other trade frictions, most notably being restrictions on Huawei. This has already begun to and will continue to weigh on global growth. More importantly, the uncertainty over the trade relationship between the U.S. and China 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.
  • 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. We will be opportunistic in our credit selection and overall positioning to take advantage of the opportunities and dislocations as they present themselves.

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.

The Bloomberg Barclays U.S. Credit Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets, including a non-corporate component of non- U.S. agencies, sovereigns, supranationals and local authorities. It is not possible to invest directly in an index.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Portfolio's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

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Ivy VIP Limited-Term Bond

Market Sector Update

  • Yields across the U.S. Treasury curve fell substantially during the quarter. The yield on the 2-year U.S. Treasury note fell 50 basis points (bps) to 1.76%, while the 5-year U.S. Treasury note fell 46 bps to 1.77% at the end of the quarter. The front end of the yield curve is particularly flat and slightly inverted as the 3-year note ended the quarter at 1.71%.
  • The first half of the year saw the Federal Reserve (Fed) shift its strategy from rate hikes to “patience” in the first quarter, then Chairman Jerome Powell pivoted toward rate cuts at the June Federal Open Market Committee (FOMC) meeting. Uncertainty about the trade environment and tariffs and global growth were key concerns. President Donald Trump raised the tariff rate from 10% to 25% on $200 billion imports from China in early May.

Portfolio Strategy

  • The Portfolio had a positive return, but slightly underperformed relative to its benchmark for the quarter.
  • The Portfolio is underweight U.S. Treasuries, overweight corporate bonds, and maintains an allocation to mortgagebacked securities, primarily commercial mortgage-backed securities. During the quarter we reduced the Portfolio’s cash position and added to all three of the asset classes.
  • The Portfolio's duration, which is a measure of the sensitivity of bond prices to changes in interest rates, is roughly 90% of the benchmark.

Outlook

  • The current economic expansion is now the longest on record. It is clear the Fed wishes to keep promoting this expansion. Inflation is in check – the Consumer Price Index, Producer Price Index and Personal Consumption Expenditure Deflator all remain under 2%. The lack of inflation provides the Fed the room to cut rates should it be deemed necessary.
  • Expectations are rising for a rate cut of at least 25 bps at the July FOMC meeting. The influx of data ahead of the meeting could shift expectations. May’s employment report was weak with nonfarm payroll number posting a gain of just 75,000 jobs. However, there will be another employment report and the first reading on second-quarter gross domestic product before the next Fed meeting.
  • We believe fixed income should perform well for the foreseeable future. The Fed rate hikes are behind us and the potential for cuts lies ahead, both of which should support performance. In dealing with slower growth in Europe, the European Central Bank said it will do “whatever it takes” to help deliver positive growth to the economies of Europe. While domestic interest rates are low, they are negative far out on the yield curve in Europe. For example, the 10-year German bund yielded -33 bps at the end of June.
  • Many market participants are debating the Fed’s reason for cutting rates. Some believe it is insurance cut aimed at helping to extend the expansion, while others think the cut is due to an impending economic recession. While we know expansions do not last forever, our view is that a recession is unlikely in the near term.

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.

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 rate rise. 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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Ivy Government Securities Fund

Market Sector Update

  • Yields across the U.S. Treasury curve fell substantially during the quarter. The yield on the 2-year U.S. Treasury note fell 50 basis points (bps) to 1.76%, while the 5-year U.S. Treasury note fell 46 bps to 1.77% at the end of the quarter. The front end of the yield curve is particularly flat and slightly inverted as the 3-year note ended the quarter at 1.71%.
  • The first half of the year saw the Federal Reserve (Fed) shift its strategy from rate hikes to “patience” in the first quarter, then Chairman Jerome Powell pivoted toward rate cuts at the June Federal Open Market Committee (FOMC) meeting. Uncertainty about the trade environment and tariffs and global growth were key concerns. President Donald Trump raised the tariff rate from 10% to 25% on $200 billion imports from China in early May.

Portfolio Strategy

  • The Fund had a positive return and performed in line with its benchmark for the quarter.
  • We shortened the Fund’s duration in the first quarter as we believed rates were poised to rise. The Fund’s positioning remains in place, but rates have fallen. We will look to opportunistically move closer to the benchmark’s duration in the third quarter.

Outlook

  • The current economic expansion is now the longest on record. It is clear the Fed wishes to keep promoting this expansion. Inflation is in check – the Consumer Price Index, Producer Price Index and Personal Consumption Expenditure Deflator all remain under 2%. The lack of inflation provides the Fed the room to cut rates should it be deemed necessary.
  • Expectations are rising for a rate cut of at least 25 bps at the July FOMC meeting. The influx of data ahead of the meeting could shift expectations. May’s employment report was weak with nonfarm payroll number posting a gain of just 75,000 jobs. However, there will be another employment report and the first reading on second-quarter gross domestic product before the next Fed meeting.
  • We believe fixed income should perform well for the foreseeable future. The Fed rate hikes are behind us and the potential for cuts lies ahead, both of which should support performance. In dealing with slower growth in Europe, the European Central Bank said it will do “whatever it takes” to help deliver positive growth to the economies of Europe. While domestic interest rates are low, they are negative far out on the yield curve in Europe. For example, the 10-year German bund yielded -33 bps at the end of June.
  • Many market participants are debating the Fed’s reason for cutting rates. Some believe it is insurance cut aimed at helping to extend the expansion, while others think the cut is due to an impending economic recession. While we know expansions do not last forever, our view is that a recession is unlikely in the near term.

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.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

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Ivy California Municipal High Income Fund

Market Sector Update

  • California municipal bonds continued to provide solid positive returns during the period, ending the second quarter up 2.26%. Flows into California municipal bonds continue to be strong and with little supply spreads have continued to compress.
  • With the Federal Reserve (Fed) indicating it would not be raising rates in 2019, but might cut rates instead, the entire municipal yield curve delivered positive returns. The 22-year-plus part of the curve provided the strongest returns yielding 2.89%.
  • For the quarter, the Bloomberg Barclays Municipal Bond Index returned 2.14%, while the Bloomberg Barclays High Yield Municipal Bond Index outperformed high grade by returning 2.73%. The outperformance was driven by coupon return as the yield-to-worst on the high yield index widened three basis points (bps) compared to the municipal bond index.
  • Longer term, with the compression of spreads due to the year-to-date rally, we continue to be cautious when looking at spread product. Spreads continue to be tight in a historical context and new investment options continue to offer very little collateral for investors. With the Fed’s concerns about future growth, we feel it is more important to focus on quality as we believe spreads will widen if the economy slows.
  • High yield funds continued the record-setting start to the year with an additional $4.8 billion of inflows in the quarter.

Portfolio Strategy

  • The Fund had a positive return for the quarter and outperformed the Bloomberg Barclays High Yield Municipal Index and the Bloomberg Barclays High Grade Municipal Index.
  • The Fund’s non-rated exposure currently sits at 22.6%, which is near the maximum desired exposure for the Fund. We do not intend to take the allocation +/-2% its current level.
  • The Fund is underweight tobacco with an approximately 7% allocation versus 14% in the Bloomberg Barclays High Yield Municipal Bond Index, which marginally contributed to performance. The Fund’s strategy has always been attractive income with low volatility. While we intend to increase exposure over time, we expect the Fund to remain underweight versus its high yield benchmark.
  • We are less cautious on California hospitals and evaluate the borrowers carefully. We intend to focus on the higher quality systems while staying away from smaller sole-regional providers. The Fund is underweight the hospital sector with 11.7% exposure versus 21.3% in the Barclays High Yield Municipal Bond Index. Going forward we expect the Fund to move closer to the benchmark.
  • The Fund has relatively small exposure to insured Puerto Rico bonds at 1.10%. These bonds are exempt from both California and federal taxes. However, we continue to stay away from unenhanced exposure in the territory. With the Fund’s primary mission of creating high levels of tax-exempt income for clients, we would be remiss to chase these bonds as they offer a high likelihood of offering no income for investors. We may look at opportunities as the territory restructures its sales-tax-backed bonds, however it would not represent more than 1% of total net assets.
  • We continue to favor revenue bonds over tax-backed debt. We believe revenue bonds provide higher yields and better diversification from general tax and pension issues currently affecting many municipalities. If recent high-profile defaults in general obligations has taught us any lessons, revenue bonds with strong collateral fare much better in a recovery in the event of a default.
  • We are seeking opportunities in bonds with more defensive structures as interest rates continue to hover around historically low levels and credit spreads continue to be tight. We are shorter duration than the benchmark, but we feel comfortable adding duration in higher quality names based on the current slope of the yield curve.
  • We have been measured in investing cash which sits at approximately 10%. We will continue to invest in a thoughtful manner based on current market fundamentals with the intent of reducing the cash position to less than 5%. With spreads compressed to 2007-levels, we do not feel comfortable chasing yield as spreads are still tight based on historical levels. We will continue to look for one-off opportunities as they present themselves moving forward.

Outlook

  • We still believe the California municipal market is attractive versus other fixed income asset classes based on strong demand due to high taxes and continued low supply. In our view, debt issuance for 2019 will be higher than most estimates, possibly up 20% to more historical norms. We are more bearish on the credit market as spreads are on top the lows of 2007 given the strong rally year-to-date.
  • We believe the strength in the high yield market should continue in the near term as positive inflows along with low levels of issuance continue to generate positive results.
  • Moving into the second half of 2019, we believe the Fed is more likely to cut rates than to raise them. The central bank seems concerned how an ongoing trade war with China and European Union may affect prices and the overall global economy. In addition, any closing of our southern border would certainly be a negative for growth.
  • With the Fund’s duration at 89% of the Bloomberg Barclays High Yield Municipal Bond Index and adequate levels of cash, we feel appropriately structured to weather the impact of the issues affecting the global economy.
  • Despite the gridlock in Washington, with Congress being run by the Democrats, infrastructure is the one thing that might get done at the federal level. If an infrastructure bill does get passed, we expect issuance to increase. However, our expectations are also that taxes in California will continue higher so demand for California municipal bonds should remain strong and we expect minimal impact on the municipal market from a bill.
  • We believe investors will continue to search for tax-exempt yield even after the tax legislation was passed. We view the tax cuts as favoring lower income brackets, but with the top Federal tax rate at 37% and the top California tax rate at 13.3%, we believe municipal bonds remain highly attractive.

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 Municipal Bond Index is an unmanaged index comprised of securities that represent the long-term municipal bond market.

The Bloomberg Barclays Municipal High Yield Index is an unmanaged index made up of bonds that are non-investment grade, unrated, or rated below Ba1 by Moody’s Investors Service with a remaining maturity of at least one year. 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 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. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt-interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. 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. Because the Fund invests predominantly in California municipal securities, events in California are likely to affect the Fund’s investments and its performance. As with California municipal securities, events in any of the U.S. territories, such as Puerto Rico, Guam and the U.S. Virgin Islands, where the Fund is invested may affect the Fund’s investments and its performance. These events may include economic or political policy changes, tax base erosion, constitutional limits on tax increases, budget deficits and other financial difficulties, and changes in the credit ratings assigned to municipal issuers of California or U.S. territories.

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Ivy Wilshire Global Allocation Fund

Market Sector Update

  • The U.S. stock market, as represented by the Wilshire 5000 Total Market Index, was up 3.99% for the second quarter. It was the strongest quarter for U.S. equities since 2009, the strongest first half of a year in 24 years and an 18.66% gain in that index for the year to date. The gains came in the face of volatile markets as trade concerns and a possible global economic slowdown continue to sway investor sentiment.
  • Equity markets outside of the U.S. continued their strong 2019 performance, although they are generally underperforming the U.S. Trade negotiations between the U.S. and China, the world’s two largest economies, continued with both countries maintaining firm stances going into the G20 Summit in late June. There was some good news following the conference as the two countries agreed to delay new trade sanctions and continue negotiations.
  • U.S. bond markets rallied during the quarter as interest rates fell and credit spreads modestly narrowed. The bellwether 10-year U.S. Treasury yield ended the quarter at 2.00%, down 41 basis points from March.
  • The U.S. Federal Reserve (Fed) left the federal funds rate unchanged during the quarter and softened some of its messaging to indicate a willingness to ease should conditions deteriorate. The Fed’s current forecast, however, is for no rate changes this year and a minor downward adjustment in 2020.
  • Growth in real gross domestic product accelerated 3.1% on an annualized basis during the first quarter. Business investment was the main driver of growth, while changes in net exports also contributed. Changes in consumer spending were positive, but slowed from fourth-quarter 2018.

Portfolio Strategy

  • The Fund had a positive return for the quarter but lagged the return of its blended benchmark. Global equity markets continued to rally during the quarter while fixed income also largely recorded gains, including high yield and investment grade corporate credit. The Fund’s exposure to global equities and credit was a material driver of returns.
  • The Fund uses a “fund-of-funds” structure that allocates assets among affiliated equity and fixed income mutual funds with both domestic and foreign investment strategies. The Fund ended the quarter with about 35.4% allocated to fixed income, about 28.7% allocated to domestic equity and about 33.2% allocated to foreign equity.
  • As of quarter-end, Ivy International Core Equity Fund was the largest underlying fund allocation at about 15.7% and was a notable contributor to performance. It was followed by an allocation to Ivy Securian Core Bond Fund at 10.2%.
  • The three largest contributors to performance in the quarter were the allocations to Ivy Large Cap Growth Fund, Ivy Securian Core Bond Fund and Ivy Value Fund. Ivy Large Cap Growth Fund was the underlying allocation with the strongest absolute performance followed by Ivy Core Equity Fund. Only two underlying allocations detracted from performance in the quarter: Ivy LaSalle Global Real Estate Fund and Ivy Emerging Markets Equity Fund.

Outlook

  • The Fund’s allowable allocation ranges are wide, but we anticipate equity-oriented investments will range from 55- 75% and fixed income-oriented investments will range from 25-45% during most market environments. The Fund’s long-term strategic target is a 65% allocation to global equities and 35% to global fixed income.
  • The strong year-to-date equity market rally, coupled with moderating economic growth, has increased investor concerns regarding continued corporate earnings growth. Those concerns have been tempered by the belief that the Fed is likely to ease monetary policy if economic growth continues to trend downwards, inflation remains muted and investor sentiment wanes.
  • We believe that while the need for caution has increased, risk assets are unlikely to undergo a protracted sell-off in the coming months. We think economic and corporate earnings growth are likely to remain positive and there are few catalysts to drive investors away from risk assets.
  • In the current investment environment, we continue to believe the most compelling equity investment opportunities include foreign equities. In our Fund allocations, we remain overweight foreign equities, with a large overweight to emerging markets equities, relative to developed market equities. Within fixed income, we have moved away from being underweight duration and credit to a neutral stance. We no longer anticipate material moves higher in interest rates and believe in the intermediate term that credit will continue to record positive results.

  • The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are 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.

    Waddell & Reed Advisors Wilshire Global Allocation Fund merged into Ivy Wilshire Global Allocation Fund on Feb. 26, 2018. The returns prior to this date reflect the performance of Waddell & Reed Advisors Wilshire Global Allocation Fund, which was incepted on March 9, 1995. Ivy Wilshire Global Allocation Fund adopted that performance as the result of a reorganization in which it acquired all assets and liabilities of WRA Wilshire Global Allocation Fund. Prior to the reorganization, the Ivy Wilshire Global Allocation Fund had no assets and had not commenced operations.

    Wilshire Associates sub-advises a portion of the Fund consisting of the multi-asset segment, which invests in affiliated mutual funds, and shall have no responsibility over any other assets or segments of the Fund.

    The Wilshire 5000 Total Market Index is an unmanaged index that represents the total U.S. equity market. The MSCI ACWI captures large- and mid-capitalization equities in 23 developed market countries and 24 emerging markets countries and covers approximately 85% of global equities. 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. The performance of the Fund will depend on the success of the allocations among the chosen underlying funds. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed-income securities are subject to interest-rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Investing in small-capitalization stocks may carry more risk than investing in stocks of larger more well-established companies. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns on investments in securities of large-capitalization companies could trail the returns on investments in securities of smaller companies. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy sector 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 energy companies in complying with environmental safety regulations. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. 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. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. 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.

Article Related Management: 

Chace Brundige
W. Jeffery Surles, CFA

Article Type: 

Quarterly Fund Commentary

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