Market Sector Update

• The first two months of quarter were strong as the U.S.–China trade deal was finally signed in January. Business confidence was improving and optimistic. Job growth was solid; beating expectations and the unemployment rate was at a historical low. The stock market reached new records with consumer confidence elevated. The outlook for 2020 was for stable global growth.
• Unfortunately, the rise of COVID-19, which began in late-November 2019 and spread throughout China, Asia, Europe and ultimately the U.S. in early-March, has dramatically impacted the overall picture for global growth, capital markets and financial stability. This macro-environment led to an immediate decline in global gross domestic product (GDP) output, massive job losses and enormous reductions of wealth.
• The fiscal and monetary responses have been massive with the Federal Reserve (Fed) cutting rates to zero, and providing U.S. dollar liquidity to other central banks, money market funds and corporate credit. It also started unlimited quantitative easing with large purchases of U.S. Treasuries and mortgage-backed securities. Most central banks have indicated they will respond as needed to maintain operations and avoid dysfunctional financial markets during this crisis and it is clear that they will keep policy extremely accommodative as their economies recover. The monetary response has been just as impressive. The $2 trillion spending bill passed the Senate and House of Representatives and should help bridge the effects of “social distancing.”
• The sharp contraction in economic activity stemming from COVID-19 and the related shutdown is assumed to be temporary. Uncertainties dominate, but the baseline assessment is the acute stage of the health crisis has largely ended in China and will begin to ease in advanced countries by late- April to early-June. Recoveries in different nations will depend mainly on their performances prior to the pandemic and whether factors that supported or detracted from economic performance will change. The downside risk is that the pandemic extends longer and there is an extended period of getting back to normal activities, which lowers the overall economic activity and GDP drifts sideways from depressed second-quarter levels rather than a “V” shaped recovery.
• Real estate securities have not outperformed the broader equity market as would typically be expected in such periods of disruption, given the defensive nature of real estate’s contractual revenue and the sector’s attractive dividend yield. These defensive characteristics were more than offset by the tightening of financial conditions.

Portfolio Strategy

• The Fund underperformed its benchmark and Morningstar peer group for the quarter. Most of the underperformance was attributable to the Fund’s exposure to credit. The Fund’s exposure to lower quality CCC credits, as well a securities priced off of LIBOR, had a negative impact on the Fund. CCC credits underperformed due to their significant reliance on a strong U.S. economy. Securities that are priced off short-term interest rates underperformed as the Fed cut its policy rates by 125 basis points in order to ease funding pressures. Concerns of a global recession due to the COVID- 19 pandemic have led to a dramatic decrease in confidence, consumption and business investment. These concerns spilled into the credit markets, which witnessed large spikes in credit spreads to levels not seen since the 2008 global financial crisis.
• Roughly 49% of the Fund was allocated to equity at the end of the quarter. The Fund’s equity positions contributed to performance relative to its benchmark with stock selection most positive in energy, information technology, industrials, materials and consumer discretionary.
• With concern of a global recession, the U.S. dollar strengthened over the quarter against developed market currencies as the pound and euro gained 6.3% and 1.6%, respectively. The Fund’s U.S. dollar exposure of approximately 71% contributed to relative performance.
• We continue to seek opportunities to reduce volatility in the Fund. Additionally, we are maintaining a low-duration strategy for the Fund as we feel it allows us a higher degree of certainty involving those companies in which we can invest. With the dramatic increase in credit spreads, we are taking this dislocation to allocate our portfolio out of higher quality U.S. Treasuries and credit into higher yielding credit.
• We continue to focus on maintaining proper diversification for the Fund. We continue to hold a higher level of liquidity (patient capital) because of structural changes in the capital markets. We will be opportunistic in allocating that capital when we believe dislocations in the market arise.

Outlook

• The U.S.’s sizable fiscal packages provide much needed income support for sidelined workers and financial support for businesses facing interrupted product demand and cash flows. However, the packages are not fiscal stimulus that will generate stronger growth.
• China was weak going into the crisis; its domestic demand had slowed sharply. Business fixed investments had decelerated materially, while growth in gross capital formation had been propped up by government infrastructure investment. Consumer and business debt levels were very high, which reduced the government’s flexibility to stimulate more.
• Most emerging markets were not well positioned going into the pandemic. In some Latin American countries, misguided policies and poor leadership have created turmoil that had contributed to capital flight. Debt levels are relatively high, and in special cases like Turkey, are burdened by large amounts of U.S. dollar-denominated debt levels that are costly to service as their currencies weaken versus the dollar. The other concern with emerging markets is the dramatic decline in the price of oil. This impact has dramatically reduced budgets in OPEC, Russia, Nigeria, Brazil, Mexico and other nations.
• The tilt away from globalization that has been underway for about half of the decade is likely to be reinforced. We believe new factors stemming from COVID-19 will fuel the move further away globalization, which will change complex international supply chains, higher tariffs and potentially increased barriers to immigration.
• The majority of listed real estate companies enter this recession with strong balance sheets and ample liquidity. Moreover, companies have reacted swiftly to the seismic shift in economic conditions and moved to augment and preserve liquidity. Strong capital foundations position these companies to weather the storm.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

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

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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