Market Sector Update

• The market has witnessed a full credit cycle in one quarter. The credit spread on the Bloomberg Barclays U.S. Aggregate Credit Index is nearly back to pre-COVID-19 levels after widening 230 basis points (bps) in the month of March. We have never seen a health crisis morph into an economic crisis by virtue of a government mandated full-stop shutdown.
• The National Bureau of Economic Research recently declared that a recession began in February. A clean “V” shaped U.S. economic recovery is unlikely, and credit is likely to be at the mercy of COVID-19-related news; both negative and positive.
• Although fixed-income investment returns have been generally positive year to date, yields have swung widely as markets reacted to the sudden halt in economic growth. The Federal Reserve’s (Fed) rapid short-term interest rate cuts and fiscal stimulus have been followed by a slight sign of an economic recovery.
• The Fed and Congress have tried to fill the gap with direct funds to households and loans to businesses. Despite the massive relief, the outlook still suggests that the economy may take time to recover.
• We believe short-term interest rates will stay near zero for the foreseeable future and that low inflation will keep a lid on long-term rates.

Portfolio Strategy

• The Fund outperformed its benchmark and Morningstar peer group for the quarter. Most of the outperformance was attributable to the Fund’s exposure to credit. The lower quality CCC and leverage loans outperformed over the quarter. The dramatic response in both fiscal and monetary policies and the bending of the COVID-19 infection rate curve led to a massive rally in credit as investors speculated in a “V” shaped recovery.
• With concern of a global recession abating, the U.S. dollar weakened over the quarter against developed market currencies such as the Australian and Canadian dollar, but was stable versus the British pound and euro.
• 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 compression on credit spreads back to more normalized levels in the investment-grade sector, we are tending to allocate our resources to the lower quality credits on a relative value basis.

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.
• The federal government will soon debate another fiscal stimulus bill, while states look to fill gaps in their budgets. This environment can lead to starts and stops in economic activity and wane on investor sentiment.
• Demand for corporate credit remains intact, though recently decelerated from record-setting levels. Across the globe, fixed-income yields are staggeringly low, leaving investors few alternatives. The Fed has stepped in as a buyer in the U.S. investment-grade and high-yield markets, which we believe is likely to support current spread levels.
• 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. Poor economic performances have harmed finances. 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 overall budgets in OPEC, Russia, Nigeria, Brazil, Mexico and other nations.
• Finally, 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 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, 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 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. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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.

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

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