Market Sector Update

• The global synchronized economic recovery continued in the quarter, led by the U.S. as recent fiscal stimulus and the impact of tax reform legislation made their way into the system.
• The U.S. Federal Reserve (Fed) raised its base policy interest rate to a range of 1.50-1.75% in March and reiterated its intent to raise short-term rates two more times this year. The Fed also increased its projections for rate hikes in 2019 to three from two.
• U.S. interest rates remained under pressure with the Fed’s tightening policy and new concerns about inflation, based on recent fiscal stimulus and the economy at full employment. Credit spreads remained fairly stable and remained near historically tight levels.
• The U.S. dollar continued to weaken and is likely to be pressured further by concerns about trade conflicts between the U.S. and China.
• The Bank of Japan (BOJ) took no action and did not provide any future guidance about its monetary policy of targeting interest rates. Inflation forecasts suggest that while the BOJ might have overcome deflation, achievement of its 2% goal is still not on the horizon.

Portfolio Strategy

• The Fund had a negative return for the quarter that trailed the slightly positive return of its blended benchmark index.
• The Fund’s heavy weighting in U.S. dollar securities hurt its performance relative to the benchmark as the dollar weakened versus the Japanese yen, British pound and euro.
• An overweight in corporate credit helped relative performance, as investor demand for income continues to attract foreign capital into the credit markets and further compress spreads.
• The Fund also benefited from an increase in short-term interest rates because of its investments in bank loans, middle market loans and structured products whose rates adjust to the higher rate.
• At quarter’s end, the Fund had about 55% of net assets allocated to corporate bonds and about 16% to senior loans.
• We continue to seek opportunities to reduce the volatility in the Fund and maintain a low-duration strategy. We also continue our longstanding position of holding a higher level of liquidity in the Fund, with the intent of being opportunistic with that capital when dislocations arise in the market.

Outlook

• We expect global growth to remain steady during the course of the year. The negative impact from the Great Recession has faded and this backdrop, when combined with significant U.S. fiscal stimulus and rising capacity utilization rates, is likely to support growth.
• U.S. inflationary pressures are gradually starting to accelerate, with the national unemployment rate now at 4.1% and wage growth beginning in some sectors.
• The shape of the yield curve is likely to remain flat in the near term, with the Fed’s intention of raising short-term rates and little inflationary pressures on the long end of the curve.
• We believe global central banks will continue to normalize their policies, driven by continued solid economic growth and easy financial conditions.
• We think the Trump administration’s policies on international trade and investment have emerged as an important source of downside risk for the global economy following the imposition of tariffs that mainly target China. We also think an emerging fear of a hard landing in China’s economy is overdone. We anticipate a managed slowdown as capital controls come back with a tightening in the shadow banking system.
• Political developments are likely to have an impact on Japan’s market as Prime Minister Shinzo Abe faces charges related to a land sale scandal. We think this is likely to mean the continuation of the status quo there of a reflation policy without bold structural reforms.

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, 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The 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.