Market Sector Update

• The Trump administration’s policies regarding international trade and investment emerged as an important source of downside risk for the global economy. The administration completed a revamp of the North American Free Trade Agreement (NAFTA) with Mexico and Canada, named the U.S.-Mexico-Canada Agreement (USMCA), but trade talks with China did not make similar progress.
• Central banks continued to normalize their policies, driven by strengthening economic growth and easy financial conditions. The U.S. Federal Reserve (Fed) determined it had met is dual mandate, with the unemployment rate at 3.9% and core inflation approaching its 2% inflation target. The Fed hiked the fed funds rate to a range of 2.00-2.25%, a 0.25-percentage point increase. It marked the third rate increase in 2018 and the eighth increase since December 2015. The European Central Bank has announced it will end its bond market purchases by December.
• As global liquidity wanes, weaker emerging market countries such as Turkey, Argentina, Brazil and Mexico faced wider credit spreads, weaker currencies and lower stock prices. Volatility in the global fixed income markets also increased during the quarter.
• Political concerns emerged after elections in Italy, which brought the issue of the European Union’s (EU) sustainability back into the spotlight. The new government’s targeted budget deficit was more aggressive than market expectations, resulting in a weakening of the euro and an increase in Italian government bond rates.

Portfolio Strategy

• The Fund had a positive return (based on Class I shares) for the quarter and performed in line with the positive return of its blended benchmark index.
• The main contributors to performance were the Fund’s high-yield exposure in CCC-rated securities as well as exposure to the leveraged loan market.
• The CCC sector within the high-yield market continued to benefit from a lack of issuance, as well as exposure to U.S. rather than international economic growth. The leveraged loan market benefitted from rising short-term rates from the Fed’s rate hike.
• We continue to seek opportunities to reduce the volatility in the Fund and to 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 think President Donald Trump will use the USMCA framework for future trade negotiations with the EU and Japan. Further negotiations with China do not appear to be imminent.
• We think the Fed will continue gradual rate hikes and expect another increase during 2018. The market also is anticipating two or three increases in 2019.
• We believe the shape of the yield curve will remain flat, with the Fed continuing its approach of increased short-term rates and measured inflationary pressures on the long end of the curve. The long end of the curve also is being affected by what we consider “push” forces (increased Treasury supply from budget deficits, Fed balance sheet normalization and increased term premiums) and “pull” forces (global trade concerns, a strong U.S. dollar, political concerns and emerging market volatility).
• Labor markets continue to grow and beat expectations, which has kept consumer confidence near cycle highs and supported strong spending growth.
• We believe trade will continue to be a risk factor going forward. There is the potential for more tariffs followed by retaliatory actions that might impact companies’ capital investment plans. In our view, a negative feedback loop could affect the markets and ultimately consumer confidence.
• U.S. economic growth is likely to continue to benefit from lower individual and corporate tax rates, vigorous privatesector hiring and consumer spending.
• We think pressure on U.S. interest rates is likely to continue as a growing Treasury supply from budget deficits and the normalization of the Fed balance sheet combine to put some term premium back into the yield curve.

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 Sept. 30, 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

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.