Market Sector Update

• In January, the Federal Open Market Committee (FOMC) pivoted from a tightening bias to a new message of “patience.” U.S. Federal Reserve (Fed) Chairman Jerome Powell implied that rate hikes were off the table for the remainder of the year. The markets welcomed the pause as financial conditions loosened with equity prices rising, credit spreads tightening and the U.S. dollar weakening relative to emerging market currencies.
• The normalization of the Fed balance sheet also is winding down as the Fed slows the pace of reductions to a level consistent with what it believes is efficient and effective policy implementation.
• The yield curve inverted as the market brought down expectations of the Fed’s tightening policy and absorbed overall expectations of a slower global growth environment. The Fed reduced its forecast of U.S. gross domestic product (GDP) growth to 2.1% from 2.3% for 2019 and kept its Core Personal Consumption Expenditures (PCE) inflation forecast unchanged at 2.0%.
• The Trump Administration’s trade negotiations with China continued during the first quarter, but nothing material happened. Nevertheless, expectations are rising that a settlement will occur soon.
• Central banks across the globe continued to generate volatility into the markets as they tried to guide market expectations with their data dependent policies. There was dovish forward guidance from the European Central Bank, Bank of Japan and Bank of England as slowing growth, persistent geopolitical uncertainty and underwhelming inflation have put policymakers on a more cautious footing.
• By switching their focus from tight labor markets and accelerating wage growth to slowing economies and softening inflation expectations, we believe policymakers are trying to create a backdrop for lower volatility.

Portfolio Strategy

• The Fund had a positive return for the quarter but underperformed its benchmark index and its Morningstar peer group average, primarily because of its shorter effective duration and defensive posturing in credit and Treasuries.
• The recent risk-on environment led to a significant tightening in credit spreads and the market’s reaction to the pause in monetary policy led to a rally in long-duration Treasuries.
• The U.S. dollar weakened over the quarter against emerging market currencies, as the Russian ruble, Chilean peso and Colombian peso rose 6.2%, 2.5%, and 2.0%, respectively. The Fund’s U.S. dollar exposure in the global bond strategy sleeve hurt relative performance.
• We continue to seek opportunities to reduce volatility in the Fund and have maintained a low-duration strategy to gain a higher degree of certainty about those companies in which we can invest.

Outlook

• We expect modest improvement in economic growth in the next couple of quarters, which we believe will provide cover for the Fed to not raise interest rates for the remainder of 2019.
• The federal budget deficit is forecast to rise to $1.0 trillion (4.7% of GDP) in 2019 because of structural forces that have deteriorated by a much greater amount than the offsetting cyclical improvement.
• Labor markets continue to grow and beat expectations, which has kept consumer confidence near cycle highs. The U.S. government shutdown, severe weather and tax refunds are just a few special factors that were a headwind for GDP growth in the quarter. We think these will have less of an impact in the second quarter.
• We continue to believe that uncertainty about global trade, Brexit and global growth will result in economic growth modestly below consensus forecasts.
• We think trade will remain a risk factor going forward. There is the potential for more tariffs, followed by retaliatory action that might impact companies’ capital investment plans. A negative feedback loop could affect markets, stocks and ultimately consumer confidence.
• In our view, fundamentals in the credit markets still are stretched, with balance sheets still levered. Softer global growth leads us to be cautious on the outlook for credit spreads.
• 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 with our credit selection and overall positioning going forward.

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, 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 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.