Market Sector Update

• U.S. inflationary pressures are starting to gradually accelerate, with the unemployment rate reported at 3.8% during the quarter. The labor market has moved beyond full employment and it appears that core inflation is likely to overshoot the U.S. Federal Reserve’s (Fed) 2% target.
• The Trump administration’s policies on international trade and investment became an important source of downside risk for the global economy. There was growing concern that costs could rise if the trade war escalates into multilateral trade or if the equity markets drop sharply around the world.
• As global liquidity waned during the quarter, weaker emerging market countries – such as Turkey, Argentina, Brazil and Mexico – felt the effects with wider credit spreads, weaker currencies and lower stock prices. Volatility in the global fixed income markets also increased, making investing across those markets more complicated.
• Political concerns emerged from elections in Italy and Mexico that led to a flight-to-quality trade. That prompted the U.S. dollar to strengthen, credit spreads to widen and U.S. Treasuries to rally. Italy’s new government brought the European Union’s (EU) viability back into the spotlight, while Mexico’s new president prompted investor concerns about the success of renegotiations on the North American Free Trade Agreement.

Portfolio Strategy

• The Fund had a slightly positive return (based on Class I shares) but underperformed its blended benchmark index, mainly because of its larger weighting in emerging markets credits.
• The Fund also has a relatively shorter duration and higher concentration of high yield bonds, which helped its performance relative to category peers.
• Trade tensions that initiated with the Trump administration as well as political concerns about the EU from the result of the Italian elections led to a rush for dollar assets. Dollar strength led to emerging market weakness that spread from Argentina and Turkey to other vulnerable countries.
• As the dollar strengthened during the quarter against the yen, pound and euro, the Fund’s 97% weighting to U.S. dollar securities helped its relative performance against category peers.
• 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

• In our view, central banks will continue to normalize their policies, driven by strengthening growth and easy financial conditions. The Fed is likely to continue to increase its policy rate at a gradual pace. We expect this to continue over the course of the second half of the year, with the market anticipating one to two more rate hikes in 2018.
• The European Central Bank also recently announced its tapering program, which will end any additional purchases by December.
• We think the shape of the yield curve is likely to remain flat, based on the Fed’s intention of raising short-term rates and measured inflationary pressures on the long end of the curve. The long end of the curve is also being affected by conflicting forces of the increased Treasury supply from budget deficits, Fed balance sheet normalization, and increased term premium versus global trade concerns, a strong dollar, political concerns and emerging market volatility. We think pressure on U.S. rates is likely to continue as a result of these forces.
• Trade will continue to be a key risk factor going forward. We think there is a potential for more tariffs followed by retaliatory action that might impact companies’ capital investment plans. That could generate a negative feedback loop affecting markets and ultimately consumer confidence.
• We believe U.S. economic growth should continue to benefit from lower individual and corporate tax rates, vigorous private-sector hiring and consumer spending. Labor markets continue to grow and beat expectations, which has kept consumer confidence near cycle highs and supported strong spending growth. We anticipate that trend will continue.

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, 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.