Market Sector Update

• Political conflicts and trade uncertainty continued to weigh on business sentiment during the quarter, leading to revisions of global and U.S. economic growth forecasts. The macro environment softened with growth slowing in the U.S., Europe and China. In the U.S., an escalation of tariffs has led to a decline in business confidence and a contraction in the Institute for Supply Management manufacturing index. The escalating trade war concerns between the U.S. and China have dampened global growth and led to a coordinated easing of central bank monetary policies.
• In Europe, the European Central Bank (ECB) cut the deposit rate by 10 basis points (bps), introduced a two-tier system for banks on the penalty rate charged on idle cash worth six times their mandatory reserves, strengthened its forward guidance and re-launched its assets purchase program. In China, the government started to implement a new round of policy initiatives in an effort to stimulate growth.
• The end of the normalization of the U.S. Federal Reserve’s (Fed) balance sheet ended this quarter with the Fed stating its intention to reinvest maturing U.S. Treasuries and mortgage-backed securities. The Fed announced that it will start expanding the balance sheet to better align it with the size of nominal gross domestic product (GDP). It also cut the fed funds rate by 25 bps in July and again in September. And finally, the stress in the short-term funding market during the quarter end led the Fed to inject cash into the system.
• The U.S. yields on Treasuries declined as the market priced in slower growth and a more active Fed on short-term rates. Two-year Treasuries declined by 14 bps while the 10-year declined by 28 bps. Credit spreads widened in high grade, high yield and emerging market debt during the quarter.
• 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 small positive return during the quarter but underperformed its benchmark.
• Most of the underperformance was attributable to the Fund’s exposure to floating rate bank loans, high exposure to CCC credits and exposure to underperforming credits such as Argentine debt, McDermott International, Inc., and Jo- Ann Stores, Inc. The Fund’s overweight exposure to floating rate bank loans hurt its relative performance as its reference index, the 3-month LIBOR, declined approximately 40 bps. Because of idiosyncratic risks, holdings in Argentina, McDermott International and Jo-Ann Stores, Inc., were key detractors from absolute and relative performance. CCC credit meaningfully lagged the other sectors in the high yield space and the Fund’s overweight exposure also hurt relative performance.
• The U.S. dollar strengthened during the quarter against developed market currencies as the yen, pound and euro lost value. The Fund’s 98.7% U.S. dollar exposure contributed to relative performance.
• We continue to seek opportunities to reduce volatility in the Fund. In addition, we maintained our longstanding lowduration strategy to gain a higher degree of certainty about companies in which we can invest.
• The Fund also continued to hold a higher level of liquidity in the quarter. We will be opportunistic in allocating that capital as we find dislocations in the market.

Outlook

• We expect most major economies to grow at a slower pace for the remainder of the year. Global manufacturing and service sector businesses report weaker conditions compared with recent periods.
• The U.S. budget deficit is expected to rise to $1.0 trillion (4.7% of GDP) in 2019 from structural forces that have deteriorated by a much greater amount than the offsetting cyclical improvement.
• Trade war rhetoric and complicated political concerns like the ongoing Brexit saga, European auto tariffs and the U.S. presidential campaign are likely to mean that global interest rates and credit markets will continue to be volatile in the near term. 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 company capital investment plans. A negative feedback loop could further affect markets and ultimately consumer and business confidence.
• Fundamentals in the credit markets remain stretched with balance sheets still levered. Softer global growth is concerning and leads us to be cautious on the outlook for credit spreads. Technicals in credit can be supported with investors’ expectations that the ECB will resume corporate bond purchases.
• Given our expectation for modest widening of spreads during the last quarter of 2019 and first half of 2020, we believe our conservative positioning relative to the benchmark is appropriate. We will be opportunistic about our credit selection and overall positioning to take advantage of perceived opportunities and dislocations as they present themselves.

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, 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.

All information is based on Class I shares.

Top 10 holdings as a percent of net assets as of 09/30/2019: Sonoco Products Co., 2.2%, 10/1/2019, 1.50%; U.S. Treasury Notes, 1.9%, 10/31/2022, 1.31%; Republic of Poland, 5.1%, 4/21/2021, 1.27%; Republic of Indonesia, 3.8%, 4/25/2022, 1.25%; U.S. Treasury Notes, 2.9%, 10/15/2021, 1.24%; U.S. Treasury Notes, 1.4%, 8/31/2026, 1.19%; U.S. Treasury Notes, 1.5%, 8/15/2020, 0.81%; Bunge Ltd. Finance Corp., 3.5%, 11/24/2020, 0.78%; iShares iBoxx $ High Yield Corporate Bond ETF, 0.68%; Republic of Indonesia, 3.0%, 1/11/2023, 0.67%.

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.