Market Sector Update

• The S&P 500 Index (Fund’s benchmark) slide slightly from the beginning of the year, but still had a positive return of just over 3% in the second quarter We believe that moderate economic growth in the U.S. will provide the underpinning for respectable gains in the benchmark's profits through the end of 2017.
• The energy sector posted the most significant underperformance in the portfolio. A rebalancing of the oil markets has been prolonged due to the large supply gains from U.S. shale production.
• While information technology performed well for the quarter, the sector declined in June on high valuations rising interest rates, which led investors to purchase more value-oriented sectors like financials.
• While overall market volatility was extremely low, large rotations between sectors have presented challenges for our Fund strategy. For example, biotechnology stocks appear to have experience a resurgence following an 18-month period related to pricing and political concerns. Also, the financials sector has been stagnate overall year to date despite the aforementioned second quarter gains.
• Even with the highly rotational nature of this stock market, we are more focused on taking advantage of opportunities as the present themselves.

Portfolio Strategy

• The Fund trailed its benchmark for second quarter with the primary detractor our overweight in energy. While we remain constructive with the longer-term that the ultimate direction of oil will be up, we have tempered our short-term views of the energy sector and currently stand slightly underweight in comparison to the benchmark.
• In the energy sector, the year-to-date decline of West Texas Intermediate oil has led to sharp underperformance in the energy sector, particularly the more growth-oriented holdings that could benefit from increased shale drilling in North America. We underestimated the swiftness with which domestic producers would get back to work in the oil patch and drive supplies higher after a two-year period of reduced investment. We believe that at current prices, investment levels may be reduced again, causing another modest down-cycle in drilling activity early in 2018. As such, we have reduced weightings within the sector recognizing this pending downturn in activity. Longer-term, we believe that price levels are unsustainable in generating the investment dollars to grow production at rates that will meet global demand.
• We believe the Fund could continue to benefit from significant exposure to financials. We anticipate continued gains in short-term interest rates could improve profit margins for banks and other companies in the financials sector, but margins should remain below longer-term trend levels. Combined with regulatory relief, these changes could increase return on equity back toward historical levels in coming years for large financial institutions. The U.S. Federal Reserve's (Fed) recent Comprehensive Capital Analysis and Review (CCAR) gave most large banks the ability to raise dividends and repurchase shares, adding to their appeal.
• Technology continues to be a large focus area for our portfolio given important secular earnings drivers. Increases in semiconductor content across consumer and industrial goods, expansion in electronic payments and the continued migration to cloud-based platforms all provide high levels of growth visibility for many years. While the market has increasingly recognized superior growth rates in some companies’ valuation multiples, we still find several attractive technology stocks where future earnings expectations continue to be underestimated.

Outlook

• We believe overall economic growth and the resulting corporate revenue growth will be an important driver for earnings and equity returns in 2017. This is because at this point in the economic cycle, companies have largely completed any cost cutting or balance sheet refinancing, and now revenue growth is required for increased earnings.
• The next challenge will be for the Fed to tighten its monetary policy. As expected, the Fed raised the key federal funds rate by 0.25 percentage point in June, and we believe an additional rate hike is possible before the end of the year. Slowing the economy and inflation via interest rate hikes is a difficult job however, one we liken to stepping on a rolling egg to stop it without breaking it. History shows a high probability of failure, particularly if raising interest rates too much and initiating a recession. This is something we will watch carefully.
• The Fed also unveiled its plan to reduce its $4.5 trillion balance sheet in June. The plan will implement a system of set limits for running down its portfolio, which includes Treasuries, mortgage-backed securities and government agency debt. We believe the Fed could begin this process as early as September, and we anticipate other central banks will pursue similar monetary policies based on the recent strength of the U.S. dollar.
• We continue to have a pro-cyclical tilt to our portfolio, meaning we anticipate positive returns for the Fund when investors are optimistic regarding modest global growth and a slow rate of interest rate normalization. That stated, we see signs that for the first time in many years that investors are beginning to punish low-growth or no-growth companies that trade at high valuation multiples. We remain optimistic that our approach could lead to improved performance in coming quarters and years.

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, 2017, 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.

Top 10 holdings (%) as of 06/30/2017: Apple, Inc. 3.8, Microsoft Corp. 3.5, Alphabet, Inc. 3.4, Morgan Stanley 3.2, JPMorgan Chase & Co. 3.0, United Healthcare Group, Inc. 2.9, Phillip Morris International, Inc. 2.9, Kraft Foods Group, Inc. 2.7, Home Depot, Inc. 2.6, Adobe Systems, Inc. 2.5.

Class R6 shares were Class N on March 31, 2017.

The S&P 500 Index is an unmanaged index of common stocks. It is not possible to invest directly in an index.

Risk factors. The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund is generally invested in a small number of stocks, the performance of any one security held by the Fund will have a greater impact than if the Fund were invested in a larger number of securities. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns on investments in securities of large capitalization companies could trail the returns on investments in securities of smaller companies. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

IVY INVESTMENTS^SM refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS℠ , and the financial services offered by their affiliates.

Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.