Market Sector Update

• Both the U.S. stock market and U.S. dollar experienced a strong rally during the first quarter of 2013, driven primarily by market stability and growth. Consequently, the strengthening U.S. dollar led to a selloff in emerging markets, as flows went back to the U.S. market for liquidity.
• In the quarter, the European market rose significantly as investors embraced the positive outcome of elections in Greece and actions by the European Central Bank (ECB) to directly recapitalize banks in Spain and buy down sovereign debt yields. Still, the Italian election went poorly, and Italy – the third-largest economy in Europe – will likely have trouble forming a government. If they do, it is likely to be very weak.
• Cyprus got an aid package from the European Union, and in order to hold up their end of the bargain, the Cypriots had to garnish deposits in the banks. This is a terrible template, as it could lead to bank runs elsewhere and will severely damage this economy heavily reliant on the financial sector. Despite these hardships, central banks remained very accommodative and provided support for equity prices.
• From an economic standpoint, Europe was disappointing as the economy remains in recession and Purchasing Managers' Indices from the region began to decline towards the end of the quarter.

Portfolio Strategy

• The Fund slightly outperformed the benchmark (before the effect of sales charges) during the quarter. In general, overall stock selection was flat for the period. Despite strong selection in the industrials and materials sectors, detractors in technology, health care, and energy were enough to offset the gains. The Fund showed effective sector allocation, with underweight positions in the poor-performing financials and energy sectors as the largest relative contributors.
• Despite overall poor performance from the financial sector, the largest relative and absolute individual contributor to Fund performance was Wirecard AG, a global financial services and technology company.
• Going forward, we maintain a favorable outlook on the information technology sector, as we believe online and mobile payment systems and security offer rewarding prospects. As such, the Fund has established a material overweight in this sector relative to the benchmark. Additionally, we maintain our position of underweight financials, as we believe there are still many challenges facing European banks.
• We remain positive about the growth prospects in Germany, which has resulted in a meaningful overweight relative to the benchmark. Many German companies we own have significant exposure to emerging market economies, which we believe will aid these companies as emerging markets are poised for continued growth.

Outlook

• With economic and political issues continuing to simmer in Europe, including the lack of leadership in Italy as a result of inconclusive election results in February, news from the eurozone will likely continue to have a large impact on the volatility of global markets. We think any significant improvement in economic growth will eventually lead to tightening of the extremely loose monetary and fiscal policy that exists across developed European economies today.
• Recently, the Bank of Japan initiated a monetary stimulus effort in addition to monetary base targeting. We are watching these developments closely to gauge the effectiveness of the banks actions. The results potentially have implications for eurozone countries struggling with a large outstanding debt-to-GDP ratio and growth prospects. While there may be negative consequences associated with monetary policy stimulus, the initiative provides a positive backdrop for risk assets.
• For the long term, we believe emerging-market middle-class populations will continue to seek higher standards of living. As a result, we think this trend will drive the stocks of consumer-facing companies that serve these markets as well as infrastructure companies. As such, we will continue to look for attractive companies that demonstrate strong cash generation and healthy balance sheets that appear to be poised to benefit from this growth.

The opinions expressed in this commentary are those of the Fund's manager and are current through March 31, 2013. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.

Risk Factors. As with any mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. 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. International investing involves additional risks including currency f uctuations, political l or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. 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.

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available a summary prospectus, containing this and other information for the Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.