Market Sector Update

• Equity markets continued the push higher with broad-based strength. Economic data points continue to show strong and stable growth in the U.S., and corporate earnings reflect that trend. The Russell 1000 Value Index (the Fund’s benchmark) return for the third quarter was +5.7%, which trailed both the broader S&P 500 Index as well as the growth style.
• Inflation and wage gains have appeared, although still very small. Interest rates rose at both the shorter and longer end of the treasury curve.

Portfolio Strategy

• In the third quarter, the Fund trailed the benchmark due to the volatility in a few individual stocks. The Fund also paid a quarterly dividend of 15 cents per share, which is a 2.55% annual run rate based on the its quarter end net asset value. This is also a 6.4% increase over the dividend paid in the third quarter of 2017.
• Holdings in information technology were the standout performers. These holdings added the most value as strong performance from Broadcom and KLA Tencor led the way. Energy and healthcare also added positive performance, including CVS Caremark Corp.
• On the negative side, performance was hampered by ownership of Gap, Inc., Macy's, General Motors and LyondellBasell. Retail has been a strong performer year-to-date as consumers have spent their tax windfall. However, many retail names have started to lag and we think we may be closer to the end of retail outperformance rather than the beginning. Our ownership in this sector is changing to reflect this outlook.
• The Fund is overweight in financials and health care where we seek value and yield. In these areas, we have been able to find good companies with repeatable business models generating high rates of free cash flow, and low stock prices relative to our estimation of each company’s intrinsic value.
• The Fund is underweight areas of consumer staples, energy and real estate. We simply do not find many attractive investments in these sectors at this time although we are constantly on the lookout should there be opportunity.

Outlook

• After eight years and some stops and starts, the U.S. economy has recovered from the 2008 recession and seems to have settled into a low single-digit growth area. Recent data has been even more encouraging, with a recovery in the energy sector, improving labor market and manufacturing data. This was boosted by tax changes in early 2018.
• The next challenge will be for the Federal Reserve (Fed) to tighten money policy, yet not slow the economy into contraction. The Fed has indicated a path to three or four rate hikes in 2019. Slowing the economy and inflation via rate hikes is a difficult job. We liken it to stepping on a rolling egg to stop it without breaking it. History shows a high probability of failure, if interest rates rise too much thus helping create a recession. This is something we will watch carefully.
• While the economic forces listed above are clearly important factors, the Fund’s portfolio management team’s first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic value. Oftentimes this is due to short-term negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time, to potentially benefit clients over the long run.

The opinions expressed are those of the Fund’s manager 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, 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.

IVY000202 01/31/2019

Top 10 holdings (%) as of 09/30/2018: Broadcom Corp. 5.9, American Capital Agency Corp. 5.7, Pfizer, Inc. 5.2, Prudential Financial Group, Inc. 4.2, Gilead Sciences, Inc. 5.1, CVS Caremark Corp. 5.1, Principal Financial Group, Inc. 4.2, Eaton Corp. 4.1, Cardinal Health, Inc. 4.1 and MetLife, Inc. 4.1.

The Russell 1000 Value Index is an unmanaged index comprised of securities that represent the large cap sector of the stock market. 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. 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. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Investing in companies in anticipation of a catalyst carries the risk that certain of such catalysts may not happen or the market may react differently than expected to such catalysts, in which case the Fund may experience losses. The securities of many companies may have significant exposure to foreign markets as a result of the company’s operations, products or services in those foreign markets. As a result, a company’s domicile and/or the markets in which the company’s securities trade may not be fully reflective of its sources of revenue. Such securities would be subject to some of the same risks as an investment in foreign securities, including the risk that political and economic events unique to a country or region will adversely affect those markets in which the company’s products or services are sold. 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.

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