Market Sector Update

• International and U.S. equity markets were higher during the quarter with the U.S. markets leading the way. Major contributors included growing confidence in the U.S. economy and a U.S. political deal that mitigated some of the GDP impact stemming from the tax and fiscal cliffs.
• In Europe, a lack of relatively bad news benefited the markets. That said, austerity policies, slowing exports and renewed concerns late in the quarter regarding European sovereign debt were a drag on returns. In our opinion, the European Central Bank’s position of backing euro countries and banks is key in stabilizing the markets and is the glue keeping European Union markets from falling apart.
• A continued push in Japan by Prime Minister Shinzo Abe for monetary easing in an effort to increase inflation and weaken the yen helped drive the Japanese market higher as exporters and reflation names relatively outperformed.
• In general, dividend-paying stocks became more attractive to investors looking for alternatives to lower-paying bonds and money markets. During the quarter, foreign investors began buying U.S. securities, which helped drive their relative outperformance.

Portfolio Strategy

• The Fund underperformed the benchmark for the quarter ending March 31, 2013. Sector allocation contributed to underperformance as our underweight relative to the benchmark in health care was a primary detractor, as was our cash position. In addition, stock selection within health care and energy hurt relative performance.
• Within the financial sector, we believe overall stability accompanied by the completed fiscal cliff deal at year-end 2012 positioned the sector for relative outperformance. We capitalized on this theme by investing in well-capitalized national/global leading banks and P&C insurance, which was the top relative contributor for the period.
• As the quarter progressed, we became more confident of the change materializing in Japan, and we added to positions we thought would benefit from either a weaker yen or reflation. We ended the quarter overweight Japan, with the majority of currency exposure hedged. In mainland Europe, we remained approximately market weight, while overweight Asia Pacific and the Middle East regions. We maintained our significant underweight in the U.S. because of lower yields and expensive stocks there.

Outlook

• We think global growth will be in the 2.5 to 2.75% range. We expect Europe to be in recession, with the U.K. challenged to post growth. We estimate 2 to 3% growth in the U.S., despite higher taxes and spending cuts, making it one of the better performers in the developed markets.
• We are enticed by the health care sector, as government intervention seems to have peaked for now, and remain constructive on well-positioned financial companies. We remain constructive on changes in Japan; however, we feel issues stemming from Europe and China need to be closely monitored as developments in the regions can have lasting impacts throughout the global marketplace.
• In our view, emerging markets generally will drive global economic growth as rate cuts and fiscal stimulus programs take hold in key countries, including China, Brazil and India (later in the year.)
• We remain focused on solid dividend yields and continue to look for stocks that we consider high quality, which means they offer sustainable growth and are positioned well in their industries throughout the world.

The opinions expressed in this commentary are those of the Fund's managers and are current through March 31, 2013. The managers' 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. Dividend-paying investments may not experience the same price appreciation as non-dividend-paying instruments. Dividend-paying companies may choose to not pay dividends, or dividends may be less than was anticipated.

Risk Factors. As with any mutual fund, the value of the Fund’s share 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 economical conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected. 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.

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.