Market Sector Update

• Broad international markets were down approximately 12.5% in U.S. dollars over the quarter. The U.S. dollar appreciated about 1% relative to a basket of other currencies. Escalating trade tensions between the U.S. and China, uncertainty surrounding the ongoing Brexit negotiations, populism in France highlighted by yellow vests activism, and concerns over the pace of rate hikes in the U.S. provided a sour backdrop for equity markets. Understandably, earnings revisions turned decidedly negative.
• In early December, the U.S. and China agreed to trade negotiations rather than ratcheting up tariffs. We believe additional agreements will be reached, though a comprehensive trade pact seems unlikely given many conflicting issues between the two nations. In the U.K., British Prime Minister Theresa May survived a no confidence vote, and while tensions surrounding Brexit negotiations remain high, we believe a soft Brexit remains likely. Whether it is trade, protests or border walls, populism and nationalism are on the rise around the world.
• The quarter witnessed an additional rate increase by the U.S. Federal Reserve, increasing the Federal Funds Rate to 2.5%. The 10-year U.S. Treasury yield closed the year at approximately 2.7%, a significant move from the 3.2% levels of November. At the end of the quarter, the European Central Bank (ECB) ceased their asset purchase program, while the Swedish Central Bank, often considered a harbinger for the ECB, raised rates 25 basis points. China’s central bank stated a desire to maintain prudent monetary policy and keep the yuan stable while offering “reasonably ample” liquidity to the market.
• Brent crude finished the quarter at $53.80, down almost 40% from its early October high. Excess U.S. supply concerns and lower global demand from an extended cycle drove the surprising swoon.

Portfolio Strategy

• The Fund underperformed its benchmark for the quarter primarily due to poor stock selection in the energy, health care and industrials sectors. As oil prices receded over the quarter, the Fund’s substantial (approximately 5%) overweight allocation to energy and poor stock selection accounted for more than half of the Fund’s relative underperformance. Allocations to Canadian energy companies (Seven Generations Energy Ltd., Class A and Suncor Energy, Inc.) were top detractors for the period. On the health care front, an allocation to Fresenius SE & Co. KGaA and Fresenius Medical Care AG & Co. KGaA were substantial detractors to relative performance for the period.
• Geographically, the Fund’s holdings in developing markets (approximately a 12% allocation) detracted from performance. Despite the setback, we continue to see relative value opportunities in emerging markets, especially China.
• Top individual contributors to Fund performance for the period included Newcrest Mining Ltd., an Australian-based gold and gold-copper miner, Orange S.A., a French multinational telecommunications company, and Axis Bank Ltd., the third largest private-sector bank in India.
• In an effort to provide support in down markets, we maintained our forward currency contract to the Japanese yen, neutralizing our stock underweight allocation on a currency basis. Additionally, we hedged our direct exposure to the Chinese yuan, and increased the Fund’s cash allocation from 3% to 5%.

Outlook

• There are a number of factors we are carefully monitoring in the current economic environment. Shift in central bank policy, the rise of nationalism and ongoing trade negotiations between the U.S. and China are standout concerns. Going forward, we believe geopolitics is likely to have a greater impact on asset performance than monetary policy. The question remains: How much longer will the cycle extend uninterrupted by looming risks? As a result, we are watching closely for signs of change and continue to seek stocks that should better withstand an economic downturn. While we think U.S.-China trade tensions will persist, we expect some positive agreements in 2019 that will provide relief to the market.
• In much of the world, global monetary policy remains at the extremes of easy and we do not see that changing materially unless inflation accelerates at a higher-than-expected rate. Virtually all countries are struggling with high levels of debt. As a result, we believe central banks will attempt to keep rates below nominal gross domestic product growth in order to monetize the debt and continue to stimulate their economies. As such, we believe there is a longterm cap on how high rates can go. Our base case is continued slow, deliberate exiting of quantitative easing and narrowing of negative interest rate policy globally. Unfortunately, this may result in many economies heading into the next economic downturn with very easy monetary policies.
• We believe relative valuation remains supportive for international equities. We see relative value opportunities in emerging markets (especially China), energy, internet-related companies and in many cyclicals that we view as more stable than average.

The opinions expressed are those of the Fund’s managers regarding Class I shares and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Dec. 31, 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.

Top 10 Equity Holdings as a percent of net assets as of 12/31/2018: Nestle S.A., Registered Shares 2.7%, Roche Holdings AG, Genusscheine 2.5%, Total S.A. 2.5%, SAP AG 2.2%, Danone S.A. 2.0%, Swedbank AB 1.9%, Isuzu Motors Ltd. 1.9%, Airbus SE 1.8%, Nippon Telegraph and Telephone Corp. 1.8% and Bayer AG 1.7%.

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. 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. 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.

IVY INVESTMENTS℠ 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.