Market Sector Update

• International markets rose slightly more than 5% in the quarter, based on the Fund’s benchmark, with currency a hindrance on international performance resulting from the strengthened U.S. dollar. Central banks remained very accommodative and provided support for risky asset prices in equity and fixedincome markets.
• Political hardships were a drag on international markets. In particular, the financial crisis in Cyprus accompanied by inconclusive election results in Italy proved to be key headwinds and will likely continue to negatively affect the eurozone going forward. On a positive note, the Chinese economy improved, albeit at a slow pace. Additionally, legislative changes designed to kick-start the Japanese economy by the Abe administration was a positive surprise.
• Turning to the U.S., the political gridlock continued as the two key political parties could not agree on spending cuts. As a result, automatic cuts under the wellpublicized sequester were implemented.

Portfolio Strategy

• The Fund lagged the benchmark slightly for the quarter. Underperformance can primarily be attributed to a beta rally during January, a market environment that was unfavorable due to the relatively defensive positioning of the Fund, and our exposure to emerging markets. Exposure to China and South Korea posted negative gains in the quarter.
• The market environment reversed course during the latter half of the quarter as a market rotation into defensives enabled the Fund to recoup a large majority of the performance shortfall. In aggregate, our developed markets outperformed the index, which was encouraging as defensives beat cyclicals in these markets.
• We expect to maintain cash levels at around 5% of assets in the Fund. We continue to seek undervalued companies or reasonably priced companies that we think can do well in a slow growth environment and withstand a material downturn.
• The Fund’s sector allocation continues to favor stable over cyclical stocks and remains neutrally positioned between growth and value. Approximately 7% of the Fund is exposed to emerging market stocks, which we think is reasonable given the current market environment. We continue to see relative value opportunities in telecommunication services, energy and information technology.

Outlook

• We believe global economic growth is fragile but showing positive momentum with global monetary policy remaining aggressive through year-end.
• We think any significant improvement in economic growth will eventually lead to tighter monetary and fiscal policy in the advanced economies. In our opinion, the slower economic growth experienced since 2008 is likely as good as we can expect today, with greater downside than upside risks. Trying to materially change positioning for short-term rallies seems increasingly futile.
• We think relative valuation remains supportive for international equities, while the opposite is true for absolute valuations. Equities are trading at levels that are in line with their historic averages (last 25 years), while bonds are trading at a premium. Since 2008, investors have had a great appetite for bonds and little for equities. If investors determine that it is safe to return to equities and sustained flows were to come, then multiples would expand. If not, we feel equities should trade at a discount to their recent average as prospects for global growth are lower.
• Long term, we believe emerging countries such as China, India and Brazil will continue to try to improve their population’s standard of living. To accomplish this feat, the countries will require vast amounts of infrastructure and increasingly productive economies. As a result, we believe these trends will benefit consumer-facing and infrastructure companies serving these markets.

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. These risks are magnified in emerging markets. 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.