Market Sector Update

• 2018 ended with a particularly volatile quarter as all major regional equity indices experienced significantly negative returns, the U.S. dollar rallied, oil prices declined approximately 40%, and the U.S. Treasury yield curve flattened.
• After years of strong performance, equity valuations contracted as investors discounted an increasingly long list of risk factors including: U.S. Federal Reserve (Fed) tightening, disturbing trade rhetoric, the U.S. government shutdown, ongoing Brexit concerns, continued fiscal challenges in the European Union, slower growth in China, a downturn in leading economic indicators in the U.S. that could signify peak earnings growth as fiscal stimulus runs off, and tightening financial conditions to name a few.

Portfolio Strategy

• The Fund generated a negative return for the quarter and underperformed its benchmark index. The performance reflects the mix of returns in the underlying funds during the quarter and their allocation weightings. The Fund’s performance was most significantly impacted by the underperformance of the energy and technology sectors, the growth equity style, small capitalization securities relative to large capitalization securities, and U.S. equities relative to international equities. Accordingly, the most significant detractors of relative performance included the Ivy International Core Equity Fund, Ivy Pzena International Value Fund, Ivy IG International Small Cap Fund and Ivy Global Growth Fund.
• Underlying fund allocations were altered early in the quarter precipitated by the mergers of the Ivy European Opportunities Fund into the Ivy International Core Equity Fund and the Ivy Global Income Allocation Fund into the Ivy Asset Strategy Fund. The Fund sold its positions in the aforementioned merged funds and added exposure to the Ivy Pzena International Value Fund, Ivy IG International Small Cap Fund and Ivy Global Equity Income Fund. These additions and allocation changes attempt to serve to diversify the styles of international equity exposure available to shareholders while reducing underlying manager concentration risk. The Fund currently targets the following underlying exposures: 35% Ivy International Core Equity Fund, 20% Ivy Pzena International Value Fund, 15% Ivy Emerging Market Equity Fund, 10% Ivy Global Equity Income Fund, 10% Ivy IG International Small Cap Fund and 10% Ivy Global Growth Fund.
• At quarter end, about 87% of the portfolio was invested in foreign equities, 10% in domestic equities and 3% in cash and cash equivalents.

Outlook

• Although global growth remains tepid, the state of the U.S. economy, while apparently slowing, remains in stable condition. Unemployment is quite low, wages are rising, inflation remains at moderate levels and oil prices have fallen, which can benefit consumer spending. The Fed has been tightening monetary policy but has recently signaled to markets their willingness to pause if necessary and real rates remain rather low, potentially diminishing the risk that the Fed has significantly over-tightened as in previous cycles.
• However, myriad risk factors remain. The combination of Fed rates hikes with balance sheet run-off will have to be monitored closely in a difficult global environment where no other major central banks are tightening as U.S. dollar strength is a mitigating factor on U.S. corporate earnings growth and international equity markets, generally. The global trade issue is a major threat to both confidence as well as earnings and the global growth outlook remains dim, although China is attempting to stimulate its economy.
• However, the market has begun discounting many of these risk factors and stocks are significantly cheaper than a quarter ago and should markets experience any combination of relief in the trade war, looser monetary policy, a softer U.S. dollar or a reacceleration of growth, we would expect valuations to again improve as sentiment has worsened to a point that sometimes signifies capitulation.
• Given this balanced but cautious outlook, the Fund is positioned with its estimated total risk relatively equal to benchmark and active equity allocations are rather modest with respect to geography and industry, as we attempt to increase the importance of our underlying active managers’ ability to add alpha through security selection in what may be more volatile markets than in past years.

The opinions expressed are those of the Fund’s managers for 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.

Effective July 31, 2018, the Fund may invest its assets in three additional underlying funds with the following target allocation ranges: Ivy IG International Small Cap Fund 0-60%, Ivy Global Equity Income Fund 0-60% and Ivy Pzena International Value Fund 0-60%. Effective Nov. 5, 2018, the Ivy European Opportunities Fund (a previous underlying investment fund option) merged into the Ivy International Core Equity Fund and the Ivy Global Income Allocation Fund (a previous underlying investment option) merged into the Ivy Asset Strategy Fund.

Diversification cannot guarantee a profit or protect against loss in a declining market.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. 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. The performance of the Fund will depend on the success of the allocations among the chosen underlying funds. Investing in a single region involves greater risk and potential reward than investing in a more diversified fund. 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.