Market Sector Update

• Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Fund’s benchmark), gained 4.21% in the second quarter.
• Outperformance within the index came from the technology, health care, materials, financials, and real estate sectors – an eclectic mix.
• The energy, telecommunications services, consumer staples, utilities, consumer discretionary and industrials sectors all underperformed.
• There was no clear trend of aggressive or defensive, cyclical or non-cyclical behavior across the index in the quarter.

Portfolio Strategy

• The Fund outperformed the benchmark in the second quarter, and on both a year-to-date and a trailing 12-month basis, before the effects of sales charges. Individual sector performance generally aligned with the strengths and weakness of the index. Technology, consumer staples, health care and financials were outperformers, and energy, consumer discretionary and materials all underperformed.
• The Fund’s technology exposure made the strongest positive contribution to performance, significantly outperforming this strong group within the index. The Fund was overweight this outperforming group, and almost all of the names turned in strong performances. Names of note included CoStar Group, Inc., GrubHub, Inc. and ServiceNow, Inc. Of particular interest was Square, Inc., a fast growing credit card payment processing company for small and medium business, which is a recent addition. Pandora Media, Inc. was a disappointment during the quarter. The company’s significant underperformance reflected investor concern and confusion over its strategic corporate vision. The picture began to clear later in the quarter as SiriusXM made a strategic investment in Pandora, and important changes in the management team began to unfold. We continue to like this asset.
• Consumer staples contributed positively to relative performance. We were underweight this group, which was slightly beneficial to performance, but the significant outperformance came from our ownership of Whole Foods Market.
• Health care was another area of strength with the largest positions leading performance within the sector. Intuitive Surgical, Inc., Zoetis, Inc., Edwards Lifesciences and Align Technology all delivered very strong double-digit performances.• Financials made a small positive contribution to relative performance based on the overweight position in this outperforming group.
• Industrials exposure also made a slight positive contribution to relative returns, primarily due to strong stock selection, as we were slightly overweight this underperforming group.
• Energy was the largest detractor to Fund performance. After delivering strong returns in 2016, the sector has weakened in 2017 on an early year decline in the price of oil, concerns about the oil production supply response related to a rebound in the rig count, and uncertainty about OPEC’s perspective regarding production restraint. The Fund was overweight this underperforming sector, and the oil exploration and production names all underperformed.
• The Fund's consumer discretionary names detracted slightly from returns, primarily related to adverse stock selection, as being underweight this underperforming group was somewhat helpful to returns.
• Performance relative to materials also detracted slightly. The Fund was underweight this outperforming sector.

Outlook

• We have expected the market to deliver positive returns in 2017, and thus far, have not been disappointed.• We think the markets can move higher from here based on accelerating economic growth around the globe, vastly improved corporate profits in the U.S. as compared to the last two years, and the potential, if not waning, benefits of pro-growth, pro-cyclical policies from a Trump administration that can enhance an already positive environment.
• The Fund continues to express a more economically constructive and optimistic view, with a more assertive progrowth, less defensive stance.
• The Fund is overweight technology, financials, industrials, energy and health care. Health care, while often considered defensive, remains one of the higher growth sectors in our universe. We have recently achieved a slight overweight to industrials, as we see an opportunity for many companies to benefit from a recovery in industrial demand, as the world begins to grow again, in addition to benefitting from possible fiscal spending initiatives of the Trump administration.
• We are underweight consumer discretionary, consumer staples, materials, real estate, telecommunication services and utilities. The climate for many consumer discretionary companies and retailers remains difficult. While we have seen some positive pockets of retail, we are generally guarded in our approach to owning names in this group, expecting to continue to see pressure on growth and margins, with stock valuations trending lower as a result.
• We are less confident about energy, as the significant investment in technology and productivity seem to have led to higher than expected supply persistency, the impact of which could be a lower ceiling on oil prices and lower than expected revenue and earnings outlooks for the group in the near to intermediate term.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2017, 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.

The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Top 10 holdings (%) as of 06/30/2017: Zoetis, Inc. 3.4, Intuitive Surgical, Inc. 3.4, Fastenal Co. 3.3, CoStar Group 3.0, Electronic Arts, Inc. 2.8, CME Group 2.5, Tiffany & Co. 2.4%., Edwards Lifesciences Corp. 2.4, ServiceNow, Inc. 2.4 and Microchip Technology, Inc. 2.3.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more well-established companies. 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. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

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.