Market Sector Update

• International markets were volatile in the quarter, driven by uncertainty stemming from European political turmoil (Italian budget and Brexit), concerns about Turkey and ongoing trade tensions.
• International indices overall closed up slightly for the quarter, though lagged U.S. markets, European and Japanese markets logged gains after falling in the second quarter, while emerging market equities continued to lag.
• The global run in developed market equities continued, with the U.S. establishing a record for the longest bull market in history. This period has also been remarkable for the severe headwinds value stocks have faced. Investors continue to prefer what has recently been working, high-growth technology names and stable earners, both of which investors perceive to be immune to normal economic forces.
• On a sector level, energy, healthcare, and communications services showed strength, but real estate, utilities, and consumer discretionary all finished in the red.

Portfolio Strategy

• The Fund performed in line with the benchmark for the quarter with allocations to information technology, energy and consumer discretionary benefitting performance while communication services, consumer staples and industrials detracted to performance.
• Chinese PC, smartphone and server manufacturer Lenovo Group Ltd. was the single largest contributor to performance, as the market finally saw evidence that the company’s attempts to turn around its ailing server business may bear fruit. Fujitsu Ltd. (Japanese IT services) performed well, as the market gained confidence in the company’s restructuring efforts and reacted positively to its announced share buyback.
• Inpex Corp. (Japanese energy) was higher, responding to higher energy prices as well as to the company’s commencing condensate shipments at its large Ichthys project. Detracting from performance were U.K. builder merchant Travis Perkins plc, ad agency Publicis Groupe S.A., and telecom giant Vodafone Group plc. Travis Perkins plc was the largest detractor, dropping significantly on fear of a hard Brexit and deteriorating sales and profits in the U.K. Publicis Groupe S.A. suffered from continued industry malaise and a disappointing second quarter earnings report. Meanwhile, Vodafone Group plc suffered due to a new entrant and expensive spectrum auctions in Italy as well as softness in Spain, despite the company’s reiteration of its full year guidance.
• During the quarter, we added two new positions: Hitachi Metals Ltd. and SCOR SE. Japan’s Hitachi Metals Ltd. is a leading manufacturer of specialty steels and metals, rare earth magnets, and iron casting components, with a 50% market share of the specialty steel industry in Japan. The stock has come under pressure due to market concerns over export-driven, cyclical industries as well as a disappointing near-term earnings outlook and high investment this year. We believe the earnings concerns are temporary and see investment levels falling after this near-term peak; as such, we believe the stock is undervalued. SCOR SE is the fourth largest global reinsurer, with a diversified property and casualty book and a leading position in U.S. life mortality reinsurance. We believe concerns around recent large catastrophe-driven losses and skepticism about the company’s ability to grow its U.S. business make the stock an undervalued investment opportunity. In addition to these new exposures, we also added to our positions in EMS giant Hon Hai Precision Industry Co. Ltd., energy services provider Saipem S.p.A., and Inpex Corp. To fund these purchases, we exited Taiwanese ODM (original device manufacturer) Compal Electronics and financial exchange player Deutsche Boerse AG and trimmed integrated energy players Total S.A. and Eni S.p.A., as well as auto manufacturer Isuzu Motors Ltd.

Outlook

• The U.S. Federal Reserve raised short-term interest rates in late September, which was the third rate increase this year, and the eighth since the current tightening cycle began in late 2015. Further rate actions could lead to dollar appreciation, which would also act as another source of monetary tightening. Fears of tighter liquidity globally have challenged market sentiment significantly.
• In addition, tariff and trade war rhetoric has dominated the headlines the past couple of quarters and should continue to be front and center for the rest of the year. Nevertheless, global trade is actually on the rise, and U.S. imports in particular have surged due to the extra income individuals and businesses alike are receiving from last year’s round of tax cuts.
• In this environment of uncertainty, the opportunity set continues to broaden out, enabling us to explore a broader set of industries and geographies. The portfolio remains heavily weighted toward financials, where we still find compelling valuations, and other cyclicals such as auto and energy, wherein our exposure has shifted somewhat toward services companies which have not yet seen order improvement on higher oil prices.

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 Sept. 30, 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 09/30/2018: Fujitsu Ltd. 2.8%, Inpex Corp. 2.7%, Volkswagen AG 2.7%, Lenovo Group Ltd. 2.5%, Honda Motor Co. Ltd. 2.5%, Publicis Groupe S.A. 2.5%, A.P. Moller-Maersk A/S 2.5%, Roche Holdings AG, Genusscheine 2.5%, Rexel S.A. 2.5% and Saipem S.p.A. 2.4%.

Effective July 31, 2018, Pzena Investment Management, LLC replaced Mackenzie Financial Corporation as the sub-adviser of the Ivy Cundill Global Value Fund. In connection with the change in sub-adviser, the Ivy Cundill Global Value Fund has been renamed to Ivy Pzena International Value Fund. In connection with the change from the Ivy Cundill Global Value Fund to the Ivy Pzena International Value Fund effective July 31, 2018, the benchmark changed from the MSCI ACWI Value Index to the MSCI EAFE Index. The index was changed to more closely align with the Fund’s international investment approach.

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. The value of a security believed by the Fund's manager to be undervalued may never reach what the manager believes to be its full value, or such security's value may decrease. These and other risks are more fully described in the Fund's prospectus.