Market Sector Update

• Developed equity markets outside the U.S. remained under pressure in the quarter as macroeconomic uncertainty continued to dominate investor psyche. Both Japan and Europe suffered double-digit declines.
• Investors wrestled with an escalating trade war, rising political instability in Europe (U.K., Italy, France), and further signs of economic deceleration globally, leaving a flight to perceived stability as the default choice.
• Defensive sectors such as utilities, real estate and consumer staples outperformed cyclical sectors such as energy, technology, consumer discretionary and materials by a wide margin.

Portfolio Strategy

• The Fund underperformed the benchmark as energy represented most of the shortfall, with financials and industrials also being negative contributors. Inpex Corp. (Japanese energy), John Wood Group plc (U.K. oil service) and Rexel S.A. (French electrical equipment distributor) were the top individual detractors. As the price of oil continued to decline, energy company valuations came under pressure. Inpex’s share price was also impacted by negative news surrounding the Ichthys LNG project and concerns over its capital discipline. We think both issues are now in the past and expect significant improvement in cashflow and return on investment at Inpex going forward. John Wood Group continued to execute on its integration of AMEC Foster Wheeler, and we believe earnings should benefit from cost savings and improved execution. Rexel appears to be executing on its turnaround plan and fundamentals remain solid at the company, however investor concerns over a slowdown in construction and general industrial activities weighed on valuation.
• ENEL S.p.A. (Italian utility), China Resources Power Holdings Co. Ltd. (Chinese utility) and Koninklijke KPN N.V. (Dutch telecom carrier) were the main contributors. All three companies reported good earnings in a volatile environment and benefited from investor preference for safety.
• In the quarter we initiated a position in Mitsui & Co. Ltd., the Japanese trading company with significant energy and resource investments. Mitsui’s management is committed to capital discipline which we think will lead to improvement in the profitability of the business. We also added to our position in Rexel S.A. and Tesco plc on weakness and continued to build our position in Hitachi Metals Ltd.

Outlook

• The U.S. Federal Reserve raised short-term interest rates in December, which was the fourth rate increase this year, and the ninth since the current tightening cycle began in late 2015. Further rate actions could lead to U.S. dollar appreciation, which would also act as another source of monetary tightening. Fear of tighter liquidity globally has challenged market sentiment significantly.
• In addition, Brexit, French protests, tariff and trade war rhetoric has dominated the headlines and should continue to be front and center over the next quarter. On the positive side, Italy’s budget compromise with the European Union and Germany’s new leadership regime should provide some measure of stability. Finally, global trade continues to rise, and U.S. imports have remained strong.
• As investors flee cyclical companies in reaction to macroeconomic and political concerns, we see opportunities to buy perceived high-quality businesses at valuation levels that are among the lowest that we have seen in the last few years. The portfolio remains heavily weighted towards financials – where we still find perceived compelling valuations – and other cyclicals such as auto and energy.

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.

Top 10 equity holdings as a percent of net assets as of 12/31/2018: Travis Perkins plc 3.2%, Fujitsu Ltd. 2.9%, Publicis Groupe S.A. 2.9%, Volkswagen AG 2.9%, A.P. Moller-Maersk A/S 2.9%, Roche Holdings AG, Genusscheine 2.9%, Honda Motor Co. Ltd. 2.8%, Schneider Electric S.A. 2.7%, Rexel S.A. 2.7% and ENEL S.p.A. 2.6%.

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.