Market Sector Update

• As a whole, global equities were higher for the quarter with the U.S. and Japan standout performers. European markets were flat in local currency and in U.S. dollar terms as the dollar remained range bound over the quarter versus a basket of other currencies. Emerging-market equities underperformed, with many emerging-market currencies weakening and contributing to their underperformance.
• Conviction of continued solid global gross domestic product (GDP) growth remains. We believe the Tax Cuts and Jobs Act passed at the end of 2017, along with higher federal spending, will serve as a tailwind to economic growth in 2018 and into 2019 via increase business and consumer spending. However, inflation concerns and a higher-thanexpected U.S. Federal deficit have added to concerns of unsustainably strong economic growth.
• During the quarter, the U.S. Federal Reserve (Fed) expectedly raised rates and indicated they plan on one additional rate increases in 2018. The Fed has stated they will continue on the path to unwind its multi-trillion-dollar balance sheet, which the market anticipates.
• The European Central Bank (ECB) began to taper its bond purchases in early 2018, and their first rate increase is expected during the fourth quarter of 2019. The ECB has focused its attention on getting the banking system fit to handle any additional shocks by pushing for more capital into weaker Italian, German, Spanish and Greek banks as well as sales of non-performing loans to third parties.
• Emerging-market growth is now under pressure from the combination of a stronger U.S. dollar and higher oil prices in the quarter. The outlook is further clouded due to aggressive U.S. trade policy and rhetoric regarding numerous nations, with China being a particular focus of escalating tariffs. These headwinds could result in sales and earnings pressure for multinational and emerging-market companies.

Portfolio Strategy

• The Portfolio outperformed its benchmark led by solid sector allocation. Of note, an overweight allocation to the strong-performing health care sector and underweight allocation to the poor-performing consumer discretionary sector aided performance. Stock selection in industrials, health care and energy helped relative performance. Stock selection in information technology, materials and communication services were each a drag on performance.
• From a geographic perspective, stock selection in North America, Europe and Asia-Pacific ex-Japan aided relative performance. Stock selection in Japan was a drag on relative performance. The Portfolio’s overweight position in North America helped relative performance, while being overweight Europe was a headwind to relative results during the period. The Portfolio’s underweight allocation to emerging markets benefitted performance for the period. At quarter end, the Portfolio maintained no currency hedges.
• Over the course of the quarter, the Portfolio reduced its positions in information technology, materials and communication services. The Portfolio’s largest sector overweight’s include health care, energy, materials and industrials where we continue to find companies we believe provide good dividend yields and reasonable growth potential relative to their valuations. The Portfolio is underweight financials, communication services and consumer discretionary due to those sectors’ poor fundamentals, growth prospects and less attractive relative valuations.
• We have increased the Portfolio’s overweight allocation to Asia-Pacific at the expense of the U.S. and Europe, as we believe the added Japanese and Hong Kong holdings offer a better risk/return and dividend profile. We also believe European political fears will continue to subside over the next few years, which should bode well for the region and increase investor interest. The Portfolio maintains underweight allocations to developed Asia (Japan, Australia) and non-Asian emerging markets.

Outlook

• Globally we expect the pace of earnings growth and economic growth to slow going forward from strong levels over the past two to three quarters. U.S. economic growth has received a strong boost from a multi-quarter uptick in capital expenditure and consumer spending. We believe a portion of this is attributable to the direct impact of stimulus from the Trump administration, and a portion of this boost is due to increased confidence that is to some degree related to those policies. U.S. market earnings growth has been significantly boosted by lower levels of corporate taxes. We expect each of these factors to moderate as drivers of growth.
• After some hope for a sustained uptick in European economic growth the run-rate has reverted to a more moderate level. We generally view growth expectations in Europe as reasonable, though not without risk in the form of Brexit, Italy and global trade. In our view, economic growth in emerging markets face headwinds in the near-term. China is coping with the lagged impact of tightening actions as well as the drag created by trade tariffs in the coming quarters. Additionally, several other emerging markets are coping with the impacts of weaker currencies, higher funding costs and in some case higher energy costs – all of which are likely to act as a governor on growth.
• In Europe, political uncertainty has increased largely due the region’s inability to effectively manage and absorb a large population of refugees. The new Italian government is headed by a coalition of two parties that are euro-skeptics, an environment that could induce increased instability to the region. We feel the U.K. faces additional long-term headwinds stemming from Brexit, as unknowns and “an uncertainty tax” will hurt its economy. In France, pro-business reformer Emmanuel Macron pushed through labor reforms. That said, we believe expectations for major European Union reforms look poor. Interests in the region are widely disparate, and leadership is slow moving and seemingly lacks the political capital necessary to drive substantive reform.
• In our view, the direction and scope of global trade policies is the most significant driver of variability to this view. The key question on this front is whether or not a worsening trade relationships between the U.S. and China ends up being a limited rebalancing of the flow of goods between the two countries – or is this a longer-term geo-political confrontation between the two countries that evolves into a broader economic Cold War that unwinds decades of deepening integration in global trade. Our initial perspective was that the issues were largely centered on the former and that impact would be more limited in scope and temporary in nature.
• However, recent events lead us to believe this represents a change in the longer-term strategic approach to China on the part of the U.S. While we believe some intermediate compromise may be reached over time, we believe global trade frictions and nationalism are on the rise. The implications of such a shift would be lower global growth potential, potentially increased operating costs for corporations, lower overall global operating efficiency and broadly lower returns on investment for many businesses. As we evaluate our portfolio, and new investments, we are keenly focused on the impact of this shift on current profitability, predictability and future growth potential.

The opinions expressed are those of the Fund’s manager regarding 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.

The Ivy Dividend Opportunities Fund merged into Ivy Global Equity Income Fund on Feb. 26, 2018.

Effective February 26, 2018, Christopher Parker, CFA, was named a portfolio manager to the Ivy Global Equity Income Fund.

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. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected.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.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.