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    Quarterly Fund Commentary

    Ivy Core Equity Fund (prospectus)
    June 30, 2016

    Gus C. Zinn, CFA
    Erik R. Becker, CFA

    Market Sector Update

    • The 2Q 2016 return for the S&P 500 Index, the Fund’s benchmark, was a slight improvement over the 1Q 2016 return. While the index’s returns could be viewed as pedestrian, the real story of the quarter was the continued action in bond markets where 10-year Treasury yields plummeted during the period.
    • The culprit for the dislocation between economic fundamentals and bond prices, we believe, lies with the world’s central bank policies that have led to more than $10 trillion in negative-yielding sovereign bonds in places such as Germany, Japan, Switzerland and The Netherlands. Governments are buying bonds aggressively in an effort to lower interest rates across the credit curve, increase risk-taking, devalue currencies versus key trading partners, inflate asset prices, or a combination of all four. We believe the results of these aggressive policy moves have been more negative than positive.
    • The other major event of the quarter was the June 23 referendum in the U.K. whereby citizens voted to leave the European Union (EU). The vote (Brexit) has led many to question the very viability of the EU, particularly in an era of subpar economic growth and significant discourse over future immigration policies and real terrorism threats. The immediate macro effects of the vote were to perpetuat many of the trends already discussed.

    Portfolio Strategy*

    • The Fund underperformed its benchmark for the period ended June 30, 2016.
    • The vast majority of underperformance during 2Q occurred within health care. While health care stocks performed well, our stocks largely did not participate relative to other benchmark names. Many of our stocks had outright declines, particularly our holdings in specialty pharmaceuticals and biotech. The events described above led investors to the perceived safety of large-cap pharma and medical devices, and away from the more volatile and lower-yielding biotech and specialty pharmaceutical areas.
    • Our strategy of emphasizing companies undergoing transformative merger and acquisition in the sector through names like Allergan, Shire Pharmaceuticals and Teva Pharmaceuticals has been out of favor in a risk-off world. Regulatory reviews have also taken far longer than expected, compounding uncertainty for investors and postponing the earnings thesis underlying Fund holdings.
    • Many of the Fund’s health care names with significant growth potential now have a lower valuation than the S&P 500, which increases our confidence that these stocks will be a source of positive performance in coming quarters.
    • The Fund was underexposure to utilities and large-cap telecommunications companies also negatively impacted performance while holdings within energy, consumer staples, technology and a significant underweight within financials aided performance for the quarter.


    • Our economic view continues to be one of moderate growth in the U.S. and somewhat improving growth across some key emerging markets driven by expectations for higher commodity prices, particularly energy. Other developed economies like Japan and much of Europe should continue to post anemic growth rates.
    • While the ultimate effects of Brexit are uncertain, our base case is a meaningful slowdown in the U.K. and a softer eurozone, maybe to the tune of 0.5% of gross domestic product (GDP) growth. Our portfolio is built accordingly, with a healthy dose of defensive growth companies in stable sectors and more offensive holdings that should perform well in a muddle-along GDP scenario.
    • Our favorite cyclical exposure today is to the energy patch, where we are confident that two years of sharp reductions in capital spending are beginning to have meaningful effects on supplies inside and outside of the U.S.
    • The Fund’s “defensive” positioning continues to be in the consumer staples and health care sectors. Within consumer staples, we believe that we are on the cusp of a major consolidation wave in the global food industry, led by or catalyzed by Kraft Heinz, a portfolio holding.
    • We expect to be significantly underweight financials until the interest rate view changes. Most business models in this sector simply do not work in an interest rate environment similar to the one we are in. We believe that a smart emphasis of dividend yield in companies that possess earnings catalysts (and even modest cyclicality) will prove to be a better strategy than chasing the lowest volatility earnings streams at expensive valuations.

    The opinions expressed in this commentary are those of the Fund’s managers and are current through June 30, 2016. The managers' views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is not a guarantee of future results.

    The S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. It is not possible to invest directly in an index.

    Top 10 holdings (%) as of 06/30/2016: Halliburton Co. 4.2, Philip Morris International 4.2, Applied Materials 3.3, Microsoft Corp. 3.3, American Tower Corp. 3.2, Kraft Food Group 3.1, Teva Pharmaceuticals Industries 2.9, Shire Pharmaceuticals Group 2.8, Adobe Systems 2.7 and Cimarex Energy Co. 2.6.

    Risk factors. The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund is generally invested in a small number of stocks, the performance of any one security held by the Fund will have a greater impact than if the Fund were invested in a larger number of securities. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns on investments in securities of large capitalization companies could trail the returns on investments in securities of smaller 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. 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.

    IVY INVESTMENTS? refers to the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds, and those financial services offered by its affiliates.

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