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    Quarterly Fund Commentary


    Ivy Cundill Global Value Fund (prospectus)
    June 30, 2016


    Manager(s):
    Andrew Massie
    Richard Wong, CFA
    Jonathan Norwood, CFA

    Market Sector Update

    • Investors reacted negatively to the surprise result of the U.K. referendum to leave the European Union (EU), shunning risk assets and favoring bond proxies such as utilities and telecoms as well as “safe haven” sectors like consumer staples and dividend stocks. The aftermath of the vote pressured deep-value equities.
    • Energy stocks recovered from extremely distraught levels in February as the market anticipated more balanced supply and demand in the second half of 2016 despite a dysfunctional OPEC.
    • Post the Brexit vote to the leave the EU, the Bank of England stood ready for rate cuts and liquidity to aid an economy that may fall into a recession. It is widely believed the European Central Bank (ECB) does not plan to lower rates further, and is instead focused on getting the banking system fit to handle any shocks in the future.

    Portfolio Strategy

    • The Fund underperformed the benchmark for the period, with poor sector allocation leading the decline. That said, stock selection and currency effects benefited relative performance for the period. Our holding in Chesapeake Preferred shares quadrupled off its recent lows. Energy securities were the top contributors to Fund performance during the period.
    • Munich Re announced that first quarter profits were hurt by equity investment write-downs due to volatility in the markets. The stock declined on the news and was the largest detractor during the quarter. We continue to hold Munich Re because we believe it is a global leader in its field. Historically, the company has been managed conservatively with a focus on return on capital.
    • Our positioning entering the third quarter has shifted more toward U.S. equities. We remain mindful of the potential for financial contagion in the EU, and will monitor the situation accordingly.
    • During the second quarter, positions were initiated or added in industrials, health care, consumer staples, telecommunications and information technology. We trimmed our consumer discretionary and energy exposure. We remain overweight financials and continue to have no exposure to utilities.
    • With the drop in global bond yields around the world, global banks were sold off, which hurt the Fund given its relative overweight position in banks. We are confident the banks held in our portfolio are well capitalized.

    Outlook

    • Despite macro headwinds post Brexit, we believe the risk of a recession in the U.S. remains relatively low, and while major economists have reduced global growth rates, we remain focused on company fundamentals. The ramifications of the Brexit should unfold over several years and nobody knows for certain what the outcome will be. We continue to look for undervalued companies that will appreciate to our estimated intrinsic value over a three- to five-year time period.
    • Despite the external shock at month end, our base case assumptions over the next few quarters are that U.S. economic data will remain on solid footing and inflation will start to gradually emerge (as wages and commodity prices get baked in). Hence the U.S. (and U.S. dollar) will likely prove to be a sanctuary of sort until macro headwinds abate. We now expect the U.S. Federal Reserve to remain in a holding pattern for a longer period, as officials seem divided on the path of rates in a post-Brexit world amid renewed economic uncertainty.
    • Companies kick-off the second quarter reporting season mid-July, so we will gain additional insight regarding the trajectory of earnings year to date and for the second half of 2016 and 2017.
    • We believe a stabilizing U.S. dollar, higher oil prices, lower borrowing costs and generally low expectations going into earnings season will improve the odds of positive surprise. The overhang associated with Brexit, and the uncertainty related to the U.S. election, could pose downside risks; however, we believe this should provide more fertile ground for long-term, value-seeking investors.

    The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2016. The manager's 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.

    Effective March 24, 2016, Jonathan Norwood and Richard Wong joined Mr. Massie as additional portfolio managers on the Fund.

    Top 10 Equity Holdings as a percent of net assets as of 06/30/2016: American International Group, Inc. 8.3%, Citigroup, Inc 7.3%, POSCO 4.9%, Bank of America Corp. 4.3%, Munchener Ruckversicherungs-Gesellschaft AG, Registered S 4.0%, Tenaris S.A. 3.5%, Mediaset S.p.A. 3.5%, Hyundai Motor Co. 3.0%, SANKYO Co. Ltd. 3.0% and McKesson Corp. 2.5%.

    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. 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 INVESTMENTSSM 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.

    Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.

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