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    Quarterly Fund Commentary

    Ivy International Core Equity Fund (prospectus)
    March 31, 2016

    John C. Maxwell, CFA

    Market Sector Update

    • Broad international markets performed poorly, posting a negative return of about 3% in U.S. dollars for the quarter. In what was generally a surprise, the euro and yen have appreciated year to date, offsetting a portion of the negative local stock returns in U.S. dollars. Global economic growth remained generally muted despite easy monetary policy.
    • Immigration issues, terrorism and the upcoming “Brexit” vote weighed on European equities, while the absence of growth/inflation and a strong currency hurt Japanese equities. Concerns in China somewhat faded over the quarter as the country continues to ease and spend – stabilizing the economy for now.
    • In the wake of the December rate hike, the U.S. Federal Reserve (Fed) turned more dovish on international risks, financial stress and the lack of credible inflation risks at home. To offset the more dovish Fed, Japan went to negative rates for the first time, while Europe expanded their quantitative easing programs and took rates further negative. Neither move stemmed the Japanese and European currency strength – the dovish Fed proved more significant.
    • The weaker U.S. dollar reversed the negative spiral in commodity prices and provided a relief valve to potential stresses in bond markets. As a result, high-yield credit spreads narrowed. In our view, this has reduced the risk of financial contagion and ultimately a global recession.

    Portfolio Strategy

    • The Fund underperformed the benchmark for the quarter. The Fund’s allocation between stable and cyclical sectors remained balanced, but our geographic weighting was higher in more economically sensitive countries. Our economic growth outlook remains muted for the foreseeable future. As such, we are upgrading the quality of the companies we own across the valuation spectrum as we expect earnings growth will be harder to come by.
    • Both sector allocation and stock selection aided performance, though adverse currency effects more than offset those gains. The Fund’s underweight allocation to financials and strong stock selection in consumer staples posted the largest relative gains. The Fund’s allocation to health care (the largest weighting among defensive sectors) slightly detracted as the U.S. presidential debates generated excessive uncertainty about the future economics of the industry.
    • The Fund’s direct emerging-market positions performed well, but exposure to multinationals and financials in Japan and, to a lesser extent Europe, detracted. In addition, poor stock selection in industrials adversely impacted performance.
    • We eliminated our hedge on the Chinese yuan as we believe the weakening U.S. dollar significantly reduces the yuan devaluation risk. We now have approximately 7.5% of our euro exposure hedged as we do not believe the fundamentals justify the recent appreciation. We expect to maintain cash levels at or below 5% of Fund assets.


    • Last year, the combination of lower energy costs; more available and cheaper money; and generally weaker currencies outside the U.S. failed to deliver better economic growth. Therefore, we believe economic growth will remain muted for the longer term, which is in line with the general consensus. Global monetary policy remains at the extremes of easy and we do not see that changing materially any time soon – unless inflation accelerates.
    • We think relative valuation remains supportive for international equities, while absolute valuations are less attractive but getting more interesting. Equities, outside emerging markets, are trading at valuation levels above their historic averages (over the last 25 years), while bonds are trading at a dramatic historic premium to longterm averages. Emerging-market equities trade at valuation levels below historic averages.
    • Long term, we believe emerging-market countries will try to improve their populations’ standards of living. To accomplish this feat, the countries will require solid real economic growth, which currently is not being achieved. There are increasing signs of stress in these developing countries, though in many cases their growth remains ahead of their developed-market counterparts. In the end, we believe maintaining our exposure to developing markets makes sense. We believe emerging-market valuations are the most attractive in our investing universe.
    • We continue to seek opportunities that are in line with the Fund’s current investment themes: disproportionate growth of emerging-market consumers; believable and sustainable dividend yield; companies benefiting from increased mergers and acquisitions; and infrastructure development – particularly the internet.

    The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 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 no guarantee of future results.

    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 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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