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    Quarterly Fund Commentary

    Ivy International Core Equity Fund (prospectus)
    June 30, 2016

    John C. Maxwell, CFA

    Market Sector Update

    • Broad international markets were down slightly more than 1% for the quarter. While there were large individual currency moves in the quarter, the U.S. dollar versus the international basket was relatively flat. Global economic growth remained generally muted and forward estimates continue to fall.
    • The U.K. voted to leave the European Union (EU) by a 52% to 48% margin. The global market place had been fairly nervous about a “Brexit,” though we feel it is best for investors to keep things in context. In our view, it was a vote against globalization/integration, and we believe the outcome will have negative longerterm implications for both the U.K. and Europe. We believe further integration in Europe is off the table, while the U.K. will face addition succession issues.
    • Chinese economic data marginally weakened; U.S. economic data was mixed, with notable disappointing employment growth; and Europe and Japan performed relatively in line with expectations. Over the short term, we believe uncertainty in the U.K. will likely hamper European growth.
    • The U.S. Federal Reserve (Fed) continues to push out further rate hikes due to the combination of paltry May jobs growth and Brexit. The rest of the developed world and China remains dovish, with central banks more likely to ease than hike. In Japan, the strong currency and ineffectiveness of negative rates have the market asking what is next for Kuroda and Abe. Consensus is a big fiscal program with handouts – it does not seem that the Bank of Japan will directly finance the stimulus.

    Portfolio Strategy

    • The Fund outperformed the benchmark, before the effects of sales charges, 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. In general, we continue to upgrade the quality of the companies we own across the valuation spectrum as we expect earnings growth will be harder to come by.
    • Currency effects drove relative outperformance. In particular, our exposure to Japan (yen) and additional emerging-market countries aided performance as those currencies appreciated relative to the U.S. dollar. Additionally, our hedge to the British pound and euro benefitted performance. For instance, on the day before Brexit we initiated a 5% hedge to the pound as there was limited downside risk to hedge our U.K. exposure in the event of a Brexit. Shortly after the Brexit, we covered our position on the pound and maintained an approximate 8% hedge on the euro.
    • Stock selection was a detractor to performance for the period, with selection in industrials and financials leading the decline. On a positive note, strong stock selection in materials and consumer staples were top contributors to relative performance.
    • Top individual contributors to performance included Softbank Group Corp., Kweichow Moutai Co. Ltd and Isuzu Motors. Softbank and Isuzu rebounded after being materially oversold, while Moutai has been a steady and consistent rerating story on strong fundamentals. Top detractor was Bouygues Sa, which suffered from a failure to complete its telecom merger.


    • 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. Inflation is not our base case globally, but the odds of some inflation in the U.S. have increased with employment and oil.
    • 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 in line with their historic averages (over the last 25 years), while bonds are trading at a dramatic historic premium to long-term averages. Emerging-market equities trade at valuation levels below historic averages.
    • 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 developedmarket 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.

    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 no guarantee of future results.

    Top 10 Equity Holdings as a percent of net assets as of 06/30/2016: SoftBank Group Corp. 3.9%, Teva Pharmaceutical Industries Ltd. ADR 2.5%, Fresenius SE & Co. KGaA 2.4%, Bridgestone Corp. 2.3%, Shire Pharmaceuticals Group plc ADR 2.3%, Svenska Cellulosa Aktiebolaget SCA (publ) Class B 2.2%, BAE Systems plc 2.2%, Nokia OYJ 2.1%, Pernod Ricard 2.1%, Deutsche Post AG 2.0%.

    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. 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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