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    Quarterly Fund Commentary

    Ivy Mid Cap Growth Fund (prospectus)
    March 31, 2016

    Kimberly A. Scott, CFA

    Market Sector Update

    • Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Fund’s benchmark) posted a modest gain in 1Q, a tumultuous quarter in which the index posted a loss before rebounding into the end of March.
    • Strong index sectors included energy, utilities, industrials, materials, consumer discretionary and consumer staples. Health care was the weakest of the underperforming sectors, followed by telecommunications, technology and financials.
    • Energy gains in 1Q were in stark contrast to their significant weakness in 2015. Health care stocks saw a reversal of fortune in their weak 1Q performance off a strong positive gain in 2015.

    Portfolio Strategy

    • The Fund slightly underperformed the index in 1Q. Weakness was in the first part of the quarter, driven by stock-specific issues, specifically in health care. The Fund was also overweight the group, which posted its weakest performance for 1Q in January. However, the Fund posted substantial gains relative to the market in both February and March, eliminating much of January’s deficit, and leading to a modest underperformance for 1Q.
    • Energy exposure made the strongest positive contribution to returns for 1Q, as the price of oil staged a strong recovery. Our stocks, as a group, performed better than the stocks in the index, and we were overweight versus the benchmark.
    • Materials exposure performed strongly on the back of a takeout in one of our two names, Valspar Corporation, which is being acquired by Sherwin-Williams. Scotts Miracle-Gro also delivered a strong positive return.
    • Industrials stocks nearly doubled the positive performance of the sector within the index, yielding nice performance even though we were underweight. Fastenal and Generac Holdings Inc. led the returns based on optimism for product demand.
    • Performance in both consumer staples and consumer discretionary was much improved in 1Q. Consumer staples contributed positively to returns largely related to the strength in Blue Buffalo Pet Products and Mead Johnson Nutrition. Consumer discretionary names performed strongly in both the index and the sector within the index, but made a slight negative contribution to returns related to our underweight position.
    • Weak sectors were health care, technology and financial. Underperformance from our health care names was largely based on sector allocation as we were overweight this underperforming group.


    • Our outlook for the stock market remains cautiously constructive, as it has been for much of 2016. The U.S. economy is in a slow growth mode. Economies elsewhere in the world remain challenged, which restricts the ultimate strength of the domestic economy and companies.
    • There are more stresses on the earnings outlook for U.S. companies than we have seen in a considerable period of time. While much of this stress emanated in energy earlier in the 2016, the negative feedback loop associated with energyrelated employment and spending has had a broader impact on economic growth and corporate health across many sectors.
    • The strengthening dollar has been another source of earnings pressure on many companies. This impact will subside as 2016 progresses, given current exchange rates, but we will continue to see a near-term impact on earnings the earnings of many companies.
    • Earnings have struggled to progress for much of the past 18 months. The significant decline in stock prices since last May has done much to improve the valuations and investability of many stocks, but much of the market, particularly leading edge growth companies, remain expensive by our calculations. The markets do seem to have gotten some relief from the ongoing uncertainty regarding the course rate hikes by the Federal Reserve, but this topic always promises to add another level of uncertainty and volatility to the market.
    • Our cautiously constructive outlook is based on our confidence that the positives we see in the economy will be enough to offset the negatives, allowing earnings and stock prices to move higher. We think these positives will outweigh the negatives as we progress through the remainder of 2016.

    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 not a guarantee of future results.

    The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

    Risk factors. The value of the Fund’s shares will change, and you could lose money on your investment. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more well-established 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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