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    Quarterly Fund Commentary


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


    Manager(s):
    Timothy J. Miller, CFA

    Market Sector Update

    • Small-cap growth stocks, as measured by the Russell 2000 Growth Index (the Fund’s benchmark), started the year in a bit of a freefall following the mid- December Federal Reserve (Fed) interest rate hike. The hike came in the face of global economic weakness, plunging oil and commodity prices and rising credit spreads.
    • The correction hit bottom on February 11, and a rally in crude prices helped calm some of the recession fears, along with the steady improvement in the domestic job market. The ensuing rally, albeit quite strong, was not enough to get the smallcap growth index into positive territory for the quarter.
    • The benchmark was down for 1Q2016, underperforming large- and mid-caps and also lagging the Russell 2000 Value Index. Of note, the bounce off of the bottom was led by the cyclical sectors, which had been chronic laggards throughout calendar 2015.

    Portfolio Strategy*

    • The Fund outperformed the benchmark by a significant margin in period ended March 31, 2016, before the effects of sales charges. Positive contributions came from health care, consumer discretionary, energy and technology.
    • The only meaningful offset was a shortfall in financials due to bank and capital market stocks.
    • Outperformance in health care was due to an absence of biotech and pharmaceutical stocks, which were down sharply in the quarter, and gains from health care service companies like AMN Healthcare, Surgical Care Affiliates, and ExamWorks.
    • The Fund’s biotech swap position was a drag, but the weighting was small relative to the benchmark, and losses were nearly offset by the portfolio’s cash position.
    • Consumer discretionary gains were led by Vail Resorts, Ollie’s Bargain Outlet, Monroe Muffler, and a nice recovery at Kate Spade.
    • Energy produced negative returns in the benchmark, but our stocks were positive led by Diamondback Energy, RSP Permian and Synergy Resources. Technology continues to provide outperformance, with other gains in technology coming from communication equipment and semiconductor stocks.

    Outlook

    • The tenuous nature of the global economic situation and the volatility it causes in the U.S. market will keep our strategy primarily focused on higher quality companies with recurring revenue and strong balance sheet growth in the technology, health care and consumer sectors. Clearly, the move off of the bottom in February suggests the possibility of a leadership change favoring cyclical sectors, so the Fund is moving gradually in that direction, with a current overweight in energy while attempting to be opportunistic in industrials and financials.

    *Top 10 holdings (%) as of 03/31/2016: Ultimate Software Group Inc. 3.9, Vail Resorts Inc. 3.6, AMN Healthcare Services 3.0, Watsco, Inc. 3.0, SVB Financial Group 2.5, Monro Muffler Brake 2.5, Jack Henry & Associates, Inc. 2.3, Booz Allen Hamilton Holding Corp. 2.2, Pool Corp. 2.2 and DexCom, Inc. 2.1.

    **The Fund invests in derivative instruments, primarily total return swaps, futures on domestic equity indexes and options, both written and purchased, in an attempt to increase exposure to various equity sectors and markets or to hedge market risk on individual equity securities.

    **Such investments involve additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived.

    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 2000 Growth Index measures the performance of the small-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 small-cap 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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