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    Quarterly Fund Commentary


    Ivy Value Fund (prospectus)
    March 31, 2016


    Manager(s):
    Matthew T. Norris, CFA

    Market Sector Update

    • Equity markets, as measured by the S&P 500 Index, had a slight positive return for the quarter, as economic conditions in the U.S. stayed stable. However, the index’s return masked a lot of underlying volatility.
    • The large-cap value segment, as measured by the Russell 1000 Value Index (Fund’s benchmark), beat the S&P 500 for the quarter. However, halfway through the quarter, value was behind growth by roughly 7%. Value’s outperformance came during the last 4-6 weeks of the quarter.
    • Historically, growth outperforms value toward the end of a lengthy economic cycle, as valuation differentials are small and investors chase a small grouping of stocks they believe have sustainable growth characteristics. The disparities have reached an extreme, and the recent comeback of value investing is notable. It is too early to call it a trend, but there are certainly opportunities for investment. Sign posts to watch for a change in this current trend include rising interest rates or slowing gross domestic product growth.

    Portfolio Strategy *

    • The Fund underperformed the benchmark for the period ended March 31, 2016. The majority of the underperformance can be blamed on two sectors, energy and technology. Energy posted a rebound of more than 4%, after nearly two years of downward moves. We have seen some value here, but the Fund is still not exposed to this sector in a meaningful way. The upward move in energy left us behind the rebound.
    • In technology, memory chip maker Micron and data storage provider Western Digital fell in value due to declines in earnings expectations. These companies were the reasons for the Fund’s underperformance during the period. Sectors and holdings that did well included consumer cyclicals and utilities.
    • The Fund has reduced its total number of names in the portfolio as we have fewer solid ideas in this environment. The market has more than tripled from the lows set in March 2009 and high-quality value ideas are currently scarce.
    • The Fund’s cash holdings have been slightly higher than normal, but we continue to search diligently for areas offering returns. Investments are selected individually, but a few themes continue to show through.
    • The portfolio is overweight in insurance, media and technology. All of these areas share certain characteristics we like. We think these areas include good companies with repeatable business models that are generating high rates of free cash flow. They also offer low stock prices relative to our estimation of each company’s true intrinsic value. The portfolio has very little representation in the areas of telecommunications, industrials and real estate.

    Outlook

    • After seven years and some stops and starts, the U.S. economy has recovered from the recession in 2008 and seems to have settled out in a low, single-digit growth area. The Federal Reserve (Fed) was instrumental in providing liquidity to the markets and economy, which helped facilitate the recovery. However, this can have other, undesired side effects.
    • The next challenge will be for the Fed to tighten money policy back up, and that is something we will watch carefully. The Fed’s guidance suggests one or two further rate increases during calendar 2016.
    • While the economic forces are clearly important factors, our first approach is always to look at the company level. We seek to find quality, growing companies whose stocks are trading notably below what we consider to be their fair value. Oftentimes, this is due to short-term negative factors, and we become larger owners of a company, if we feel those negatives are about to dissipate.
    • We continue to search for and make investments one company at a time and look to provide potential benefit to shareholders over the long team.

    *Top 10 holdings (%) as of 03/31/2016: Citigroup, Inc. 4.7, Microsoft Corp. 4.6, JPMorgan Chase & Co. 4.6, Capital One Financial Corp. 4.1, American International Group Inc. 4.0, MetLife, Inc. 3.9, Dow Chemical Co. 3.3, Allstate Corp. 3.3, Duke Energy Corp. 3.3 and Teva Pharmaceutical Industries 3.0.

    The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe.

    Risk factors:The value of the Fund’s shares will change, and you could lose money on your investment. 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. 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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