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    Quarterly Fund Commentary


    Ivy Value Fund (prospectus)
    June 30, 2016


    Manager(s):
    Matthew T. Norris, CFA

    Market Sector Update

    • Equity markets had a solid positive return for the quarter, as U.S. economic conditions stayed stable. However, the Russell 1000 Value Index’s (Fund’s benchmark) return masked a lot of underlying volatility. The large-cap value segment beat the S&P 500 Index for the quarter. This is a shift, as growth has been leading value for the past few years. The disparity had 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.
    • The time frame of this trend are not yet known, but signposts to monitor include rising interest rates or slowing gross domestic product growth.

    Portfolio Strategy *

    • The Fund underperformed its benchmark for the period ended June 30, 2016, largely due to our positioning in health care. Our holdings of generic drug manufacturers and health maintenance organizations trailed, as the market preferred large branded drug makers.
    • Energy continued its strong recent run in the quarter. Investors are clearly expecting oil prices to continue their upward trend. Technology and industrials were bright spots, with better performance out of individual stocks in these areas.
    • The portfolio has reduced its total number of names 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 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 show through.
    • The portfolio is overweight insurance, consumer discretionary and health care. All of these areas share certain characteristics we like. They are good companies with repeatable business models generating high rates of free cash flow, and 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 and industrials. Telecommunication stocks simply don’t offer us the value we require, and industrials business fundamentals are unclear to us at this time. However, we do think there are some emerging ideas in this sector.

    Outlook

    • After seven years and some stops and starts, the U.S. economy appears to have recovered from the 2008 recession and seems to have settled into a low, singledigit growth area.
    • The Federal Reserve (Fed) has been instrumental in providing liquidity to the markets and economy, which has 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, something we will watch carefully. The Fed’s guidance suggests one or two rate increases during the next six months.
    • While the economic forces listed above are clearly important factors, our first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider to be their intrinsic value. Often times 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 term.

    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 not a guarantee of future results.

    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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